I recently had the opportunity to lead a panel discussion on raising capital during Seattle Startup Week. The room was jam packed with 150 people, and the panel included 4 investors – 2 Angel Investors and 2 Venture Capitalists. A friend of mine took massive notes and passed them onto me. You can read them below, lots of nuggets in there.
SEATTLE STARTUP WEEK: Pick the Brains of Local Angel Investors – 10/27/15
Seattle Startup Week is an incredible opportunity for those involved in, or interested in, startups, funding, networking, learning or just enjoying all of the resources that we have here in the Seattle area for entrepreneurs, investors and connectors. Thank you to Zillow for hosting the event, to the many sponsors of the events and especially Chase, the primary sponsor.
Tuesday evening’s investor event was oversold with standing room only. It provided the audience with the opportunity to hear ideas from experienced investors in a panel format, then ask specific questions of the investors. The panel included Josh Maher, Angel investor and head of the Seattle Angel Conference; Yi-Jian Ngo, Managing Director for the Alliance of Angels; Tim Porter, Managing Director of Madrona Venture Group and Gary Rubens, Angel investor and CEO of Start it Labs. The panel was led by Nick Hughes as moderator. Nick is an entrepreneur and Director of Business Development at Knotis.
The session started with each panel member introducing themselves and providing a little background on how they ended up being a startup investor. Josh Maher is not only an angel investor, but an author. He wrote the book “Startup Wealth: How the Best Angel Investors Make Money in Startups”. Look it up on Amazon. Josh is essentially involved at the intersection of startups and Angels. As head of the Angel Conference, he represents 430 Angel investors. Tim Porter, Managing Director for Madrona Venture Group, attributes his current position to his wife, who knew someone at Madrona and referred him to them when he was ready to make a change. Madrona, a Venture Capital company, is focused on Business to Business investing in the Northwest and Tim’s focus is primarily SaaS (software as a service) applied to both horizontal and vertical applications. Yi-Jian is a network engineer by background and inadvertently ended up in the Angel world when AT&T changed their corporate venture fund and recruited him as a founding team member. As Managing Director of the Alliance of Angels his focus is mobile and enterprise/infrastructure software and services with a global focus. Gary Rubens found the ability to be an angel investor when he sold his company, ATGStores.com, to Lowe’s in 2012. He is currently CEO of Start it Labs and gives back to the community, not only helping startups, but also helping worthy causes. He heads the meetup “Angels, Pitches and Beers” held at the SURF Incubator. With over 1400 members, they have a meeting Thursday, October 29, 2015, starting at 5:30 PM.
After the introductions, Nick asked the panel “How did you start as an investor”? Josh said that it was primarily luck and timing (and I’m sure a fair amount of work to create that luck and timing). Yi also said it was luck when he was offered to be a founding team member of the AT&T corporate venture fund. As noted above, Tim attributes his current position to his wife knowing Greg Gottesman at Madrona. However, he started toward that position by being involved in a startup, Teledesic, in 1996. He then subsequently had stints at Goldman Sachs and Microsoft. Gary’s ability to be an angel investor began with his sale to Lowe’s for a lot of money. Following that, he invested in people in the startup world, became a philanthropist and studied angel investing so he could be more effective.
The next question Nick asked was “What do you look for in a startup”. Gary began by saying the most important aspect was the team. The team has to have passion for what they are doing and they have to work together. They also have to have a good business model and be able to pivot as a team when circumstances dictate, or in some cases be willing to drop the venture and move on. Tim echoed Gary’s thoughts on the team being critical. He also said it was important to have a market or product that made sense. In other words, what was the value proposition they were offering. Were they solving a problem? Why was now the best time for their solution? Yi also echoed that the team was most important. Without an effective team, the chances for success were diminished greatly. Josh said that the others had basically covered the question, but he added that it is very important to get to know the people early on. You can’t really make an informed decision one month after meeting the team or the founder. You need to know how they work together and whether or not they have the ability to execute. A side note to this is for entrepreneurs to develop a relationship with investors well before they actually need money. Ask for advice as you’re getting started and keep the investor informed as to your progress.
The next question from Nick was “What is one mistake or problem that many founders make or face”? Gary said that many times the founder doesn’t ask for enough money and they find themselves needing money before they’ve met their next milestone. Another mistake is not getting sufficient market validation before embarking on their product journey. It’s important to know that there is a market for whatever you are developing, that it is a market of sufficient scale to warrant your investment of time and money and also that prospective customers will actually pay for what you’re offering. It’s also important to know what your cost is versus what someone is actually willing to pay for your product. Tim echoed Gary’s comments re customer validation. What does the product do? Why is it a good business? Do you know your competition? Ji said that one of the problems he sees is founders who say they have no competition when they haven’t even done the research to find out who may be competing in their field. Everyone has some competition, even if it’s just an existing technology that does some of what you are offering. Ji also suggested not asking for an NDA (non-disclosure agreement). The investor should be on your side. The last thing they want is for anyone to think that they may take your creation and give that information to someone else or do something with it themselves. They certainly don’t have the time for that. As entrepreneurs need to focus on their business, so do investors. Of most importance to every investor is their integrity. You shouldn’t need an NDA from a qualified investor and you shouldn’t ask. Josh commented by saying that your investors should be considered as partners, not just someone supplying you with funding. Expect them to contribute to your success by providing counsel and sharing connections that they may have to help you. The investors want to know what your business potential might be and how they can help it grow.
Nick then asked for the current state of the market for funding startups. Gary suggested that many view this as somewhat of a bubble in funding with valuations that are too high and unreasonable expectations. Tim said that there is a disconnect between public markets and private markets. Although there seems to be a shift from greed to fear, deals are still getting done. In addition, valuations have started to come down somewhat. Ji said that the environment for startups has been friendly. He also suggested that a startup should take money now, if they can get it, before things begin to turn further. Typical deals now are at valuations of $2 to $5 million with up to 40% of equity given for funding.
Josh said that it’s important to consider your cash burn and make sure you ask for enough to get you to the next milestone. He also said that the entrepreneur could likely give up to 40% equity in their company. Gary said it is extremely important to use your money wisely. You need to prove your business model and you can’t always count on raising money. Make it last. Tim said that it is important to know what your long-term value is. Ji noted that you not only need to track your metrics, but be able to pivot and make adjustments when situations warrant. How you use your money is critical. Josh said that if you’re spending a dollar and only getting one or two users, your model may not be sustainable. You not only need multiples of users, but users that will stick over time.
There was an audience question about crowdfunding. Some consider a successful campaign on Kickstarter or Indiegogo as validation of the product or service. However, Josh said that a company that gets that validation, yet can’t follow through and deliver product to the funders, may not be a good prospect for investment. Ji said that a successful crowdfunding effort can show traction and market interest. Gary agreed that there could be market validation, but there should also be other considerations. Do the metrics work? Will it be profitable?
Another question had to do with exit strategies. With three to five years being the usual timeline, would a shorter exit increase the valuation/money raised? Gary said that your primary focus should be on developing a good product or service and not concentrating so much on the exit. It you are successful with your product, you will probably be bought out. Ji said that most angels are looking for a 10x return in three to five years. Josh echoed Gary’s comment that the focus shouldn’t be on selling the company, but first making it successful.
A questions was asked about the difference between Angels and VC’s. Angels usually invest their own money. VC’s may invest their own money, other’s money or invest money using a fund format. Josh said there are three types of investors: Visionaries, or those that relate to the product or service and believe in it; those that go by the numbers or metrics and finally those that use a combination of the first two. All of them will bring up the team, but those that review the company by the numbers would be similar to a value investor. Those that are visionaries want to believe in the product or service, and usually have sufficient background in that technology to make a good decision. Tim said that you should go for at least 18 months of operation funding.
There was a question about patents as they relate to SaaS. In most cases, it’s more important to get to scale quickly as a barrier to entry rather than have a patent. Even if it can be replicated, the first to market usually will win if they are the biggest in the space.
Nick asked what is exciting in the Northwest. What’s working and what worries investors. Gary said that there weren’t enough VC’s like Madrona in the Northwest. Tim (with Madrona) said that 90 percent of their investments were local. Seattle is best in some of the macro tech trends such as cloud services, etc. However, most agreed more capital to invest is needed in our region.
With that, we ran out of time and the meeting ended. It was one of the best sessions I attended and I believe that those who attended appreciated the cogent insights from some of the most experienced investors in our area. A special thanks to all of the sponsors, Perkins Coie as provider of the venue, Nick Hughes as moderator and our panel.
Ken Carlson, Owner
Carlson Specialty Services