Angel Groups - Angelic Or Not?

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So, you have a new company, a great idea, and a killer product. Chances are good you'll change the world, retire in a few years and become an angel yourself. First, however, you need to raise some money to get it done. No problem. See, there's this angel group you're going to pitch to next week - tons of angels there, you'll nail your presentation and it'll be great.

Or will it?

Chances are that if you're raising money, you're going to find yourself pitching at NWEN Early Stage Investment Forum, a Keiretsu meeting, a Zino meeting, an Alliance of Angels meeting. Why do I think that? Because I did most of them, and every time I did, I ran into the same people. The same angels. The same entrepreneurs. The same advisors. It's what people do.

We (the entrepreneurs) do them each, ONCE. And there's a reason. We do it the first time because we believe that's how it's done. We don't do it again because we realize that, for most people, it doesn't work. (Disclaimer here�. I consider both Cathi Hatch of Zino and Todd Dean of Keiretsu to be friends and people who I respect. They have been good to me personally and professionally, and I did get a bunch of money from angel investors from both groups. I am grateful!)

Here's the deal... Angel investment groups are businesses. In order to make money, they need to collect money from everyone who is in any way involved with the organization. Angels pay money to belong to the group. Entrepreneurs pay money to pitch to the group. The group, however, has no vested interest in the successful outcome of any of those pitches because, at the most basic level, by the time that pitch takes place, they've already made the money they're going to make.

That is overly simplified and overly cynical, but it IS how the revenue streams work for them. (By law, they can't officially promote or invest in companies, as that would make them brokerages and open up a whole mess of legal restrictions and regulations.)

Most angel groups charge thousands of dollars to present, which can be an entire month's development budget for a startup - not to mention payroll, though few sartups have the luxury to do things like pay people.

That money goes to support the infrastructure that allows you to present to hundreds of angels. The question is, what do you get out of it?

Well, the first time you do it, you actually get lots of things.

The first time I pitched it was at NWEN's Early Stage Investment Forum. What I got out of it was incredible training in presentation skills. I did my pitch several times and had advisors critique everything from my slide deck to my tone of voice and posture. Was it worth it? Totally. Well worth it. (NWEN, by they way, only charges a few hundred dollars.)

I then took my new skills (and some proplanalol) to pitch at other angel groups, and in each case I got something out of it, but am less sure that it was worth it.

Each of the groups will scrutinize your business plan and if it is good enough, you will get to do a "pitch" to a selection committee. That committee will decide if you're good enough to pitch to their members at a monthly meeting. That process is educational, and grants you a tacit seal of approval to investors. And yes, that's useful.

If you are lucky enough (and there is a LOT of luck involved) to get interest from investors, you will typically be assigned a "due diligence" committee who will really dig into your business, which generally results in investment at some level. The ability to say you've been through the process and it resulted in investment is good. I have been asked, more than once, if I made it through the Keiretsu due diligence process, and I'm always happy to say, "yes, and we got investments from it."

However, I'll not be pitching at any meetings like that again. Because, in my OPINION it isn't worth it to me. I don't feel like it is a system that is set up to support entrepreneurs, and I think it needs to change.

1. Asking startup companies to "gamble" a significant percentage of their monthly operating budget in the hopes that the right angels will happen to be in the right room and in the right mood at the right time is really silly. It does not serve the entrepreneur, and it never will.
2. Very few of these pitches result in the entrepreneur getting the names and contact information of the investors in the room, or the ones that "sign up" to receive more info. We have no reason to believe that Angel Groups can and will follow-up in the same way we will. You won't. You can't. And what we really need is the ability to reach out. And we don't know who was in the room, or if they were a reasonable "target."
3. These are generally small stakes investments. Believe me, right now, I'd give my left leg for a $20K cash infusion, really, I would. But in the grand scheme of things, it's a bit of a hamster wheel because an entrepreneur spends so much time getting a little bit of money that they are never able to take their eye off "the raise" and get it back on "the company" which is where it really needs to be in order to succeed and therefore make money for everyone.
4. Angel Groups cannot meet the needs of both the investor and the entrepreneur. Yes, I mean that. And most groups are focusing on the investors�. Which is not sustainable in the long term. You see, by charging entrepreneurs so much money to pitch, you are inherently NOT meeting our needs. Which is fine for a while, but eventually we will realize that, and stop pitching to you. And when we do that, you will no longer be offering interesting companies to your investors, and then you won't be useful to them either. Ergo, not sustainable. I spend a lot of time talking to other entrepreneurs about who and where to pitch, and most of us are not interested in doing the "group" thing anymore, because it isn't worth it. And if you can't offer us to your members, then, well, what will you offer them?

What needs to change? (Kudos here to Cathi and Kristie at Zino who actually put a group of us entrepreneurs in a room and asked us that very question.)

1. Stop charging entrepreneurs so much, at every turn. (We're not the ones with the money in this equation.) You charge us to pitch, you charge us to go to cocktail parties, you charge us to sneeze. We don't have the money, period. The first one of you who has the courage to stop charging so much will have a pool 4 times the size of anyone else from which to pick presenting companies. You will get all the cool companies out there that no one else is seeing, and as such you can be 4 times as picky while also offering exclusivity.
2. Give us some control and some contact information. We know that it's not what you know, its WHO you know, let us know your members.
3. Give us a mentor. Assign someone from your group to "manage" our relationship with the group on an ongoing basis.
4. Let us know who your members are so that we can make informed decisions.

As an Entrepreneur, what should you look at when considering who to pitch to? Well, don't look at the "how much we have invested overall" number. What you want to know is:
1. How many of their members actually invest?
2. How big is the average single investment ?
3. What percentage of companies that have pitched have received funding? In many cases, one very "popular" company has raised the lions share of that "overall" number, and you want to know if that's the case.
4. Who are their members? Hint, most of the big time angels that I know do not, and will not, belong to these groups, so yes, it matters. Start asking.

I'm not saying that entrepreneurs should avoid angel groups. But you need to look at them realistically.

Look, I'm an idealist and believe that we can all come together on common ground to successfully reach a common goal. I believe that there are brilliant entrepreneurs and eager angels who want to meet each other and make happy baby companies for years to come. But if we don't talk about what's working and what isn't, we'll never be able to make this relationship work for the long haul. (Yes, I know that was a very "wifey" thing to say. What can I say, I'm a chick.)
____
Alyssa Royse is the founder and primary fundraiser and cheerleader for her startup, JustCauseIt.com. She's very much looking forward to switching sides and being an angel investor in other young companies. Someday.

Posted by at March 30, 2008 1:29 p.m.

Comments

#113321

Posted by unregistered user at 3/31/08 1:41 p.m.

I completely agree with many of the comments Alyssa makes here, but I also want you to know that not all angel groups are the same. Many of us, for example, do not charge presenters, nor do we charge for any other service. I founded Hawaii Angels (http://www.hawaiiangels.org) in 2002, and since then we have funded around 40 companies, and never accepted a penny from entrepreneurs or their companies. The organization is run entirely by member subscription, and volunteer executive work. In general, when looking at an angel group, there shouldn't be people making money off the presenting companies, unless it is through investment and return of capital down the road.

The Angels Capital Association (http://www.angelcapitalassociation.org/) was formed to promote best practices, and to allow angels and entrepreneurs to exchange ideas. While the ACA does not formally condemn charging a fee for presenting, many of the members are against this policy. The ACA is also a great resource for finding an angel group in your area, and for finding research, documents, and templates, etc. that may be helpful.

Best,
Rob Robinson
Founder, Hawaii Angels.

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#113325

Posted by unregistered user at 3/31/08 1:55 p.m.

Seconding Rob's comment, at CommonAngels in Boston (www.commonangels.com) , we do not charge entrepreneurs fees and we have money under management that goes in to each investment. Ie., we are tightly tied to the successful outcome of each investment, not the day-to-day operations. The latter is funded by our investors and funds just like any venture firm. We, too, have issues on several fronts with charging entrepreneurs and also believe it's in every ones interest to focus on the long-term outcome.

Best wishes,

James Geshwiler
Managing Director, CommonAngels
Founding Chairman (now emeritus...), Angel Capital Association

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#113361

Posted by Rebecca Lovell at 3/31/08 3:25 p.m.

Good afternoon, Alyssa-

We wanted to support the above two comments, and add that the Angel Capital Association agrees with your concerns regarding the high fees charged by some angel groups. This national association (http://www.angelcapitalassociation.org/) conducted a survey, and recently published their guidelines: they will no longer grant membership to angel organizations who charge more than nominal fees for entrepreneurs to apply and present to investors. This policy is excerpted below.
Also, Susan Schreter published a good overview of the many angel organizations in the Puget Sound area:http://seattlepi.nwsource.com/business/353076_schreter29.html. The difference in the fee structure reflects two very different business models: for profit and not-for-profit. The Alliance of Angels is a nonprofit organization -- we are a program of the Technology Alliance dedicated to supporting a robust entrepreneurial economy. To that end, our staff's salaries are largely sponsor-supported, and we charge minimal to no fees for a variety of programs we offer. Though we haven't yet had the opportunity to work with you, should you apply to our website, you would be charged a one-time $95 application fee (no presentation fee). That fee gets entrepreneurs a 90-minute screening and coaching session, or, for the companies who do not qualify for investment, we offer a 2-1/2 hour pitch clinic (which we hold the first Tuesday of every month, and those are open to the public). For any company that has applied, we extend the invitation to quarterly, free "entrepreneur roundtables" on topics of interest such as building a team, structuring a deal, and working with investors.
As for our membership, they do indeed pay dues ($1250/year), and these membership fees cover most of the rest of our costs. What do our accredited investor members get for their money? Ten membership luncheons per year, where they review 3-4 investment opportunities. In a given month, 3 new companies are selected from a pool of 20 that have undergone a three-step screening process prior to presenting. The fourth investment opportunity is an AoA portfolio company that has received investment from our organization before and is raising another round of capital. Members get the benefit of this screening process, the opportunity to share the load on due diligence, and to stay under the radar screen for those who wish to guard their anonymity. As we do with entrepreneurs, we offer a series of complimentary "fireside chat" education events for our membership.
The bottom line? We think it is really important to cultivate a community of active, sophisticated investors while supporting the growth of young companies in our region...and whether it be as an entrepreneur or an angel, would welcome your participation.

Best regards,

Rebecca Lovell
Program Director, Alliance of Angels
----
ACA Guidelines on Charging Entrepreneurs Fees for Applications and Presentations:
In 2008, ACA recommends that angel groups charge entrepreneurs no more than nominal fees for applying for and/or making presentations for angel capital and that all fees are fully disclosed, ideally appearing on the group's Web site. The fees should be no more than a few hundred dollars for applications and no more than $500 for presentations. Transparency to entrepreneurs is of utmost importance, so full information about fee amounts and what the fees are for should be included on the group's home page and/or other prominent portions of the site and other important promotional materials. Angel groups should also provide a consistent program of high quality coaching, preparation and feedback to entrepreneurs participating in screening and presentation activities.

These guidelines match the practices of the great majority of ACA member groups, based on a 2008 survey. More than two-thirds of responding members charge no application or presentation fees, and the other third mostly charged nominal fees. See below for a summary of the survey results. ACA will also pursue developing a database on member group investment practices, including fees, on our Web site to search and review by entrepreneurial ventures.

ACA is an inclusive association that welcomes membership from any angel organization meeting the application criteria, but it does not endorse the practices of any group that levies large fees and/or does not forthrightly explain its potential fees to the entrepreneurial community.

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#113397

Posted by unregistered user at 3/31/08 4:52 p.m.

I like this entry because it helps reveal a little secret that should not be kept a secret. I comment from my own angel group pitching experiences as well as from other entrepreneurs I know.

Many of the members of these groups are not really there to invest. They are there to offer services to the entrepreneur. They are there to sell something, not to buy something. Finance people offering CFO services, bankers offering banking services, PR people offering publicity services, lawyers offering law services. and various other consultants offering various other ways to spend the money you're trying to raise. None of whom are angel investors seeking investment opportunities. This is certainly one reason the member lists are not made available to entrepreneurs � because they read much like a rotary club roster. And there is also the unhelpful social club aspect of the groups (hey, let's compare wine trips and wine collections!) instead of an investment club feel (hey, let's invest lots of money on great people!). Sure there are angels in the groups and there are angels at the events but even a vast majority of them are there to schmooze and network, not to invest.

As far as the value you get from the fees and experience, it would be quite difficult for most to justify the costs or the risks for their new company. Some of that same fee-money could be better spent buying books that can teach you the same things in a day of reading that you would learn from pitching. Unless you are lucky enough to be one of the very few recipients of actual venture funding from the long process and the expensive pitch. But even as a top entrepreneur with a great promising company you might seriously get better odds buying a state lottery ticket. Or a few thousand of them. And as far as the value of the experience, you should be able to get that at much lower cost by finding a few good angels to pitch to who will give you the same sort of good helpful feedback.

The groups will tout the process as full of value, possibly ending in a cash infusion. They will tout their mentoring and preparation process and the quality and stature of the members, among other things. Just don't forget that they are generating money themselves by your participation. So be careful what a salesperson is telling you.

There are those exceptions to the rule. These groups talk about the hundreds of thousands or millions of dollars of funding that resulted over the years that they have been in existence. But as the blogger suggested: ask the right questions and do the math because even those entrepreneurs who do get funding - the averages and numbers are likely lower than you would like to assume.

If an entrepreneur still feels compelled to test these waters they should limit themselves to a single pitch and maybe the one that will cost the least amount of time, money and effort. And as soon as your pitch is over collect as many actual angel business cards you can get your hands on in the room before you are sent home. Because those cards and the networking opportunities that you turn them into are the best and possibly the only benefit you will get from the process.

May be better to just meet with angels individually and ask them to introduce you to other angels. It worked much better for me.

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#113495

Posted by unregistered user at 4/1/08 1:44 a.m.

The Angel market is incredibly inefficient not only for the entrepeneur but also for the investor. I've been on both sides of the table (or podium, as it is) and it's challenging for all parties.

I agree that high presenting fees and service providers masquerading as investors are troubling, although not universal, attributes of angel groups.

Personally, I believe the Pledge Fund structure will bring efficiencies and begin to fill the capital gap in the angel market. Pledge Funds can be seen as a hybrid between VC funds and angel groups. They combine committed capital and professional management (like a VC fund) with individual directive and financial flexibiliity (like an angel group). As a benefit to entrepeneurs, they can move quickly and bring considerable amounts of capital. And for investors, Pledge Funds allow for semi-passive investment without the constraints and delegation of traditional venture capital limited partnership.

While it's still early in their development, I believe Pledge Funds will become an increasing source of capital in the angel market.

Jeff Schrock
Venture Partner
Monster Venture Partners
www.angelunplugged.com

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#113599

Posted by unregistered user at 4/1/08 10:05 a.m.

One data point from a startup:
Angel groups presented to: 5. Angel groups rejected from: 2. Total $$ investment from all angel forums: $25k. Total angel money raised: more than $1M. This does NOT mean they are not valuable. One good lesson: your competition is every other use of capital in the world. My rule of thumb: if you can describe your business in 8 words or fewer (e.g. $11,000 coffee machine with over 100 unit sales"), go!

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#113834

Posted by Alyssa Royse at 4/1/08 7:13 p.m.

I"m not saying Angel groups are not valuable. Though I guess people can read what they want to into what I say. (Like the people who seem to think I hate men, I have NEVER said anything even vaguely like that! Au Contraire, LOVE them!)

What I am saying is that entrepreneurs need to look very realistically at them and understand how they work. Entrepreneurs need to know - at every turn - what it is they are "buying" with their time and money and make sure that's what they actually need. Your assessment that "your competition is every other use of capital in the world" is right on. Including how you use your own capital - you can kill yourself by using it foolishly.

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#114186

Posted by unregistered user at 4/2/08 8:12 p.m.

Alyssa, your critiques seem to apply very much to Keiretsu with their multi-thousand-dollar application fees, and not much at all to most of the other nonprofit angel associations with lower fee structures. Perhaps you should focus your criticisms on Keiretsu specifically?

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#114198

Posted by Alyssa Royse at 4/2/08 9:14 p.m.

Well, this has stirred up some stuff, and been very interesting.

I don't want to call out anyone specifically, because they are part of a very typical business model that is all over the country. It would be like calling out McDonalds, when the whole fast food industry is the problem, as is the lack of consumer education and easy access to better choices.

What I am REALLY trying to do is help entrepreneurs evaluate the angel funding process more openly and with more information.

There is certainly a difference between the for-profit and not-for profit model as it exists now. But, let's be clear, I'm a hardcore capitalist, (business turns me on!) So I have no objection to someone creating a business that serves a market need. (Isn't that what we're all doing?) And there is a big market here of investors and investees that need to find each other.

I have 2 main issues here:

1. Entrepreneurs spending so much money when we really can't afford it and it is a gamble. As some commenter above said, you may as well buy lottery tickets and business books. But many entrepreneurs think "that's how it's done," so they do it.

2. It's just bad business. Ultimately, they are selling investors the opportunity to see companies (and I have no problem with that.) But if companies can't afford to present, or refuse to present, or just get mad and walk away, then what will they have to "sell" to their members? It just doesn't make sense. And I HATE to see a good business opportunity fouled up. Trying to make money coming and going very often fails.....

Especially, you are right, with organizations like NWEN's ESIF and Alliance of Angels that don't do it.

What we need is a productive dialog about this, and new ways for angels and companies to find each other.

There are, however upsides to the Keiretsu model. ESIF is great and inexpensive and has good training, but you are one of a HUGE number of companies, presenting all at the same time and there is no way to assure how many investors will be in on your pitch. Conversely Keiretsu and others have a captive audience and you are one of 4 companies.

It's not black and white. Good and bad. It's all different. And that's why entrepreneurs need to ask the right questions, frame their expectations carefully,know what you're trying to achieve and make decisions accordingly. You don't HAVE to do it any one way

Networking is HARD. It takes time and perseverance, but there is not any real way to shortcut it.

When I decided to start this blog it was so that people can learn from my experiences - good and bad. I'm not here to judge, just share my experiences and reflections on them. That's all.

You all get to draw your own conclusions.

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#114361

Posted by Bruce MacCormack at 4/3/08 12:17 p.m.

Dear Alyssa,

Thank you for sharing your experiences with us as an Entrepreneur. As Chairman of the Bellingham Angels, I'm sorry that you did not extend your search for funding a little further north. Like Rob in Hawaii, we make no charge to either apply or present to our Group - we even supply you with a nice lunch! If you get through our thorough screening process, we nominate a 'sponsor' who will guide you through our presentation process, offering useful tips on what our members will be looking for. At the end of our meetings, you can spend as much time as appropriate with those of our members who may have an interest in your company and they will certainly identify themselves at that time. Just like our good friends at the Alliance of Angels and Zino Society, we always follow up after the meeting with valuable feedback for each company whether the process continues or not. We also work together with other Angel Groups in the Northwest to provide full funding through co-investment arrangements. The Bellingham Angels truly care about their community and the economic health of the region as a whole; we are not out to make money from either companies or our members, that's why we have great sponsors. We often mentor companies in whom we have invested and sometimes sit on their advisory boards. Alyssa, do take a look at our website: www.bellinghamangels.com As you say, 'It's not all black and white'
I hope this offers some further balance to this thread and an understanding that it is difficult to make generalizations in the world of Angels!

Sincerely,

Bruce MacCormack

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#114489

Posted by Alyssa Royse at 4/3/08 6:22 p.m.

I am fascinated that this has caused such a seeming firestorm of accusation and defensiveness. That could not have been further from my intention. Between comments here and emails to me, it is clear that I have hit a nerve.

I would like to restate some things that I though I made clear, but perhaps I need to make clearer.

I am not pointing fingers at any organization or person. Someone asked that, and I answered, but to be clearer: Every person I have met in the Angel community has been kind, insightful, supportive and helpful. Without exception.

There are no people or organizations who are "the problem."

There are systems that don't serve entrepreneurs as well as they could, and they are increasing in number. As an entrepreneur, finding funding is difficult, and it is getting increasingly expensive. There are also increasing numbers of groups and types of groups to navigate.

Cathi Hatch with Zino was the first person to organize a committee of entrepreneurs - that I know of anyway - and ask "what can we do to make this work better for you guys." That started a really interesting conversation, one that she started in earnest and out of genuine concern. Some of that is what I shared here, because I believe that everyone involved in these angel groups genuinely has the best interest of entrepreneurs at heart. But if we don't tell you honestly what we're thinking, how can you know?

Likewise, as an entrepreneur, I wish someone had told me all my options and helped me figure out how to ask the right questions, and how to evaluate an opportunity.

My intent was not and is not to condemn anyone. Far from it. I did want to start a dialog, and it has.

Many of you have chimed in with resources. So, a new list and new post about angel groups is coming. I thank you all for that. I am looking at the ACA guidelines closely, as well as all the groups that chimed in.... (and who knows, maybe I'll even get to pitch again. I do love pitching, and have a hard drive full of pitch decks.)

And to restate, there is value in the training, the networking, the practice. But ALL of us involved in this process need to think long and hard about what is a safe and productive use of the very limited resources that startups have.

By thinking about it and talking about it and being actively involved in the growth of the angel community together, we can meet all of our needs, grow amazing companies, make great investments and grow together.

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#115214

Posted by unregistered user at 4/7/08 7:44 a.m.

This is brilliant. Finally, the secrets have been exposed. The defensiveness of the angel organizations only shows the depth and intensity of the problem.

Folks have been asking John Cook to do a thorough investigative report on this issue...you have exposes much of what folks have asked him to expose.

Thank you so much and best of luck in your ventures!

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#115337

Posted by unregistered user at 4/7/08 2:23 p.m.

Do you know the secret value that all those local angel funds operators provide.? The secret is there is no value provided. But you have to pay a lot to learn this secret.
Too bad people don't tell that in public. Those angel-devil groups operators are making money from the inexperienced entrepreneurs without providing the value. The serial entrepreneur does not bother attending those events knowing it is waste of money and time. The system should become result-oriented and those from Keiretsu, Zino, Alliance ... should be paid only upon funding event occurred. However if you try offer them such model they would laugh at your face.

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Alyssa Royse