Over the last several years I’ve diversified my personal investments by allocating the money I have been earning into different types of investments such as real estate projects and early stage companies. There is a wealth of information out there (sometimes too much information) on investing in public companies and real estate, yet I found that there is a lack of information on how to think about or get started investing in early stage companies.
Finding the right places to go for this information and connecting with the right groups wasn’t exactly simple. The first thing I found was that when I told people I was angel investing they immediately thought that meant I was planning to lose all of the money that I was investing in these companies. Granted early stage investing is riskier than investing in a company that has current cash flows or assets to support the valuation, but early stage investing doesn’t have to be an exercise of philanthropy. Coming from a public markets & real estate investment perspective, I couldn’t justify an investment of this type. So figuring out how to design my investments so they were more of an investment was a requirement – even if it wasn’t easy.
I started like most people who are in the tech space, attended all the angel group meetings as a guest, went to TechStars demo days, etc. They were all great and the pitches in the room were helpful, but I didn’t get introduced to a process for thinking about an early stage portfolio or how to perform due diligence on the companies in the portfolio.
Enter the Seattle Angel Conference. I met with John Sechrest who founded the conference here in Seattle after having successfully launched a similar group in Oregon. John’s focus on education/learning as a key component to the investment process fell in line with what I’ve learned with investing in other types of assets and attracted me to the concept. Of course the fact that the cost to participate as an investor in one of the conferences was only a little more than the cost to be a member of one of the local angel groups wasn’t bad either.
The Seattle Angel Conference is split up into the event (A conference that occurs twice a year) and a set of funds (One fund for every conference). The actual conference event includes speakers and pitches from startups. The fund is where I’ll focus most of my posts on the topic as it includes the angel investing, the pitches from all potential companies, and a heavy education arm for investors and entrepreneurs. The three Seattle Angel Conference funds that have been created so far have had three successful investments over a year and a half and the new Fund IV will be making a fourth in the fall of 2013. The first three funds invested in Ilumagear, Exolabs, & Daily Dollar, I only participated in the third fund and am pretty excited to participate in the fourth fund this fall as an investor and fund manager. The thing that captured my interest in participating was the opportunity that has been created to train new investors and provide a source of capital that is not exactly a traditional angel investment and is not exactly a traditional early stage fund investment. There is a strong rigor around due diligence and high return expectations of a fund – yet incorporates a mentorship model that angels usually provide better than early stage funds.
The first thing that struck me was that even as an experienced investor and having spent a lot of time advising startups or being on the entrepreneur side I still learned a lot. The education that the team put together for investors and entrepreneurs in the months leading up to the start of the process was immensely more educational than anything I saw the angel groups putting together. The immediate expectation that all investors participate in the evaluation and due diligence process was a bit like a cold bath – overwhelming at first, but highly beneficial in the end. I was able to learn from many other smart investors who brought different investment philosophies, different technical and business experiences, and of course a high level of intelligence that made the conversations worthwhile.
The companies pitching of course was key and when you pay a couple grand to become a member of an angel group that is mostly what you are paying for – the deal flow. I found the companies that were pitching included a wide range of companies, from biotech, to high tech, to manufacturing, etc. The types of companies were quite varied and the stage of the businesses were as well. The good thing is that the process made it easier to distill all the information about the companies. The process was pretty simple, first the list of companies that would be accepted was finalized and investors were encouraged to evaluate all of the companies based on their profile in Gust.com. Investors could see some of the company business model information, financial projections, etc. There was little guidance at this early stage and investors were able to bring their early opinions about the companies to the first official meeting and discuss all of these opinions and why the opinions were important to the investment decision making process. This was the first clashing of ideas and was a perfect opportunity for the group to both learn from each other and receive the much needed guidance on what is most important to think about when you really don’t know much about a potential investment.
The process of letting investors run a little ahead and then discuss and receive guidance continued as a theme through the entire process. The initial list of companies was refined to those that the group of investors could see themselves investing in and then the companies were brought in for short pitches and networking. The opinion forming, discussion, and guidance followed these short pitches and the whole process of shortening the potential investments, pitches, & discussion was repeated only on the second time through it was with longer ten minute pitches. I found many new investors surprised at how different their opinions were of companies during each of the rounds of pitching as the entrepreneurs refined their pitches and brought more information to the table during networking. I also found there were many companies I thought were a good idea initially turned out to need a lot of work before they’d be ready for an investment. The learning process along the way made it easy to discover these things and allowed me to be more confident in my investment decisions. In fact I outlined my thoughts on the process in a series of posts earlier this year title Seattle Angel Conference III.
As the process came to an end, the group of investors bring the list of companies they would potentially invest in down to a total of six, all of whom present at the actual conference. The conference itself is similar to a demo day from YC or TechStars, there are loads of other investors and entrepreneurs in the room and one or more of the six companies that will be presenting are about to get a reasonable sized early stage investment.
If you are looking to learn how to think about early stage investing or have been wondering how to get started, one of the early stage investing workshops that the Seattle Angel Conference is putting on this summer are a good place to start. The first one is on July 23rd and is titled The Jobs Act consequences: New Rules for Angel Investing. William Carleton will be speaking, you can find his blog and twitter accounts under the @wac6 name (I recommend you follow him). There will be sessions nearly every Tuesday starting with this one and ending in late August. The fund officially starts performing due diligence on the companies that apply starting in September. If you’d like to be considered by the fund you should APPLY NOW. If you’d like to learn more about being an investor you should LOOK INTO IT NOW.
Regardless of whether you invest through an angel network, an early stage investment fund such as Founders Co-Op, or through the Seattle Angel Conference Fund, the workshops will help to orient you in the process. Similarly if you are an entrepreneur looking for funding the workshops geared for entrepreneurs are also a way to better understand the landscape and where to start.