Investments over dinner and board room – Angels v Seed Funds

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(embarrassing picture from an old Newsweek article)

Eric Paley called me one evening to talk about an angel deal he was looking at. I was cooking dinner with my wife when he phoned. We talked about whether behavioral psychology could really work in convincing consumers to reduce their energy consumption. Eric had known the founders for years and thought the world of them, and I had gotten to know one of them, and figured the business was a bet worth taking. While still cooking, I agreed to invest with Eric and Dave Frankel. That investment, Opower, is my best to date.

It got me thinking how different angel investing is from my role as an institutional seed investor. I no longer make investing decisions while cooking, and that’s just the start.

1000s of companies vs dozens

As an angel investor, I saw a dozen or two companies per year. For the better part of my angel investing career, I was running a business so I didn’t have time to meet hundreds of start-ups. Thus, my context was very different. My first year as an angel, I looked at a med device company, a sports nutrition company, and a restaurant business. I had very little context on any of these. In some sense, ignorance was an asset and thus it was easier to make a quick decision with limited data. There was no time or means to “get smart” in a given space, so if I didn’t get the gist of the business in the initial pitch, I didn’t invest. (that year, I invested in none which was a mistake!)

Founder Collective receives thousands of opportunities per year and we take about 1000 pitches. We track our “venture” funnel in a CRM (jerry rigged Salesforce.com). The minute I see a company that’s intriguing, I can see if we’ve met them before and ask my partners what they think. Usually one of them will have knowledge about the space or related companies. Thus, the context around each deal is much more developed when we make an investment.

Angels pursue passion, invest in the network (and mostly ignore valuation)

When you’re investing your own capital, you can invest in stuff you’re passionate about. Noted angel investor Andy Palmer pays particular attention to the healthcare space, and Joanne Wilson favors women entrepreneurs in the industries she knows well. I invested primarily in my network – virtually everyone I invested in as an angel was someone I knew.

In the seed fund world, investing is our business. We can’t just invest in industries or people that we know. (If so, I would only invest in dental companies!) We make 20-30 investments per year. There simply wouldn’t be enough opportunities. That isn’t to say we don’t have high conviction and enthusiasm for the stuff we fund, its just that we need to explore a myriad of opportunities. Additionally, while some more experienced angels are price sensitive, as a fund, we are much more focused on valuation than I was as an angel. Angels don’t need to think about IRR, mainly cash on cash return, but as a fund we’re measured on it.

Follow on support

I did very little to check in on my investments. Often times, I wouldn’t even be aware of follow-on financings. These investments were for fun and hopefully a little extra “alpha” for my personal portfolio.

As a partner at Founder Collective, I’m responsible for keeping my partners up to speed on our companies. In turn, we have to keep our investors (LPs) updated on the performance of our companies. We discuss them at our annual meeting and they receive regular reports on their value. There’s a benefit here, which is our portfolio gets the benefit of help not just from me, but from the whole FC team and sometimes, even our LPs.

The increase in the universe of angels and seed funds is a good thing for entrepreneurs, but with so many options, fundraising has gotten more complicated. Entrepreneurs today can sequence their fundraising, and graduate from Angel to Seed Fund to Series A fund, etc. This provides the entrepreneur with more options along the way, even for those starting companies in the dental industry!

 

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