At a recent Boulder New Tech Meetup, my friend Kimbal Musk said something to me in passing that, well, I just couldn’t let pass. He said he didn’t believe in angel investing anymore, and that any company worth getting involved with was worth taking right to a VC. This piqued my interest and I started trying to think of companies that had truly made it and become something really remarkable after raising only a small angel round. Not many came to mind. Something rang suspiciously true here – If I had a nickel for every time I heard an entrepreneur say that they’d be raising $500k and then nothing more I could give them all to one of them and find out.
I asked Kimbal if I could follow up on his comment with a podcast (full audio here) and I invited Brad Feld to attend as well figuring he’d have plenty of insight (he did).
The discussion meandered a bit before Brad argued that there are really three types of companies who seek angel funding. They are;
- Those that will ultimately need significant institutional money and won’t get much impact from angel dollars
- Companies that don’t need to raise much money ($250k-$1m) before they can grow and accelerate, but are likely to later need an institutional round.
- Those that don’t really deserve to exist in the first place.
Kimbal goes on to say that his experience is that putting $500k into a company never really changes the first or last page of the business plan, and that anything related to adoption takes marketing and a great team, and therefore money.
At one point in the discussion, Kimbal realized that the disconnect was simply that his philosophy of angel investing is to get very involved and that what he really disagrees with is very passive angel investing. Brad agreed that passive angel investing is really often just “for profit philanthropy.”
So after the discussion, I think Kimbal would now agree that for the second type of company that Brad listed, angels can and do have a large impact especially when they get heavily involved and use their resources, energy, talent, and connections to help the company get to the next level and that such companies would not likely survive to see a venture round without such angels.
So? Are there companies who really make it to a worldwide audience on only a small angel round? Brad points out that while it can and does happen once in a while, that when you hear such a plan it is essentially just “bullshit.”
Give it a listen – I hope you’ll find the discussion as interesting as I did. I learned a great deal from the conversation – but then again I don’t think I’ve ever spent ten minutes with either one of these guys that I haven’t learned something valuable. We did this at Kimbal’s restaurant in Boulder, The Kitchen, so I apologize in advance for the couple of rough edits while coffee was being ordered.
David,
I have to agree with Kimbal. Having been in this “business” for 16 years I’ve raised all kinds of money. And here’s what I’ve learned. It has to be “meaningful” money. Most startups lack discipline and without careful management, money compounds the problems.
Here’s what I focus on – what problem, for “whom,” are you solving? Once that’s figured out, can you make meaningful, sustainable, profitable revenue from solving that problem? If the answer to both of those questions is yes then move to the next step.
The next step is can you convince 10 other people that this really is a problem worth solving. So far total capital spent is $0. Next build a prototype – time allotted is 90 days. Next showcase that prototype to an additional 10 people for “customer validation”. If all is well so far pursue two vectors – customers and funding. Up until this time total investment is still $0 dollars (excluding the time). Total time elapsed is now 6 months.
You now have 6 months to get what you have into the end zone. What you will have done so far is to mitigate both technical and business risk, AND you will have validated with potential customers. If you’re a product company it’s unlikely you can ship without funding, if you’re a service company it’s unlikely you can accelerate growth without funding. From this point the funding now becomes the accelerator. The “type” either Angel of Series A all depends upon risk mitigation.
It all boils down to two things risk mitigation (think customer validation) and value (think customer validation). Solve both and you will be creating value. Investors invest in value.
Cheers.
Peter
Hold on a second here, kids.
Haven’t we veterans mostly agreed that, somehow, the most surprising and successful startups DO NOT take vc money?
Why is it that most startup founders, in retrospect, wish that they hadn’t taken VC money?
I realize there are different kinds of startups, and some may want to trade time for money in order to reach the ‘next level’ sooner. But a large investment is not required for success.
David, even your experience asserts this. I wish the coloradostartups blog was more focused on our headstrong rocky-mountain way of ingenuity and creativity in overcoming our obstacles and building dreams, rather than money, money, money money.
Didn’t we go over all of this in the 90s?
Unfortunately, it often takes money to go after your dream, so it seemed relevent to me. True, many startups can bootstrap and do well, but most are not build this way these days, it seems.
David,
Interesting discussion. Nice to see some disagreement among participants to help explore the edges better.
One of the subtle yet poignant one-liners (which Kimbal mentioned a couple of times) is, “does the angel investment reduce or mitigate risk in the venture?”. Any “smart” investment in an early stage company should be coupled with a timeline and set of obectives. And the objectives should include elements that directly lead to risk mitigation. For example: Reaching a development milestone that shows the software actually does what the idea claimed. Allowing a prototype to be put in the hands of a customer to validate that it solves the claimed problem. Creating the training materials allowing you to sign & support that first channel and prove the sales model. Or to put up a base-salary to hire that first sales person to see if you can replicate that “first customer experience” without the CEO/CTO making the sales call.
Adding to Brad’s “three kinds of startups”, there are 2 kinds of companies that get angel funding: those that already have boot-strap mentality and spend 250 or 500K like it was a million bucks. And those that churn it away and don’t mitigate risk.
It’s one thing for a couple or three founders to stay hunkered down and go without salary for 3, 6 or 12 months. Its quite another thing for that same trio of founders to put up $50K of hard cash to buy the quad servers and guarantee the datacenter space to transition from onesy-twosy pilot customers to 10+ real customers. Also, its one thing to get a fellow technogeek to share your vision and go no salary to build a prototype. A completely different deal to bring on a seasoned sales-guy that (if he/she is worth their salt) is probably making $200K to 300K low-risk now. I’ve seen a LOT of companies with good products/ideas blow 6 months or a year enlisting 1 or 2 “commission only reps” not realizing the high cost of free.
I for one am a believer that $250-500K in the hands of a buckle-down entrepreneuerial team can leverage that money to get them over a first revenues or repeatable revenues hump.
Jim
Hey guys, lets not forget that the vast majority of companies (startups, and existing) never take venture money. Very few companies ever achieve (or even attempt to achieve) a “world-wide” audience.
The venture model makes sense for a very very small number of companies; angel investing makes sense for many more. These two sets do not typically overlap much.
One dis-service done by the venture-world-hype is to encourage the idea that the only path to real success is to do a venture-funded startup. I think this is discouraging to the vast majority of entrepreneurial ventures & entrepreneurs out there where a VC path/growth curve/expectations are simply inappropriate; if we only had VC-appropriate companies in our economy we’d have nowhere to eat, no way to get gas for our cars, few services to make our lives easier, etc… and many of these are great businesses.
“Are there companies who really make it to a worldwide audience on only a small angel round?”
One way to get there (kind of) is to bootstrap your way to building a great product and selling to a small group of key customers (so you never build a huge infrastructure) … and getting acquired by a company that provides the platform to a worldwide audience.
Saul, agreed. We were really talking about companies who don’t have an exit/acquisition that make it only on that first angel round and really reach a huge audience. being acquired gives you extra resources/funding and we were exluding those from our discussion (not that this is not a very viable option as you point out).
This is the first time that I’ve visited this site. I was very impressed by the lead article and the postings that followed. There is excellent information to be had here. As far as Angel investors go you’re talking about a marriage between 2 groups. It has to be right to work, and if it’s right it works extremely well. If it doesn’t you both have problems. My only point is that you can’t generalize. Whether angel investing will work depends on the characteristics and objectives of the angel as well as the characteristics and objectives of the start-up. All too often CEO’s of start-ups need the money and jump at the first angels investment that comes along. That’s a mistake. As was said above, BE PATIENT. Pace your start-up with the capital you have available until you can find an angel whose characteristics and objectives fit well with yours. Otherwise you’re going to get into trouble.