The fall semester at SJSU started this week and had the first class meeting of my Entrepreneurial Finance class, which was overflowing with students standing, sitting on the floor and begging to get in. I'd like to think that work of my excellent teaching has made it's way around campus or that the Entrepreneurial fervor has reached new heights, but I've seen my ratings on Rate My Professor. Still wondering who that student was loved the course, but said I was a dork with a voice like Steven Hawkins. More likely the reality is that many students are trying to fill that last elective to graduate, which has not been easy with all of the budget cuts resulting in fewer class offerings.
Many of my students are finance majors, so I spend the first class with a (very) brief corporate finance review with the hint that very little applies to start-up finance. In corporate finance, students are taught that capital markets are efficient and this is an underlying assumption for valuing stocks, bonds and other financial instruments. The theory states that all ifnormation is publicy available and it is not possible to earn returns above average on a risk-adjusted basis. Whether you buy this or not for public equities, the market for early stage private companies has always been wildly inefficient. Entrepreneurs struggle to find investors and investors struggle to find the best start-ups. When they do, it is often a competitive situation and the hot start-ups end up oversubscribed and instad of adjusting price and other terms to optimize the deal, they are forced to leave some interested parties out.
While VC firms have been easy to find from the old school days of Pratt's Guide to Venture Capital, to the early web presence of the 1990's and the current web sites, blogs, twitter feeds, facebook fan pages and sites such as The Funded, angels are still a bit harder to track down. We do have certain angels aggressively marketing themselves (Good to see my former student, Dave McClure, making a name for himself as part of the PayPal Mafia and "Super Angel" crowd), many others have no interest in publicizing their net worth or investing activities.
According to the Center for Venture Research at UNH, there are over 260,000 angel investors. How the hell are you going to find and ptich the one who is going to invest in your deal??? These angels invested $17.6 billion in 2009, which matches the amount invested by VC's. However, angels invested in 57,225 ventures vs. 2,795 for VC's. It goes without saying that a much higher percentage of the angels deals are seed than VC, so you are likely looking at a 1 in 50 shot of getting your company's initial funding from VC's vs. angels (if you are among those that are able to raise either!). And the 1 in 50 is a team that has already made that VC money. While the supply-demand equation will never be completely fixed, the information and accessibility to angel investors is only getting better.
There are several efforts being made to make this process better and will mention a couple below:
- Angel Capital Association Collaboration Committee - I was a charter member of the this group and the goal is to facilitate syndication among the angel groups via education and tools such as Angelsoft. One of the issues in angel group investing is that any one group often doesn't have the investor interest level to provide the total capital required for a round. At Sand Hill Angels, our initial investments are in the $100 - $500K range and rounds are typically $500K - $1.5M. The goal of cooperation is theoretically very interesting, but practically difficult. There tends to be a strong groupthink mentality in the angel groups, and once one group has decided to invest, the others still need to run through their process, which can take weeks to months. This is a brutal process for entrepreneurs and many have no interest in the angel groups for this reason. At SHA, we have instituted a fast track process where companies that have already lined up committed investors (including some SHA members), can expedite the process. We recently led a financing for AppBistro, that had a great group of investors committed, including Dave McClure and Alfred Lin. I joined the board and am looking forward to working closely with the team.
- The AngelList - a service where entrepreneurs can connect with angel investors an dangels can share interesting opportunities with other angels. I recently became aware of this list and just joined and have started reviewing some of the start-ups and looks like an excellent resource for both entrepenurs and investors. I'll follow-up in a future post on how it has worked for me.
Now back to the original question posed in the title. For angel funding, my choice would definitely be AngelList. Of course, if you are looking for a plumber, Angie's list would be better. However, you never know, you might find a start-up that has a cool mobile app to fix your leaky faucet...
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