Thursday, July 28, 2005

Angel Financing

We have just finished the painstaking process of raising seed money for the company. By the way, the company is named Collective Intellect. We've been full time at this venture for about 15 weeks now. We have 4 full time people, 1 part time , 1 temp, 1 dog, and 1 server. We're using advanced analytics to aggregate and summarize information into research analysis for consumption by institutional traders in the financial markets. I know, kind of vague, but more on that later ...

Since we were a seed stage company and the venture capitalists all but have gotten out of the venture side of early round financing, we decided to raise money from angels. This is sometimes referred to as "friends and family" money and to some degree it is. But unless Uncle Joe has very deep pockets and an undying love for you, you had best start networking.

Now there is a fairly wide quality gap in the angel community on four axis.

  1. knowledge of investing in seed stage companies - you will find through your networking many angels who have invested multiple times in startup companies and several who have run startup companies. These people are smart money. They know what challenges you face, they understand risk, and most likely they will allocate additional investment for when you need it later (known in the business as "dry powder"). These people can help you tremendously. There are others who have not invested much before and are trying it out, or are family members who believe in you but don't necessarily understand the risk. These people will also help you because they can fill in a round (help get you to the total capital you need). Be careful to explain the risks to this second group of investors, walk them through the model, etc. DO NOT TAKE MONEY from anyone in the second group who wishes to be actively involved with your company. That is a recipe for disaster.
  2. knowledge of your space - Try to find at least one or two angels who are familiar with the market you're going after. They can give you sage advice, help test your hypothesis, and connect you with people who can help move the business along (like prospects :)
  3. reputation - Getting angels to invest is the same as selling product. In this case the product is most likely you if it is a seed stage deal. You have to generate demand. One way to do this is convince someone well respected in the angel investing community to invest. If they see value then others will see value by association. This will help you close the angel round and will later benefit in helping to close a VC round.
  4. cash - This is somewhat tied to number 1 but with the caveat of available liquid resources. Some people just have more money than others. Hopefully the people you find with the fat wallets are also the knowledgable investors. Having an unknowledgable investor in with a lot of cash will lead you down the disasterous route at the end of point 1. They will likely want to get involved with your company. Trust me, it will not end well.
So, as in all things business, network, network, network. Get some people to commit, constantly assess their quality and ability to contribute using the four criteria above. Also, due dilligence is not just for the investor. Ask potential investors for references from people they've invested in before and find out how it went.

Nobody said it was going to be easy. But capital is paramount to success. One way or another you will always be raising capital, be it from investors or customers. Have fun with it, build relationships with people who can help get it done, and go conquor the world!

8 comments:

Keshava said...

Tim,

As the ever sought-after "serial entrepreneur", can you comment on how much harder it is to raise seed capital from a group of angels, compared with a single VC firm? It seems to me that it would require a lot more logistics, communication, etc, to get XXX dollars out of 5 different angels, than out of 1 VC firm.

Keshava

Tim Wolters said...

it is true that you have more communications to manage once the round has closed. There are trade offs on both sides of the equation. It's hard to close a significant round with a single VC these days, since they like to syndicate deals (2 or more in), but if you can do it that's great. The other thing to consider is equity preservation. In an early round the VC will want a much greater percentage of the company (primarily because they need to put more capital to work) than you will face with an angel round.

Anonymous said...

On your site.."Don is the overall business management.."

Shoudln't it be Business Manager..?

jgn said...

Congrats on closing your round. We have just closed ours. We went for Angels - 3 of them so nice and compact. Only challenge is 2 of them are in Australia (where we moved from) and one is in California.
We actually had the money raised when our lead US investor passed away. i didn't see that in the business plan we wrote but there you go. So we have in fact been funded twice...

We were told VC stood for Vulture Capital...!

Cheers

Jason (www.gdiapers.com)

Tim Wolters said...

you're right anonymous. I should have looked at that more closely.

Tino Buntic said...

I just had a look at your site. I may not be the most articulate when it comes to financial markets jargon, but I'm not stupid either. I can't figure out what, exactly, your company does. How much did you raise from the Angels?

Anonymous said...

Congrats on getting your seed funding, while this is only one of many hurdles, many people never manage to get over it... Having just worked with a company that is angel funded and looking for VC funding, I can definitely attest to the fact that it is still a tough environment to raise capital in. Looking forward to hearing about your successes!

Rich Molumby said...

I have an Entr site/blog. It pretty much covers making large amounts of money on the web.

Come and check it out if you get time :-)

pull your banner ads until google does a better job