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| Seattle Angel Group leaders at MIT Forum - Meet the Angels |
By Ken Carlson
Once a year the MIT NW Forum holds an event which connects Angel Investors with entrepreneurs. The objective is to provide the entrepreneurs with an insight as to how angel investors make their decisions to help with funding a startup. The panel was moderated by Bryan Brewer, Founder of Funding Quest. Bryan has been consulting with startups and helping them find funding since 1999. The panel included Dan Rosen of the Alliance of Angels; Dante Jones of the Cannabis Investment Network; Eric Berman of Element 8; Juan Arango of the Keiretsu Forum; May McCarthy of the Puget Sound Venture Club; John Sechrest of the Seattle Angel Conference and the Seattle Angel Fund; Haresh Ved of the TiE Angels Group and finally, Ky Calder of WINGS investment group.
Bryan first asked each member of the panel to introduce themselves and tell a little bit about how their organizations help startups with funding. Dante Jones of the Cannabis Investment Network was first. The CIN is a membership based angel group for accredited investors that focuses on the cannabis industry. They have a membership fee and their website is www.cannabisinvestmentnetwork.com. They are looking for companies to invest in. They will also have a Pitch Event Thursday, May 11th at the downtown offices of Lane Powell at 1420 Fifth Ave., 42nd Floor, Seattle, WA 98101. Register at their website. Dante said that the cannabis industry made $7 billion last year and their expectation is $50 billion going forward. Washington state made $1 billion last year with $400 million going to taxes for the state. Dante’s group connects entrepreneurs with angel investors.
Juan Arango, Entrepreneur Director for Keiretsu was next. Keiretsu Forum is a global investment community of angel investors. They have a worldwide network of capital, resources and deal flow with 49 chapters on 3 continents. They are the most active venture investors in the U.S. There are 400 accredited investors in the Northwest. Keiretsu is looking for later stage startups with the ability to scale, a proprietary “secret sauce” and a solid team.
Dan Rosen represented the Alliance of Angels. The group has been in operation for 20 years and has 120 accredited investors (their maximum). They are northwest focused and the organization is not for profit. They are the largest group in the northwest and they invest $10 million plus each year into 20 plus startups. They also sponsor many events to help entrepreneurs in their quest for funding.
Ky Calder of WINGS was next. WINGS is a group of investors that focuses on medical technologies in Washington State. They invest $500,000 to $800,000 per year in 8 to 12 early stage companies. They have invested more than $11 million in 23 companies since 2010.
Haresh Ved represents TiE Angel Group Seattle. They specialize in pre-seed to seed companies primarily in Seattle and the NW region. They usually invest in deals of $100,000 to $500,000, although they did a $1.5 million deal not long ago. They focus on biotechnology, business products and clean technology.
Eric Berman is from Element 8. They are an angel group previously known as Northwest Energy Angels and they are committed to supporting clean technologies. They will look at early-stage companies all over North America. They have done over $29 million since 2006 in 74 deals. They have 70 investor members. They look at clean tech and sustainability.
John Sechrest founded the Seattle Angel Conference and is involved in the Fund. Their focus is educating potential angel investors and investing in their fund. They look at startups in the Puget Sound and greater Seattle area.
May McCarthy represented Puget Sound Venture Club in Gary Ritners absence. May is a member of Puget Sound Venture Club and an active investor and entrepreneur. Puget Sound Venture Club started more than 31 years ago and has 30 members, all active investors. Prospective entrepreneurs can sign up with PSVC and need pay only a small fee for the opportunity to present. They have invested in over 880 companies some of which have been very successful.
Bryan asked the question of the panel, what are your pet peeves when it comes to entrepreneurs? He said the most common challenge he had was that entrepreneurs are typically too close to their product and spend way too much time and too many words describing their product instead of showing the benefit to the investor. It’s important to use less words, more pictures and stories to get your message across.
Dan Rosen said that he frequently would see the founder talk about many different things, but never say what they were actually doing (the problem they were addressing and how they solved it). He also said that their last slide in their presentation should be why the investor should consider investing in their company.
May McCarthy said that the founder should state the problem then show their solution. Don’t use too many words. Instead use pictures that show how you solve the problem.
Eric Berman talked about the “hockey stick” and how it was really a fiction. It’s more important to show the assumptions you have for your projections than spend a lot of time on the final number. It’s a guess in any case. But the assumptions can show the investor how the founder is thinking. He also said that the founder needs to understand the difference between a product and a company.
Haresh asked “What do you do and why?” He said that customer validation was very important. If you don’t have customers, you don’t have a business.
John Sechrest said that it’s important to show what you know about your business, but it’s also very important to have the relationships that can help the business succeed.
Ky Calder said that it’s more difficult with medical devices. Before anything happens, they have to work.
Juan Arango said that one of the typical problems was a valuation that was too high and not well thought out. The valuation is what the company is worth at that point in time and is like an agreement between a buyer and a seller. The founder is usually so proud of his company that they find it difficult to accept a valuation that is lower. Juan also said, if you’re an investor and don’t know the founder or the team well, you shouldn’t invest. That also applies to the founder. If the investor isn’t a good fit for the founder, the founder shouldn’t take the money.
Dante said that the founder needs to communicate why the money is needed. What will the use of funds be. Marketing? Sales? Personnel? The relationship between the investor and the founder is critical and includes the entire team.
Bryan next asked the panel “What sectors are most exciting to you”?
Dante said Cannabis Finance. One of the biggest challenges facing the cannabis industry is financial. Where can they put their money? How can they get loans? How can they operate without being a risky, cash based industry?
Juan said he likes companies that have high revenue and a reasonable valuation. The specific sectors included IoT (Internet of Things), AI (Artificial Intelligence) and Security.
Dan likes VR (Virtual Reality) and AR (Augmented Reality), but first a great management team. He is looking for multi-billion opportunities. To find those, a founder needs to identify a problem that is important, but doesn’t have a solution, currently. Those are the things Unicorns are made of.
Ky echoed that by saying that a simple solution to a real problem is what he is looking for.
Haresh liked building on platforms to arrive at a solution.
Eric focuses not only on their sector, but efficiencies that can be achieved in their sector using AI or IoT. He is also looking for solutions for marketing and efficient learning.
John has no sector bias, but said that it is much easier to do due diligence on things that you know, rather than things you don’t know.
May has no bias, but is looking for good opportunities with the prospect for great returns. She doesn’t like a company saying we’re just like them, i.e. we’re the Uber of shipping, or something like that. She also likes medical technologies.
The next question posed by Bryan had to do with priced rounds versus convertible debt. Convertible debt is less expensive for the entrepreneur. Valuation is typically capped and there is usually an interest rate (i.e. 8%) plus a discount to the valuation (usually 20%).
May prefers a priced round (equity). John said it’s easier to do convertible debt, but a priced round is better for the investor, if you can come up with a reasonable valuation. Eric mentioned he was seeing a lot of convertible debt. Haresh said it was important to not have a complicated document, whichever way you go. Dan said that the history of the convertible note goes back about 20 years, but he suggested never signing a boiler plate note. He prefers a price round. Juan said that every investor negotiates individually. Dante said his industry was different. There are two types of companies – licensed or not licensed. If you are investing in a licensed business, make sure you do equity, not debt. He also suggested considering debt financing with a revenue share. He said that Lighter Capital does this.
There was a question from the audience regarding Section 1244 of the tax code. Section 1244 of the Internal Revenue Code is the small business stock provision enacted to allow shareholders of domestic small business corporations to deduct a loss on the disposal of such stock as an ordinary loss rather than as a capital loss, which is limited to only $3,000 annually. It is designed to encourage new startups. Dan Rosen is an expert in the area and was involved in protecting this provision. He said that in the last 20 years, 100% of net job growth has come from startups. This provision helps foster that growth.
When you take money from investors you need to communicate with them constantly, both good and bad news. Never overpromise and underdeliver. Especially don’t communicate with your investors just when you need money. Keep them informed on an ongoing basis. Juan suggested a clause in the agreement that shows required communication. It should show the cash position, monthly burn, main projects, what the investor is needed for (traction, connections, other help) and what is the state of funding.
The final question from the audience was “where is it best to get funded? Here or Silicon Valley? May said it’s a matter of who you know and where they are. Eric said you need to find the investor who best fits your needs. Dan said that if you take money from Silicon Valley, they may expect you to move your business down there. He also said that one of the first questions an investor from Silicon Valley will ask you is “Who have you contacted in the Northwest for funding?” The angel community is small. Investors talk with one another. Before you go to Silicon Valley, at least try to connect with investors in the Northwest. If that doesn’t work, you will be able to answer that telling question – did you try to get funding in the Northwest?
Great information from an excellent and representative panel of angel investors. Thank you to the MIT Enterprise Forum Northwest for putting the program together.
Ken Carlson
