Angel Investors | Summary and Q&A

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March 22, 2010
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Stanford Graduate School of Business
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Angel Investors

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Summary

In this video, a panel of angel investors and successful entrepreneurs discuss the process of angel investing and raising capital for startups. They share their insights and experiences on topics such as the role of angel investors, how to attract their attention, the importance of value-added investors, the decision-making process for investments, valuation considerations, and the importance of traction and milestones in fundraising. They also emphasize the importance of finding the right amount of capital and the right investors to help achieve success.

Questions & Answers

Q: How did the panelists get into angel investing?

Bob got into angel investing after working as a lawyer representing tech companies and becoming interested in being on the other side of the table. Anu, a serial entrepreneur, used both angel and VC funding for her three companies. Eden, a former Googler, started making angel investments after leaving the company and has made over 50 investments to date. Todd, a first-time entrepreneur, raised funding for his company after attending business school and co-founding the company.

Q: How did Todd corral nine angel investors for his first funding round?

Todd and his co-founder met with around 50 investors through personal relationships and referrals. They asked each investor to recommend two or three others who might be interested. The most important factor was finding a lead investor who could rally the group and drive the process.

Q: Did Anu find value-added angel investors helpful for her companies?

Initially, Anu didn't see the value in having angel investors other than for the initial seed funding. However, with hindsight, she realizes that having the right angel investors who can offer guidance, connections, and help with critical decisions would have been beneficial.

Q: How involved are the panelists as angel investors?

Bob describes himself as a high-value, rather than hands-on, angel investor. He focuses on important milestones and major decision points in a company's journey, providing advice and connections when needed. Eden also aims to add value by helping entrepreneurs form syndicates and providing guidance and connections at critical turning points.

Q: How many deals do the panelists invest in and see in a year?

Bob invested in over a dozen deals in the past year and sees around 10-12 incoming leads per day. Eden invested in 50 deals over four years and saw around 200 deals last year. Todd raised funding from nine angels for his first round and looked at around 50 investors in total.

Q: What catches the panelists' attention as entrepreneurs seek funding?

Making a personal connection or being referred by someone trusted is the best way to grab an investor's attention. Researching the investor's background and interests helps entrepreneurs understand if there's a positive bias or match with their idea.

Q: When angel investors ask for more traction, what does it mean?

Asking for more traction usually means the investor needs more data points or wants to see more progress before making a decision. It's about conviction and reducing risk. First-time entrepreneurs should focus on getting any traction they can to show progress.

Q: How do angel investors value early-stage companies?

Deals are usually valued based on comparison to subsequent venture rounds or within a valuation range that assumes a reasonable markup on a later venture investment. The valuation ultimately depends on supply and demand, positive bias, and reduction of risk.

Q: How long does it take for angel investors to decide on an investment?

The decision time can range from 48 hours to several weeks, depending on various factors such as the level of risk and readiness of the company, the availability of other investors, and the investor's level of conviction. It's important for entrepreneurs to effectively communicate their accomplishments and potential to reduce the decision time.

Q: How does an entrepreneur determine the right amount of money to raise in the first round?

Entrepreneurs should consider the milestones they want to achieve and the progress they need to show for the next round of funding. It's important to have enough capital to reach those milestones and, if possible, have a buffer of three months' runway. The goal is to raise enough without giving up too much equity.

Takeaways

The panelists highlight the importance of making personal connections and referrals to attract angel investors' attention. It's crucial for entrepreneurs to understand the investor's background and interests to create a positive bias. Valuation is influenced by supply and demand, as well as the reduction of risk through traction and milestones. Entrepreneurs should raise the right amount of money to reach important milestones and consider the value-added potential of angel investors. The decision-making process for investments can vary, but having a clear value proposition and addressing risk factors can expedite the process. Finally, entrepreneurs should not underestimate the value of angel investors and advisors in the early stages of the company.

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