Tag Archives: Angel Investing

Angel Investing – Projections?????

Firework of dollarsThere is much debate as to whether investors in early stage companies benefit from reviewing  financial projections and business plans. The earlier the stage of the company, the harder it is to “predict” what the future pathway will look like. Without a having an opportunity to review a business plan however,  it is difficult for investors to understand how the company intends to spend the funds raised and what it hopes to accomplish with those funds.

In reviewing plans/projections from early stage companies, I like to be able to answer the following three questions:

  • What will be the monthly net spend? – the BURN
  • How long will this funding last? – the RUNWAY
  • What will this raise enable the company to accomplish? – the METRICS

Understanding the components of the monthly BURN provides insight as to how the CEO plans to grow the team, allocate any marketing dollars, build out a tech team, etc. This projection should include the efficacy of the funds to be spent – will it result in an increase in user growth or engagement, a completed pilot or other measure critical to the industry vertical represented. If the company is generating or anticipating generating revenue near term, the “go to market” strategy can be evaluated based on the underlying assumptions in the model. Understanding whether these revenue assumptions are based on a pilot that the company has run, industry metrics or just a best guess will help the investor determine the confidence level they want to assign to any projections. As a company matures, so should the financial sophistication of the projections. Understanding the RUNWAY and the METRICS will help the investor evaluate whether the proposed funding will enable the company to reach an inflection point to either attract additional funding or become cash flow positive. Unfortunately many startups run out of money before achieving the necessary metrics. 

I once had a CEO tell me that they were not going to “waste their time” putting together a financial model for investors. I could not agree more – if the CEO is creating a business model simply for investors, it is pretty useless. I want the CEO to share with me the model they are actually using to run their business. Reminds me of the famous words of Yogi Berra – “If you don’t know where you are going, you’ll end up someplace else”.  Another red flag for me is the CEO who outsources the financial model and never really owns their numbers. I’ll trade a multi-color picture perfect chart for a somewhat messy but real excel spreadsheet any day. 

For investors and founders looking to increase their comfort level in understanding financial statements and projections, I recommend:

Financial Literacy – by Richard A. Lambert, Professor of Accounting at the Wharton School of the University of Pennsylvania

Financial Intelligence – by Karen Berman and Joe Knight

Although both of these books are targeted primarily at understanding the financial statements of public companies, many of the concepts apply to startups as well. As early stage companies mature and begin to become more financially sophisticated, this information will prove even more useful.

Becoming an Angel Investor

One of the first topics I covered on WomenInvest was “Are you ready to become an Angel Investor?” I thought I would dust off this prior post and update it given all the changes in the startup ecosystem over the past decade.

The term “angel investor” is used to describe a wide variety of investors in early stage companies. From the reality-show world of Shark Tank where entrepreneurs are grilled in front of a prime-time audience to established professional networks of angel investors, including Golden Seeds and New York Angels (both of which I am a member), it is clear that there is more than one type of angel investor. The passage of The Jumpstart Our Business Startups (“JOBs”) Act in April of 2012 was meant to broaden the number of investors able to participate in this sector and at the same time loosen some regulations on early stage companies raising funds.  

The origin of the term “Angel Investor” can be traced back to Broadway, when wealthy patrons invested their own money to help launch Broadway shows. Today’s angel investors are typically high net worth individuals (“accredited investors”) who invest either solo, as part of an angel group or online via platforms such as Angel List. In most case Angel Investors provide both investment capital and guidance to early stage companies. With the passage of the JOBs Act, even investors who do not meet the “accredited investor” test are able to participate through online portals such as Republic. (Note: There are many other online platforms – these are just two that I have come across while reviewing potential investments)

Whichever path you chose to begin investing in this sector, it is important to keep in mind that:

Angel Investing Involves….

  • A high degree of risk:
  • A need for portfolio diversification:
  • Patient capital:
  • More than just the money:

Risk: Investing in early stage companies involves a high degree of risk. The statistics are quite sobering and data on angel investor performance indicates that 5-10% of portfolio investments provide the majority of investor returns. One source of information that I follow is Seraf Compass that published a great post on Angel Investing Returns.  Most angels are “Accredited Investors “ who must meet certain net worth and income requirements or financial sophistication tests as defined by the SEC. As mentioned above, there are now opportunities for “Non-Accredited” investors to participate in this market. Given the stage of these companies, there is certainly more “art” than “science” in making an investment decision.

Diversification: With the high-risk profile of these early stage investments, it is important to have a portfolio of investments to increase the probability that there will be some “winners” in your portfolio. In an earlier post this year, I indicated that my goal was to include more “ I am so excited to be a part of this great company” and hopefully limit the “What was I thinking” investments. Each angel investor needs to determine how much capital they are prepared to invest in this sector and whether they can construct a portfolio of individual investments or should perhaps consider investing via a fund to provide that diversification.

Patient Capital: Early stage investments are highly illiquid. Although there have been more opportunities in the secondary market for “pre-IPO” private company investments, you should be prepared to be investor for several years and also to be open to participating in subsequent rounds of financing for your portfolio companies.

More than the Money: For many angel investors, the opportunity to get involved in exciting new ventures and mentor entrepreneurs is an important ingredient in the desire to act as an angel.

Angel Investing can be rewarding both financially and emotionally due to the real impact you can have on early stage companies. Before you get measured for your wings, make sure you understand your personal risk tolerance, your ability to make a sufficient capital investment to this sector to provide diversification and your willingness to truly invest for the long term.

If you decide that an angel investing makes sense for you, the next step is to identify what type of angel fits you and your investment style. Should you decide to participate in an Angel Group, you can find a comprehensive list of Angel Groups in the directory of the Angel Capital Association. Groups come in all shapes and flavors. Some are very focused on a specific sector in the market, some regional and others focused on female founders, alumni affiliations, etc. Angel Groups may require that you become an “active” member of the group and require a minimum commitment of both your dollars and your time. Before you commit to a group, see if you can participate as a guest at one of their screening or investment sessions to get a better sense if this group makes sense for you.

Over the past 20 or so years that I have been investing in this space, I have acted solo, invested through funds and also invested as a member of angel groups. All three methods have advantages and disadvantages. Solo investing is great if you really have expertise in the space and want to be able to make quick decisions. It also helps to have a “significant” amount of capital to invest. Funds can provide great diversification to your portfolio or provide opportunities for you to participate in sectors where you do not have real domain expertise. One such group of funds that I participate in is the Portfolia Group of Funds, which have enabled me to invest indirectly in FemTech and other specific verticals. Angel Groups can bring many different perspectives and expertise not only to the investment decision itself but also to supporting the entrepreneur post funding.

Whichever method you chose as you don your angel wings, best of luck in the journey. There is nothing more rewarding in the investment world than helping to launch a new company

Angel Investing – Happy New Year 2021

January is always a great month to reflect back on investment decisions made in the prior year, and hopefully gain some intelligence to aide the process of investment selection moving forward. This past year, the combination of a worldwide pandemic and national political upheaval, provided unique challenges to the startup community, founders and funders alike. Stressful times tend to magnify both the strengths and unfortunately the weaknesses of leaders. Whether it was the ability to quickly shift to a remote working environment, understand and respond to changes needed in the business model, or to communicate honestly with both team members and investors regarding the strategy moving forward, the environment of 2020 was challenging for all.

Continue reading

Angel Investing – Ringing in the New Year 2016

New Year 2016 conceptIt’s that time once again to reflect on the prior year and make some resolutions for the next. In last year’s post, I suggested that you develop your own investment strategy, take a closer look at the convertible notes in your portfolio and add some interesting reads to your list. Here are a few of my suggested resolutions for 2016: Continue reading

Angel Investing – Twelve Days of Christmas 2015

12 days of christmas: 12 Snowflakes

On the first day of Christmas
a founder shared with me:
A Term Sheet for Series B Continue reading

Angel Investing – Make way for the Crowd

This past Friday, just a day shy of Halloween, the SEC finally voted on Title III of the JOBs Act, the “Crowdfunding” provision enabling individuals who do not meet the definition of “accredited investor” to participate as investors in online portals investing in the start-up space. This “democratization” of capital formation will be done through funding portals that will need to register with the SEC and become a member of a national securities association. Continue reading

Wharton Venture Award: A Judge’s Perspective

Note: This was originally posted on the Wharton Entrepreneurship Blog 3/31/ 2015

This year was my second opportunity to serve as a judge for the Wharton Venture Awards.  In addition to working with a great team of fellow judges to select the award recipients, I also have the opportunity to continue to follow the progress of the students. After last year’s program, I was able to act as a mentor to one of the recipients, Katlyn Grasso, CEO and Founder of GenHERation. The progress she has made on GenHeration is amazing and I was thrilled to learn that Katlyn had recently been awarded the University’s “President’s Engagement Prize” which not only validates her business proposal but also provides funding to help her actually build her business. As an active angel investor, supporting young entrepreneurs and celebrating their successes is one of the most rewarding aspects of being involved in the early-stage ecosystem. Continue reading

Angel Investing – Happy New Year 2015

new year designAnother year has passed and it’s time to think about resolutions for the New Year. As an angel investor, it’s a great time to reflect on the past year and then turn your thoughts forward to investment opportunities in 2015. In last year’s New Year’s post, I suggested that you think about knowing your co-investors, getting your investment dox in order and looking at the world through the lens of an entrepreneur. Continue reading

Angel Investing – Twelve Days of Christmas 2014

12 days of christmas: 12 Snowflakes

On the first day of Christmas
a founder sent to me:
A Financial Model error free Continue reading

Angel Investing – Financial Projections – “Cash is King”

Cash is King Shopping Money Vs Credit Buy Power CurrencyAs an angel investor, I see lots of financial models, which range from the very simple to the extremely complex. I am often asked why I insist on seeing the actual model ( yes the excel not the pdf version) as it all based on layers of assumptions. In response, the financial model is nothing more than a quantitative expression of the business model and in fact what is most important to me are the assumptions that underlie the numbers. Continue reading