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Lessons from Silicon Valley
Advice from top angel investors
by Greg Henley
August 10, 2009
I recently had the privilege of attending an Entrepreneurship Conference at Stanford University.
Stanford, of course, is in Silicon Valley that is home to many high technology firms. Google and
Yahoo were started by Stanford students and the well-known venture capital firms are located
nearby.
Panel of angel investors
One of the highlights of the conference for me was a session by angel investors. Angel
investors are often wealthy individuals who invest in startup ventures and most are successful
entrepreneurs. It is common to find organized groups of angel investors who invest together. A
typical startup receives financing first from the entrepreneur, then from family and friends. After
those sources of financing, but before venture capital, are angel investors.
The angel investors on the panel in Silicon Valley were organized – none were individual
investors – and all had a staff of people to analyze deals. They explained how angel investors fill
a need for smaller investments. Venture capital firms are so large that they are only interested in
mega-transactions. For example, an entrepreneur who sells his company for $50 million has made a
life-changing event. But for large venture capital firms, that same transaction is a
disappointment. Yet, the same transaction is a good deal for angel investors.
Characteristics of ventures
The panel was extremely bullish on investment opportunities "in the valley." They all agreed
that this is a great time to invest in technology companies and that there is no lack of quality
companies to invest in. The panel did expect that companies would bootstrap their development
longer than in the past to develop their product. Whereas angels often invest before the product is
developed, the consensus was that companies need to begin generating revenue in today's
environment.
Characteristics of companies they seek to invest in are those with a solid team, with
protected intellectual property and whose product fills a need that people want. But they also want
to see a technology that can be validated (not just pie-in-the-sky ideas), unless the entrepreneur
has a really, really good track record.
Software, however, was said to have a low barrier to entry that can reduce its
attractiveness. One panelist looks for companies that operate in an industry sector that is up and
coming (that is, before the sector becomes hot and deal valuations are high). Also mentioned was
the importance of the entrepreneur's commitment with the expectation that the entrepreneur work
nights, weekends and quit the day job.
One area where there are different opinions is whether the angel investor should take a board
seat. The panelists who regularly take board seats get off the board when the company begins to get
multiple rounds of venture capital financing. The panelist who does not take a board seat suggested
that he can find out everything he needs to know by talking to the entrepreneur for an hour.
Advice for entrepreneurs
The advice for entrepreneurs who need $1 million is to talk to three to four angel investors.
Try to close the deal with one of the four and try to get that one to syndicate the deal to others.
But under no circumstances should the entrepreneur try to play one angel versus another as they
tend to know each other and work together. They pointed out that Google started with $1 million
from angels to test the market.
My advice is that angels can make excellent investors. But the entrepreneur must do the due
diligence on the angel to make sure that the match is correct. Some of the factors to be considered
before accepting an investment from an angel investor include:
- Can the angel offer advice in addition to funding?
- Does the angel have contacts that can help the entrepreneur?
- How compatible are the goals and the expected involvement of the angel?
Greg Henley is the Director of the Herman J. Russell, Sr. Center for Entrepreneurship at Georgia State University. His background includes entrepreneurial experience both as a practitioner and as an academic. Dr. Henley received his doctorate is from Columbia Business School with a concentration in Strategic Management and Entrepreneurship.
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