Tips from the SDEE Angel Investor Panel

By Amy Duncan, Goldfish Consulting

Have a great team and access to mentors that can help pivot from failure. That was one piece of advice from the SDEE Angel Investor Panel held on Tuesday, June 18, 2019, at Green Acre Campus Pointe and sponsored by ALT, Morrison Foerster, and Alexandria. The panel included Sam Ellis, member of Tech Coast Angels and Life Science Angels, Jay Goth, Managing Partner of Forentis Fund, and Randy Berholtz, Sr. Fund Advisor and Fund Counsel with Mesa Verde and a Member of the Investment Committee, and was moderated by Jim Krenn, Partner from Morrison & Foerster LLP.

Panel Goals

The panel shared success stories and failures and passed along recommendations, tips, and insights. The goal was to help entrepreneurs understand what angel investing is, what investors are looking for, and what it takes to get an angel to believe in the founder. Equally important, they wanted to encourage a better entrepreneur and investor ecosystem in San Diego.

SDEE Investor Panel

Panelists left to right:  Randy Berholtz, Jay Goth, and Sam Ellis with moderator Jim Krenn

Who are Angel Investors?

Krenn opened by describing angel investors as private, high net worth individuals that are investing in emerging private companies either individually or through organized groups. Their investment is often the first outside capital coming into a company, either prior to, or sometimes simultaneously with venture capital or strategic investors.  

Evaluating the CEO

The CEO needs to be coachable. A strong-willed person who won't listen to outside influence and insists on doing things their way is a big turnoff for Goth. He added that he likes to see confidence—not desperation—in the CEO. Think of it where the company is the value and the money is the commodity. Founders showing confidence and an attitude of, "I don't need your money, I'm going to make this happen no matter what," are more effective than founders showing desperation. Goth noted that the times he failed in raising money were when he tried to make friends. Berholtz emphasized that founders have to persevere and believe in the product. They need to be the advocate that influences other people.

Have a Good Team

Goth shared that companies fail largely fail because of management execution. Along with a business and funding strategy, Ellis likes to see a team strategy in place. He says that because startups are likely to fail and will need to pivot, they need a team to help navigate out of the jungle and enable the CEO to effectively raise capital. If the manager can't make it happen, starts running into problems, or runs out of money, Goth likes to bring in someone else to move it forward.

Find Good Advisors and Mentors

Know what you know and know what you don’t know—and be a good collaborator. Ellis said founders should realize what they're good at and when to reach out to people with other skills, because no one does it all. Get the right people on the team and add to the board with the people who can develop the CEO. He suggested that founders look for independent board members with business experience that can help push the business forward—even if it requires paying them equity—because their value and expertise can make a difference between having a “popsicle stand” or a company. Berholtz underscored the importance of learning from failures and picking good mentors. Where companies start is not where they finish, and those pivots are very important. Tap into mentor’s and board member’s skill set and experience to get to the next level.

Network to Meet People Who Can Help You

When founders want to seriously get funded, Goth said they need to start expanding their network and making more connections. Ellis and Berholtz agreed and added that the angel investors should help make connections to key people, networks, and other investors.

Practice Concise Pitching

All the panelists agreed that the CEO needs to be a good communicator. Founders should polish their communication skills and learn how to describe the technology concisely. Berholtz and Goth echoed that that in five minutes, the CEO should be able show someone who doesn't know about the technology why they should invest by describing the value statement, the problem, the team, and the funding required to reach the next milestone. Berholtz emphasized that the CEO must practice, come prepared, and be on time. He advised to have someone, like a spouse, read everything and provide honest feedback. Goth suggested brining in a business development professional to present if necessary. He also recommended three books:

  1. The Art of the Start” by Guy Kawasaki - A book on how to communicate and synthesize everything into a couple of words.
  2. Pitch Anything” by Oren Klaff, a local venture banker, that advises on the mindset and framing the conversation, to build interest. One tip from the book is to stay away from rational analytical thinking and get to the emotion. Goth says he learned early on that people buy on emotion and use analytics to rationalize the decision they've already made.
  3. Venture Deals” by Brad Feld and Jason Mendelson - Written by a VC on all the things that you need to know about a term sheet.

Match Funding to Milestones

Investors need to know the endgame and a milestone plan to follow. Ellis advises entrepreneurs to know how much funding is needed to reach an inflection point and recommends avoiding undercapitalization by padding the amount by 20-30%. He noted that founders should budget for failure. Berholtz wants to see how the funding requested matches clear, reasonable milestones. He also wants founders to have skin in the game by making an investment. For Goth, his goal is to get founders in front of the capital sources they’ll need to carry out the entire plan. If founders aren’t meeting milestones, investors will get worried and want to pitch in and help. Berholtz added that angels want to protect themselves without harming the company for the Series A since the first VC coming in sets the valuation. The first VC doesn’t want to see a company bogged down with too much angel investment.

Deliver Honest and Periodic Communications

Berholtz emphasized that founders should have open, honest communications with investors, because failures happen, and investors talk. Failure or missing a milestone should not be a surprise to investors. And founders shouldn’t make excuses. Explain why and come up with a better plan. Word spreads and founders can quickly lose credibility. Goth added that if an investor is interested but doesn’t invest, to keep them informed along the way, because what's “no” today could be “yes” six months from now. If communication stops, they’ll forget about the opportunity and move on to something else. Berholtz recommends building a relationship with investors because they are going to provide ongoing guidance long term.

Financing Structure

Angels want something simple to invest in and grow. When it comes to structure, Ellis likes Delaware C-corps because it's investible for the next phase. Ellis de-risks by moving through proof of concept with a tranche at each point, to pivot if things fail. Goth prefers convertible notes where he is a debt holder and recover tangible assets if things fail. He added that equity also works well because investors can track company performance based on share price and financing raised. Berholtz said a typical angel investment in therapeutic development can range from $500,000 to $2 million, with angels taking anywhere from 10 to 15%. Krenn advised that founders should get to know potential investors to know if the structure is a good fit. On the legal side Krenn added that founders should make sure the corporate house is in order. For example, don't go out and start talking to investors with an incomplete cap table that is ambiguous or full of undocumented oral equity promises. The first impression makes a difference not only on the financial side, but the legal side as well.

Know Your Market and Potential Customers

Berholtz advises founders to understand reimbursement, costs, manufacturing, IP, and competition, and to run their concept by a potential customer or even someone outside of the industry. He said angels want to de-risk an opportunity. Having letters of intent from potential customers is helpful for investors to see the exit horizon.

Keep Learning - Attend SDEE Entrepreneur Boot Camp

Want more tips? Consider attending the SDEE Entrepreneur Boot Camp in September 2019. Whether you are considering a start-up or want to grow your existing company, SDEE’s Boot Camp will provide a complete tool kit for successfully achieving the next critical step. Learn more at https://www.sdentrepreneurs.org/entrepreneur_boot_camp

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