"As has been discussed for several years, Birmingham is in dire need of additional startup capital for our many worthy high growth and high tech businesses and BAN will be a great resource for many of those companies."
Watkins is Managing Member of the Watkins Law Firm, one of the few firms in the area that works with early stage companies on all manners of financial transactions, and adds he is looking forward to "seeing the group grow and become a powerful driving force in the Birmingham and Alabama economy."
I found this report that Jason Nazar, founder of docstoc.com, wrote on raising capital. It provides a great overview of the entire funding process that is essential for entrepreneurs to understand.
I particularly like pages 3-4 which explain the funding lifecycle. I receive a lot of questions from entrepreneurs who are confused about what stage an Angel Investor is looking to invest at. Highly recommended reading:
One of Angelsoft’s angel networks in Europe, the BiD Network, has launched an new opportunity for angels across the globe. Taking a cue from the success of micro-finance and the problem with finding any type of early stage funding for SMEs in emerging markets, the Business in Development Network has created a way for angels to start investing in newly emerging markets. Investments with comparably high risks, but often in untapped markets with unlimited opportunities.
In our rapidly globalizing world, it is vital to keep up with the latest investment opportunities. Read on for a short interview with a business angel without borders.
Why are you committed to the BiD Network and her entrepreneurs? "I think I can meaningfully support SMEs in emerging markets, by sharing my expertise and by providing access to finance to promising entrepreneurs. I consider this an important personal objective. The BiD Network offers a professional platform to get in touch with the entrepreneurs I am looking for."
In which BiD Network entrepreneurs did you invest? 'In 2006 I invested in Stewart Craine and his business called Barefoot Power (click here). Last year I decided to continue with another two entrepreneurs: Peter Meijer and Victor Mfinanga.
Peter is starting up a workshop in Malawi. He is going to manufacture bicycle carts as a mean for transportation, as mobile shop or even as an ambulance. Peter knows Malawi very well, saw a clear opportunity and is highly dedicated to make this business a success. I will provide Peter a loan of about 23,000 US dollar.
One of my friends went on business travel to Tanzania. He did me a favor to also visit Victor Mfinanga whom I already met at a BiD Network event in the Netherlands. My friend reported positively on Victor, proving my gut feeling to be right. I am currently negotiating with Victor on a 20,000 US dollar equity investment in his milk business. I believe that Victor is the right man to make it happen.'
What do you expect from the investments? 'I do not have calculated expectations. But obviously the repayments and financial returns will influence my possibilities to make new investments as well as the confidence I have in the entrepreneurs I invested in.’
To learn more about the entrepreneurs and matchmaking services of BiD Network, please visit www.bidnetwork.org/matchmaking or send an e-mail to matchmaking@bidnetwork.org. To learn about more examples of business opportunities, please click here. If you would like BiD Network to tell you when relevant deals come in, please indicate your investment preferences in the “Expression of Interest”. Access to deals relevant to you will be provided via Angelsoft.
The BiD Network is a member of the European Business Angel Network and is headquartered in the Netherlands.
If you want to set off an entrepreneur, tell them that their business isn't an Angel deal. We receive more complaints from entrepreneurs when an investor says that, than anything else.
There are a lot of reasons that a deal may not be right for investment, and over the next few weeks we will be covering a number of them. The important thing to remember is that just because a business isn't right for early stage investors, doesn't make it a bad business. However, it does mean that if you want to go ahead, you will need to find another way to finance your startup.
Lifestyle Business
A lifestyle business could generate enough money for the entrepreneur to live comfortably, but lacks the potential for scalability that would make it attractive for acquisition. It may also mean that even if the company could scale, it appears that the entrepreneur has no real ambition to do so past providing a comfortable income.
Example 1: The entrepreneur has a plan for a high-end concierge service for wealthy New Yorkers. The entrepreneur projects $2 Million in revenues every year.
It would be very difficult to scale this company. There are few places in the world where this service would be needed, and the potential market is relatively static. It may provide a nice salary for the entrepreneur, but there is little potential to grow this company to the point of acquisition.
Example 2: A famous designer decides he wants to break off and start his own company. He wants to work at home so he can spend more time with his children.
This is not the hallmark of someone who is interested in building a company. While he may be able to trade on his name to turn the new company into an international brand, it doesn’t appear that he has the ambition to do so. He is looking to create a lifestyle that is comfortable for him.
In either case, there is no exit for the company, and therefore no way for an investor to see a return. If the investor can’t get a return, there is no reason to invest.
So how do you start a lifestyle business without investors? If you’re going to start one, make sure you can bootstrap your way to revenue. Use income from another job, raise money from friends and family, or take out a business loan. If you can’t, then you may want to reconsider your business.
Two things can happen with a startup, you can succeed or you can learn. Roger Ehrenberg wrote a great postmortem on Friday detailing what he learned from Monitor110. His seven deadly sins are:
The lack of a single, "the buck stops here" leader until too late in the game
No separation between the technology organization and the product organization
Too much PR, too early
Too much money
Not close enough to the customer
Slow to adapt to market reality
Disagreement on strategy both within the Company and with the Board
Roger learned these lessons the hard way. Take a minute to read over his post so you can avoid them in your startup.
The question of whether angel investments in early stage companies should be in the form of a loan that converts (usually at a discount) into the equity, and at the valuation, of the following (usually VC) investment round, or instead in the form of Convertible Preferred stock (typical of a venture capital investment round) is one which generates a lot of heat in entrepreneurial circles. It also frequently leads to disagreements and hard feelings between entrepreneurs seeking funding and the angels who may be in the best position to fund them. But in reality, the answer is very simple:
"Smart Money" does NOT invest in convertible debt. Period.
This is not a negotiation, or a matter of what is right, or a matter of choice, or anything else. It is simply a definitive, rational, factual statement.
But it does have one corollary, and one exception.
The multiple reasons that smart money (which includes venture capitalists, modern organized angel investment groups, and the leading independent angel investors) simply won't (and shouldn't) do convertible notes are amply and clearly spelled out by Bill Payne, formerly Entrepreneur in Residence at the Kauffman Foundation and generally regarded as the world's leading trainer of angel investors. The primary reason, of course, is economic: the angel is investing at an earlier, riskier stage and therefore should expect a higher return than the VC, who is coming in when some of the risk has been removed, and after the entrepreneur has made the company more valuable using the angel's money. For the angel to wait until the next round to value the company results in exactly the opposite: he or she takes the early stage risk and ends up with later stage valuation: a lose/lose proposition!
Another perspective on why convertible debt sucks comes from Furqan Nazeeri, a serial entrepreneur with EIR experience who is an extremely perceptive observer of the startup financing scene. He points out that from the side of the entrepreneur, doing a convertible debt round correctly is complicated, creates a perverse incentive for the angel investor to work against the company, and ultimately doesn't make a big difference for the entrepreneur.
The practice of convertible debt had its heyday about a decade ago, when inexperienced angels found themselves getting hammered by VCs in follow-on rounds, and decided that it would be better to join them instead. Since then, serial angels have gotten a lot smarter, best practices in angel investing have been standardized, and a funny thing happened to all the serial angels who started out doing convertible notes: they found themselves losing money because of the poor risk/reward relationship, and therefore either (a) stopped angel investing, or (b) got smart and stopped doing convertible notes.
But wait, you say. I mentioned earlier that there was a corollary and an exception. OK, here they are:
Corollary: "Not-Smart Money" SHOULD invest in convertible debt.
Huh? Why? Because the primary trick to raising early stage money in a 'priced' round of Convertible Preferred stock is to price it to value it correctly! And this is the essential difference between 'smart' and 'not-smart' money.
Perhaps the single biggest problem we see with companies applying for funding to New York Angels is that they have done an earlier Friends & Family round that valued the company at a significantly higher valuation than we (the so called "smart money") believe it is worth. In this situation, there are only three possible outcomes, none of which are good: (1) the entrepreneur won't do a 'down round', so we simply walk away and don't fund; (2) the entrepreneur does a down round, and poor Aunt Edna, who invested $50,000 of her retirement money, sees her investment lose half it's value; or (3) the entrepreneur falls on his/her sword and protects Aunt Edna by taking the full valuation hit personally. Ugh.
In cases like this, the BEST thing the entrepreneur can do is take the unsophisticated money in a convertible note, because that way it will end up getting priced correctly when the smart money comes in. But one thing to beware: the next round investors, whether professional angels or venture capitalists, will be the ones to ultimately decide what discount the convertible note will get...regardless of whatever was written into the original note. In practice, few sophisticated investors will have a problem with a 10% discount, which will usually stand. And if there has been a fair amount of time between the note and the venture round (say, six months to a year, or more) a 20% discount has a decent chance of holding. But don't bet the farm on the new investors accepting anything much more than that. If the note has, say, a 50% discount, it will almost certainly be eliminated, or, in a best case, factored into the lower pre-money valuation the VC offers.
Exception: Smart Money should consider a convertible note as a bridge to a legitimate term sheet, and should always have a backup price.
Bill Payne walks through these economics in detail, but in a nutshell, if a VC has already signed (or is thisclose to signing) a term sheet, it will be at a fixed valuation, so the angel bridge will be at a known discount to a known 'correct' price. In this case (a) the 10-20% discount is a fair benefit for the risk being taken (which is that the term sheet might fall through), and (b) if the term sheet DOES fall through, the angel now has debt, which is a better thing than equity to have when things go bad, which they will if the VC walks. Nevertheless, even in this case the convertible note should have a fallback feature of a set price, so that if the term sheet doesn't happen the angel will STILL end up with an investment at a known, appropriate, valuation.
Note to angel investors: As Ben Franklin said, "experience is a hard school, but some will learn through no other." Let me add one more piece of advice: no matter HOW iron clad a term sheet you think you are bridging to, NEVER make the bridge loan subordinate to other debt, and ALWAYS ensure that you are first in line (ideally, make the loan secured.) Don't ask me how I know this.
So, there you have the definitive answer on convertible debt vs. preferred stock. It's not hard. It's not emotional. It's just business.
Charlie O’Donnell over at ThisIsGoingToBeBig.com wrote a great post on the value that the right investors can bring to a company. He uses the case study of Summize vs Tweetscan to highlight how the right investors led Summize to get ahead in the Twitter search race.
This is the definition of what it means to have Smart Money in your deal. Smart Money refers to investors that have insight into your business or industry that can help you grow as a company. Dumb Money refers to investors that can write a check and not much more.
When you’re handed a term sheet where the investor is taking a sizable chunk of your company, make sure you’re taking into account the value of that investor. The right investor can help you grow making the additional percentage your giving up negligible.
While it may feel like investors are evaluating you, you should be equally critical of them. This may seem hard to stomach when your in desperate need of capital, but getting the right person in can prevent you from having your back up against the wall in the future.
1. Enter your location in the left hand column of the Group Finder to sort groups by distance from you.
2. Click the View Site link to learn more about the group and the Start Application button to begin the application.
3. You can have up to three active submissions. If you apply to more than three, your deal will go into the group's Bulk Submission folder.
4. If you want to apply to an additional group click the Delete button next to an active submission. This will free up a spot and allow you to submit without being placed in the Bulk Submission folder.
Full Explanation:
Finding the right group to apply to can save you considerable time and money. Groups often have specific criteria they are looking for in a business such as industry and investment range. Applying to the correct group greatly increases your chance of additional funding talks. While it may seem like a good idea to send your plan to as many groups as possible, this can actually hurt you. Angelsoft is an ecosystem, and investors quickly ignore companies that abuse the system. To further prevent misuse, if you have more than 3 active submissions, your application will go into a group's Bulk Submission folder. You may delete an application to free up a spot. If you are looking for broad exposure we suggest applying to OPENdeals, which is accessible to the 8000 investors and 450 groups that use Angelsoft.To find the right group for you, start by entering your location in the left hand column of the Group Finder. This will display the groups that are closest to you. A local deal is more attractive to an Angel, so these are the best groups to apply to first.
Click the View Site link next to a group's name and familiarize yourself with their funding criteria. If you think your company is a fit, click Start Application. If you do not have an Angelsoft account you will be asked to register.
You can save an application as you work on it, so there is no need to finish it at once. All of your applications can be managed from the My Application tab. You can start as many applications as you want; you will only be placed in the Bulk Submission folder if you SUBMIT to more than three groups.
If you have already submitted to three groups, and would like to submit to an additional group, you can click the Delete button next to an active submission. Usually you would do this after the group has declined your deal. This will allow you to submit to an additional group without being placed in the Bulk Submission Folder.
Once you have submitted your application you will be brought to the Entrepreneur Funding Manager.
From here you can see the number of investors that have viewed your deal, referred your deal into their Angel Group, and the amount of time your have remaining in OPENdeals
On the right hand side is the News Feed, where you will see all investor activity on your application. Investors review submissions to bring the best opportunities to the top of OPENdeals. The investor can choose to share that review with you which will appear in the News Feed.
If an investor is interested, they will refer your deal into their Angel Group’s Angelsoft account for review. Angelsoft is used by most of the world's Angel groups to manage ALL their deals, not just the ones from OPENdeals.
When an investor refers your deal into their group's Angelsoft account, the General Manager is notified by email. That deal shows up at the top of the New Submissions list which is the first thing that the members of the group will see the next time they log in.You will be notified by email of the referral. When you log into the Funding Manager you will see that you have a new section for this group.
A deal-specific email address is included. This allows you to communicate with the investor that referred your deal along with the General Manager of the group. As your deal progresses, you will continue to use this email to communicate with all interested investors.
1. Click the Get Started button on the OPENdeals page
2. Register or Login if you already have an account
3. If you have previously applied to another Angel Group, you will be asked if you want to import your answers from that application.
You can do this at any time by clicking the import button at the top of the screen
4. Fill out your application. This is often the only document that an investor will look at; make sure that you fill it out completely. Do not put “see business plan” in any of the fields. Investors do not look at business plans until much later in the process, if at all.
5. Upload a video pitch or click “Record With Webcam” to record a video using your webcam directly in your browser. A video pitch vastly increases the number of investors who will look at your application.
6. The application will autosave every 10 minutes, but you can click save at the top of the screen at any time. Click Save & Close to finish your application later.
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7. When you are ready, click Submit at the bottom of the page. You will be brought to the payment screen where you will be asked to pay by credit card. The cost to apply to OPENdeals is $250.
