Investments over dinner and board room – Angels v Seed Funds

(embarrassing picture from an old Newsweek article)

Eric Paley called me one evening to talk about an angel deal he was looking at. I was cooking dinner with my wife when he phoned. We talked about whether behavioral psychology could really work in convincing consumers to reduce their energy consumption. Eric had known the founders for years and thought the world of them, and I had gotten to know one of them, and figured the business was a bet worth taking. While still cooking, I agreed to invest with Eric and Dave Frankel. That investment, Opower, is my best to date.

It got me thinking how different angel investing is from my role as an institutional seed investor. I no longer make investing decisions while cooking, and that’s just the start.

1000s of companies vs dozens

As an angel investor, I saw a dozen or two companies per year. For the better part of my angel investing career, I was running a business so I didn’t have time to meet hundreds of start-ups. Thus, my context was very different. My first year as an angel, I looked at a med device company, a sports nutrition company, and a restaurant business. I had very little context on any of these. In some sense, ignorance was an asset and thus it was easier to make a quick decision with limited data. There was no time or means to “get smart” in a given space, so if I didn’t get the gist of the business in the initial pitch, I didn’t invest. (that year, I invested in none which was a mistake!)

Founder Collective receives thousands of opportunities per year and we take about 1000 pitches. We track our “venture” funnel in a CRM (jerry rigged Salesforce.com). The minute I see a company that’s intriguing, I can see if we’ve met them before and ask my partners what they think. Usually one of them will have knowledge about the space or related companies. Thus, the context around each deal is much more developed when we make an investment.

Angels pursue passion, invest in the network (and mostly ignore valuation)

When you’re investing your own capital, you can invest in stuff you’re passionate about. Noted angel investor Andy Palmer pays particular attention to the healthcare space, and Joanne Wilson favors women entrepreneurs in the industries she knows well. I invested primarily in my network – virtually everyone I invested in as an angel was someone I knew.

In the seed fund world, investing is our business. We can’t just invest in industries or people that we know. (If so, I would only invest in dental companies!) We make 20-30 investments per year. There simply wouldn’t be enough opportunities. That isn’t to say we don’t have high conviction and enthusiasm for the stuff we fund, its just that we need to explore a myriad of opportunities. Additionally, while some more experienced angels are price sensitive, as a fund, we are much more focused on valuation than I was as an angel. Angels don’t need to think about IRR, mainly cash on cash return, but as a fund we’re measured on it.

Follow on support

I did very little to check in on my investments. Often times, I wouldn’t even be aware of follow-on financings. These investments were for fun and hopefully a little extra “alpha” for my personal portfolio.

As a partner at Founder Collective, I’m responsible for keeping my partners up to speed on our companies. In turn, we have to keep our investors (LPs) updated on the performance of our companies. We discuss them at our annual meeting and they receive regular reports on their value. There’s a benefit here, which is our portfolio gets the benefit of help not just from me, but from the whole FC team and sometimes, even our LPs.

The increase in the universe of angels and seed funds is a good thing for entrepreneurs, but with so many options, fundraising has gotten more complicated. Entrepreneurs today can sequence their fundraising, and graduate from Angel to Seed Fund to Series A fund, etc. This provides the entrepreneur with more options along the way, even for those starting companies in the dental industry!

 

SXSW observations (party meter is at 7)

After a few days running around Austin, I jotted down a few of my observations.

International flavor
Maybe it was the fantastic mix of Korean kimchi and Mexican tacos that I ate last night, but I sensed an international vibe to SXSW. I heard numerous accents and languages spoken throughout the convention center. Prior to the conference, I received invites from dozens of groups outside the US hosting events. The Silicon Valley culture has definitely permeated the globe (nobody carries that torch better than Dave McClure). Moreover, the Whatsapp acquisition has led the generally inward focused tech community to understand the value of a global userbase.

Medtech is mainstream 
I saw connected health devices of all kinds. One example was Wello, an iPhone case that captures your vital signs. Another interesting one was Push Strength, a wearable that ensures you’re exerting the ideal amount of power when lifting weights. The R/GA accelerator in NY hosted its demo day in Austin as well, featuring a handful of intriguing connected devices. I still believe we’re in the early innings as it remains ambiguous as to how  consumers will use this information in our daily lives.

Commoditization of hardware is fast
I was in the market for a battery recharger (juice pack) and was able to pick one up that can charge my phone 2x for $20. I was shocked how cheap it was. It was a reminder that despite barriers to entry, hardware can commoditize quickly. Larger companies or companies that know how to access Asian manufacturing can produce similar quality stuff quickly and cheaply. It’s another reminder why upstart hardware companies must leverage software as their differentiator. I wouldn’t be surprised if we see lots of low-cost wearables in coming years.

SXSW fatigue
The conference was as energizing as ever. However, I noticed that some of the entrepreneurs and VCs I would have expected to attend, did not. I  heard someone say “The valley is over SXSW.”  While that didn’t feel to be the case, we did find that within the FC portfolio, fewer founders attended than in previous years. I suppose they’re all heads-down focused on growing their businesses instead of loading up on BBQ!

Tech party meter stands at 7
When I started Handshake.com in 1999, I remember attending a party on a huge yacht that served lobster and top shelf drinks.  A well known band performed on the deck. Those types of events were the mainstream in those days. While the parties at SXSW this year were  swank, and enthusiasm ran high, it didn’t feel over-the-top like I remember from 1999. On that metric, I’d put the tech party meter at about a 7, so I suppose we’re okay … for now.