One Less Angel?

I have heard that the best way to get into blogging is to wait until something disturbs you and then write about it.  Well today I am disturbed about something I have seen recently in the world of angel investing that may end it for me.

I started angel investing almost two years ago by joining a local angel investor group.  My goal was to make money, of course, but I realized that first I had to learn more about the current state of the startup world, both locally and worldwide.  I knew that I could take two paths; one would be to sit back, be cautious, learn as much as I could and then selectively and carefully invest in some ‘sure things’.  Of course if we could tell which ones were the ‘sure things’ then it would be a piece of cake!  I took another, more aggressive approach, which was to pay my dues (literally) and learn by doing.  I have certainly learned a lot, and continue to learn.  The main thing I have learned is something my friend Jason told me, which was “Until you have an exit, angel investing is essentially a charitable contribution”.

At the same time, whether you believe we are in a bubble or not, it seems to me that startup entrepreneurs have now been conditioned that Step 2 in having a successful startup (Step 1 being think up a snappy name that ends in ‘ly’) is to raise a lot of money from angel investors.  Many of these entrepreneurs do not understand or care about the equation from the angel’s side, that even ‘sure thing’ investments are quite likely to fail.  Angel investing necessitates a high risk tolerance but insanity should not be a requirement.  In any event, I strongly feel that angel investors and startup entrepreneurs can and should coexist in a fair and mutually beneficial relationship.

This brings me to what has been bothering me.  I recently found out about a new startup, FundersClub (https://fundersclub.com/) that in preparation for the expected crowdfunding gold rush is enabling angel investors to invest in select deals at a much lower investment size (ex. $1-2.5K vs. typically 10-20x that amount).  My understanding is that they aggregate up to 95 or so smaller investments into one combined LLC investment.  If the minimum total is not met, the overall investment doesn’t close, a la Kickstarter.  

Initially I thought this was a good idea, and it may very well be a great idea (for startups) in the end.  It will enable non-accredited investors to crowdfund (at this time it is limited to accredited investors), and facilitate all investors to diversify their holdings more easily than they could at higher minimum investments.  The thing the is bothering me is that I noticed that the first 5 deals on the site all have the same terms, which in my opinion are terrible from the investor’s point of view.

In short, they all are raising on an uncapped, undiscounted convertible note.  I have seen arguments from both sides for and against convertible notes, and I personally feel they can be a good and fair way to structure seed stage investments.  The problem from my perspective is that in this case, the convertible notes are uncapped and undiscounted.  The entrepreneurs (and by extension the site) are offering investors to be allowed to invest in a note which will convert at the time and price of the next priced round, whenever that may be.  As an investor, aside from the fact that an uncapped note puts me at odds with the entrepreneur in terms of valuing the next round, the problem is that now I am risking my hard earned money much earlier than the investors in the next priced round (which may be more than a year off) with no corresponding reward.  I have thought about this a lot over the past few days and have come to the conclusion that this makes no sense.   

I can only view this new approach as one sign that angel investing may have ‘jumped the shark’.  Another possibility is that the upcoming crowdfunding boom is expected to bring a lot more suckers to the table, pushing traditional accredited angel investors aside.  I have been told that the terms on the site are the same as those being offered to and accepted by (presumably larger) investors not using the site, which is actually more troubling to me.  I have invested in a few convertible notes over the past year and have not seen any terms like this (yet?), although I have been assured that these terms are considered by some to be ‘standard’.  All I know is if this is indeed the direction of early stage angel investing, there will be one less angel around in the future.  What do you think?

The Value of Outsourcing in the case of Analog IC Design and Development

Moved to MIE Labs blog link

Bootstrap your startup

Back in 1995 I took my first steps as an entrepreneur and decided to move from the corporate world out on my own.  At the time the concept was fairly novel, to be a consultant working from my home that could successfully develop new integrated circuits for vertical semiconductor companies.  It seems hard to believe but back then 90% of my sales effort was convincing potential customers that their designers didn't need to all be sitting in the same building with the fab!  Anyway that is material for another story...

The point I wanted to make here was that in my current role as a newbie Angel investor, I have already seen many strong entrepreneurs with great ideas that nonetheless are not really appropriate for outside investment, at least not yet.  Most of these ideas are not at all capital-intensive and at the same time while being great ways for the entrepreneur to make a good living, they do not lend themselves to the scalability or quick revenue growth favored by outside investors.  I feel for the entrepreneur facing the 'no' answer.  It makes me think that if I had counted on outside funding back in 1995 my business would never have got off the ground.

So how did I do it?  Bootstrapping is the key.  I needed some cash to buy a computer and some cheap (but still fairly expensive) design software.  But all other costs were minimized.  The office was an old desk in my basement.  I did not pay myself much of a salary.  In my case this was relatively painless because my wife had a full time job.  "That's cheating!", you say, but there were times when my wife was out of work and doing her own thing and I had the old corporate job.  With so many two-income families these days I don't think this situation is all that unique.  The key is having the support of your spouse and both being frugal enough to live off the one salary for a while.

As my business grew soon I had to make a decision to bring on additional designers.  Each designer I brought in required a significant capital outlay for equipment and software.  At the same time I was not comfortable having a group of people working in my basement so I needed to find a cheap facility.  I think even more so today than back then there are many lower-cost options for office space for startups.  Some of these, like incubators subsidized by local economic development departments, are actually quite nice, but in any case a secure, safe workplace should be the primary goal, not a slick, fancy office.  I would much rather spend a little more money on having an impressive web presence rather than an impressive office space (of course this may not apply as well to a retail startup).

Finally, the team you assemble has to be bought into the concept and motivated primarily by the work itself.  Salaries by necessity have to be scaled back, replaced by stock or option ownership in the firm.  Leadership and teamwork are the key here.  Once the business is well-established it is much easier to get outside funding if required but in many cases the original goals will have been achieved without that need. 

Through some creative thinking and shared sacrifice the 'no' from outside investors does not have to be the end of your dream.

My first foray into the blogosphere

Hopefully more interesting content to follow...