Something momentous happened in my life at Seattle Angel Conference VI (SAC). On November 12th, 2014, together with a community of supportive investors, I officially became an angel investor. But I am a lawyer and this is our firm’s blog, so why do I want to write here about my exhilarating experience of becoming an angel investor? It’s simple: angel investors provide a valuable and reliable source of guidance, support and capital for early stage start-ups, and most of my clients are promising early startups. As with most investment transactions, angel investment is subject to federal and state securities laws; investing, the law, and being an angel are all tightly interconnected, and understanding these relationships and what goes behind the scenes is important to my clients and me both. So, I hope the lessons I share here are valuable to many of you.
Before I joined SAC as part of a team of thirty or so fellow investors, I had not, in practice, evaluated a deal with the goal of finding the best investment for a common fund. Moreover, before SAC, I was also unaware about what went through the minds of seasoned investors before they’re ready to part with their money with a fledging business enterprise. So, SAC provided me the ideal opportunity to immerse myself in the process of angel investing.
A bit about SAC program before I go on: SAC began with a five-month program that included a series of seminars, workshops, and practice exercises held at Kirkland Impact Hub, and was geared to educate and train accredited investors to be exemplary angel investors. The workshops consisted of rich subject matter on a myriad of topics: founding legal documents, building a great portfolio, the journey of an entrepreneur-VC, convertible note structure, and success factors for seed stage investing. Industry experts led the talks (my favorites were Susan Preston and Bill Bryant), while investors and prospective entrepreneurs soaked it all up.
Aspiring and growing startups apply to SAC to participate in a contest for up to $200K in seed investment and submit their pitches on an online portal for review and selection by SAC. Then, roughly twenty selected companies participate in the process leading up to selecting the six semi-finalists. The startups presented their timed pitches to investors in their weekly meetings, got grilled in the follow-up Q&A, and closed out with a good dose of socialization with investors over dinner, coffee, and team meetings, before the investors embarked on the four-to-six week journey of deep due diligence. Using the SAC Due Diligence Framework, which consists of materials from reputed sources like the Kauffman Foundation and Lean Canvas, we conducted interviews, we shadowed the startup teams, we commented, reported, updated and discussed. And simultaneously, I learned from my fellow investors, just what goes on in their minds (and hearts) when it comes time to invest. Angel investment, although a valuable means of funding, after all, is a high-risk investment that must be undertaken with full understanding of how to minimize those risks.
Lesson One: I learned that there’s no generic “founder”. I’ve now gotten to know startups founded by those who’ve left full-time employment to commit solely to their startup, by still full-time employees of universities or corporations, and by those waiting for the right opportunity to leave their job. I’ve met the solo founder, the co-founders, founders who are married couples, founders who are dating, first-time founders, and serial entrepreneurs. SAC was the perfect example to showcase the fact that there is no set formula in crafting the startup dream team. Sure, there’s data to show that certain founders who position themselves in such a way that the bulk of their focus is the startup itself are more successful (pretty common sense if you ask me!), I really felt the notion of the “right team” was pluralistic – there isn’t a one-size-fits-all method to design that. As an investor, that’s important to know. All the star technologists in the world wouldn’t guarantee the success of a startup – there’s relationships, work ethic, affability, complementary skills, and the strength of the idea to consider as well.
That brings me to Lesson Two – the idea needs to solve a problem. SAC received applications from startups with some diverse ideas, from low-cost medical devices to online haute couture to content curation in education. The idea can be anchored in any space, but it needs to solve a real problem in a way that ensures a willingness by the customers to pay for the solution.
Lesson Three was a shocker! Even though we investors came from all walks of life – some were experienced, but a majority were first timers, entrepreneurs themselves, retirees from area companies, and professionals like me. But the ratio of male to female angels was…appalling:
Why is that, I wonder? Is risk-taking and financial decision-making mostly male terrain? Do women simply use men as their proxies for investing? This gloomy ratio became a whole lot darker when it became apparent to me that ideas, services or consumables that concern or relate to women tend to have an extremely low rate of obtaining funding, in large part due to low awareness or interest by investors. This, it seems to me, is more than just an issue of equality or gender bias. It’s an issue about sitting at the table and participating in the conversation leading up to making informed and calculated business and investment decisions, which doesn’t appear to be the current status quo.
The flip side of that, however, was Lesson Four. I learned that investors like to invest their time in areas that they have a personal interest in, or can connect to organically. Our finalists were in education, luxury custom couture, water purification, energy storage, and a geography based social network. Portland-based Energy Storage Systems was selected as the winner. I offered to be the Due Diligence Lead for a finalist called Third & Loom based on my interest in innovation in fashion and my instant connection with the female, immigrant co-founder. They are autodidacts trying to achieve what seems impossible: competing with established high fashion houses, in relatively unchartered waters – creating a fully online experience to tailor bespoke creations that marry the ideas of haute couture and fast fashion seamlessly (pun intended); democratizing high fashion. And I am all about that – helping a strong team achieve the “impossible”.
I learned that in order to deduce a solid business to invest in, a good angel investor must remain objective, despite the investor’s passions and the likability of the team – that was Lesson Five. SAC’s due diligence process helped us maintain objectivity and rationality, amplified by SAC founder John Sechrest’s encouragement to remain diligent and avoid passing judgment on any entrepreneur. As such, I came to value my due diligence responsibilities of having to evaluate the team, the product market fit, the business’ competitive advantage, technology, traction, past and future ability to scale, and of course, their legal and financial details. Despite being called “angels”, I discovered, we’re as human as it comes: as we grew closer to each other, we disclosed our innermost and darkest biases, concerns, and prejudices. We challenged each other not to fall in love with any particular startup before the due diligence, and we tried not to be swayed by which startup needed our investment and guidance the most. In short, I learned that a good angel investor always trys to learn more, evaluating new information impartially, and objectively.
When it came time to impart constructive criticism and feedback to each of the finalists at the end of SAC, we reflected on what we were taught to evaluate and pay attention to, and explained to the startups what mattered to us, as investors, the most. Startups, listen up – I’m sharing the collective wisdom of a group of truly dedicated and savvy angels in Seattle:
- Know your domain like the lyrics to your favorite song. Back to front and upside down. Convince us that you are the expert in your field. Instill in investors a strong confidence in your success;
- Highlight market validation of your product – an excellent service, product or pitch does less to boost an investor’s confidence than actual sales or a list of committed buyers. The rationale is that if others are getting behind you, or can at least see the potential, your perceived flaws – whether that’s an unfriendly UI/UX at the moment, low industry experience or a few initial negative investor reviews – are all overshadowed by market validation. Sales solve everything;
- Founders should commit to the company full-time, or as close to full-time as possible; investors are more likely to sense your strong passion for your idea, and the time you spend on it shows;
- Have a clear execution plan with realistic but challenging milestones as well as solid financial projections. A slew of stellar advisors who can vouch for your team is gold;
- Make sure to have a solid technology foundation behind your operations;
- Pitch perfect – make sure your Founder’s Story is made known in the pitch, because the investors have likely had some of the same experiences you have. Along with data and figures, pitch the heart of the idea.
When they started, none of the SAC finalists had executed perfectly. But by the time November 12 came around, the finalists were sharp enough to pitch curbside and get funding. It speaks as much to the tenacity of the SAC finalists, as it does to the rigor of the SAC Due Diligence process. That brings me to my Sixth and most surprising lesson learned at SAC: angel investing is both an art and a science, and just like pitching, it takes practice to invest well.
For Founders – SAC proved to me that there is a group of large-hearted volunteer entrepreneurs and investors in Seattle who are ready to help you train, walk with you, and succeed. So come pitch at SAC VII!
For Would-be Angels – When you see your net worth approaching that cool million-dollar mark, don’t go straight for a fancy new car – consider becoming an angel! You don’t have to do it alone; do it with the help of a knowledgeable and supportive group of people who are ready to help you. I assure you, the thrill of angel investing is just as fun as that fancy car, and the value of the process and the experience comes with a whole host of additional perks: a ringside seat in front of a company that is out to change the world, direct access to company CEOs who may become the corporate magnates of tomorrow, early access to the innovative products and services, and above all, the knowledge that you have made, and continue to make, a lasting impact on your community.