It's about a year ago that I joined Boston Harbor Angels, and I have found the experience to be rewarding as well as tremendously educational.
Over the course of the year I've placed small bets on three companies: Emerginvest, StylePath, and Nomir Medical. Three very different companies, but they do share one thing: I'm impressed with the management teams (especially the CEOs) at each company. I know it's trite that investors value the team most highly, but for me it appears to be true.
A lot has been written about angel investing, but I've learned some things that are not necessarily in the common lore. I'll share a few observations here.
It's really hard for young companies to get money, and when they do it's a lot less than they had hoped for. A corollary to this is that it is much better to self-fund if you possibly can.
Breaking this down a bit, I've seen a number of deals come through that looked like they were going to close, then "something happens" and everything falls apart. Because we invest as individuals, and because we often syndicate deals with other groups, there are as many reasons that someone is investing as there are interested investors. This implies that if you adjust your plan or deal please investor A, there's almost certainty that you're going to displease one of investors B-Z. With the current economy, it has, of course, become even harder to please investors, as they are now even more cautious before opening their wallets.
The size of the deals I've seen is also much smaller than I had expected. I believe that no single deal in BHA received much more than $100K last year, and the largest deal (with syndication) received perhaps a third of a million. This is much less than most deals are asking when they come in to the system, usually $500 - $1.5M.
Given that it takes 3 - 6 Months (!) to close a deal - if it's going to close at all - it's really advisable to go it alone if you possibly can. There are reasons to get money, such as a capital intensive business, or competition close on your heels, but these are not as common as all that. A year of eating ramen noodles saves a lot of money that can be put into the company. Just ask Baranof's co-founder...
On to another observation: everyone claims to hate convertible debt as an angel investment vehicle, but in practice it seems to be different. Before discussing this, I should remind the reader that I'm a rube when it comes to terms sheets. End of disclaimer.
The theory that I've read of and heard espoused every time an entrepreneur comes in looking for a convertible debt deal is that it is easier for an A-round VC to push down the angels in a debt situation than when they have an equity position, so as the big risk-takers, the angels prefer equity (at a terribly low valuation, of course!). OK, I get the idea, but every deal in which I've participated has been convertible debt. I see two likely explanations for this. The first is that I'm a rube. See above. The second is that the theory is somehow flawed. I like this possibility better, and it is supported by the fact that far less rube-ish investors have participated in these deals as well.
In thinking about the flaw, I've got two prongs to my approach. First, I think that, given that angels almost never get a majority stake in the start-up, the idea that they are protected from push down. Shareholder "wash-out" is a well-known phenomenon from one round to the next, so I don't see why this should be exempt from the same problems. Second, I believe the fear of push down is exaggerated because the worried angel somehow sees this as a single round game. In fact, the VCs rely on angel money to bring companies to the stage at which they deserve an A-round. If VCs regularly push out the angels, they will soon find themselves out of the deal flow. It's too early in my investment history to tell whether my optimism will be borne out.
More later