Angel Investors Acting Like VCs

A Business Week article (thanks John and Steve!) discusses that angel investors are banding together more often and investing larger amounts in less risky deals. The author mentions that more than 200 organized angel groups exist in the U.S. served by the Angel Capital Association.

I like seeing the growth from the organized angel groups.

FundingUniverse.com (one of our portfolio companies) helps by providing free online software (the DealFlow Suite) to help angel groups find quality business plans and growing companies that they want to learn more about.

But I still think that the vast majority of angel investments are made by individuals who are not part of organized angel investor groups. I think the largest investments are made by superangels who don’t join groups and I think the majority of deals come from angels who aren’t trying to be like VCs–they are helping entrepreneurs that they know and like to try to get something off the ground. They invest anywhere from a few thousand dollars to hundreds of times that amount.

I know quite a few superangels. I wish more of them would join angel investor groups because sometimes angel groups can’t raise enough money to get good deals funded. Superangels could easily solve that problem.

Meanwhile, FundingUniverse.com now has more than 700 angel investors (20 state sites have at least 10) registered on its network of states sites. They collectively have more than $500 million in "available capital." As more and more state sites attract angels, the company will be able to hold speed pitching events and larger regional events in more locations.

Wikipedia’s New Competition

Wikipedia is providing “semi-protection” to articles that get vandalized often. New users won’t be able to edit these pages.

Meanwhile, Wikipedia co-founder Larry and serial entrepreneur Joe Firmage (who has Utah roots) have raised $10 million to create an expert-driven open source encyclopedia called Digital Universe.

It will be interesting to see if anything can stop the momentum of Wikipedia. I wouldn’t bet that Digital Universe will ever come close to catching up. That said, a commercially funded #2 player in the online encyclopedia space could very well be a financial success. And I think that it will be.

Pitching VCs to Get Valuable Feedback

Even if you don’t need to raise money, or if you know you probably aren’t fundable, you should probably get in the habit of hanging out with and pitching VCs regularly. Why?

Because VCs have more meta-data about who is doing what than any one else in the business world. They are on the front line of all the emerging technologies, the best new ideas, and they know hundreds and hundreds of entrepreneurs and funded companies.

I blogged last month about the phenomenal meeting that David Bradford and I had with Tim Draper of Draper, Fisher, Jurvetson, where he gave us a HUGE idea for FundingUniverse.com. That has started the ball rolling and our team is mobilizing around his idea.

Yesterday one of our teams had a meeting with a very successful VC who shared some excellent wisdom with us. Here are some tidbits:

  • He asked, “Who are you going to sell the company to?” We didn’t have a good answer. He said, “I never start a company without knowing who is going to buy it. And then I run the company with the intention of not selling to them, otherwise we stop focusing on our customer.”
  • “Laser focus on your customer and serve their needs. If you don’t know who is going to buy you, then you don’t understand your customer.”
  • “Who is your customer? How many have you talked to? What are the top 3 features they want?”
  • “Focus groups are a complete waste of time. They have made more companies go out of business … if you get the wrong panel, you won’t solve the right problems.”
  • Build a panel of customers from the kind of people that always say they knew what was coming. Nail the panel. Have them tell you what is coming and then work back from there.”
  • Must read book: “Getting It Right The First Time” by Internet Research Group
  • Our venture friend also told us about a great new technology that might fit into what we are doing.

    So bottom line was we got feedback on our business, our team, potential partners, and some pointed questions that will force us to better define our customers, systematically talk with more of them, and think about our exit and who will want to buy us as we meet our customers needs.

    So when is the last time you pitched a VC? What is stopping you from trying that right now? Make some phone calls. Use LinkedIn. Get introduced. Try your pitch and see what you can learn.

    The Vision of Grow Utah Ventures

    I’m sitting inside the old greyhound bus station on Ogden’s infamous 25th street.

    But it isn’t a bus station anymore. Utah visionary Alan Hall and his team at Grow Utah Ventures have purchased the old bus depot. They are renovating it and today are christening it the “E Station.”

    E, of course, stands for entrepreneur.

    Alan Hall’s vision is for Grow Utah Ventures to be the most influential private sector force for economic development in the state of Utah, with a focus on Northern Utah.

    In the next five years Grow Utah Ventures plans to launch 100 new companies, invest $15 million in entrepreneurs, and create over 2,000 good paying jobs.

    The E Station will be a launch center for new companies, providing low cost office space, mentoring from GUV Advisors, and sales and marketing assistance.

    GUV companies will also have access to expansion capital because GUV is closely allied with many angel investor groups in Utah, including groups in Salt Lake, Weber, Davis, Cache and Washington Counties.

    The E Station ribbon cutting starts in 10 minutes.

    It is conveniently located a block away from MarketStar, a global sales and marketing outsourcing company which helped its clients sell more than $8 billion in products last year.

    I love Alan’s vision. I believe the economic impact from funding 100 companies and mentoring hundreds of entrepreneurs will be vast. It will be part of his lasting legacy.

    At a time when people worldwide are complaining about slow government response to every external event and disaster, I love watching private entrepreneurship and philanthropy having such a major impact on the world.

    From Larry and Sergey’s incalculable effect on the worldwide diffusion of knowledge, to Clara Barton’s Red Cross, which provides relief to millions, to Habitat for Humanity’s vision of providing homes to the needy, and on and on. These things come from individual initiative, not government fiat.

    Remember JFK’s powerful words: Ask not what your country can do for you; ask what you can do for your country.

    Think of the kind of world we would create together if all of us tried to answer that question.

    Thanks, Alan, for answering it with this wonderful Grow Utah Ventures initiative!

    Sent wirelessly via BlackBerry from T-Mobile.

    Josh Coates: Disruptive Entrepreneur Speaks

    If you are in Utah Thursday, you have to pay $10 to hear Silicon Valley transplant Josh Coates speak about how to start a company
    and raise money. He is an incredible technologist with a disruptive
    business model and he knows how to raise capital. He likes to challenge
    the way the Utah angel and VC community fund startups. Josh likes the
    Silicon Valley way. The event will be at Los Hermanos in Lindon at 3:30
    pm. Don’t miss this.

    FundingUniverse.com

    We are making serious progress with our FundingUniverse.com
    business. Soon we’ll announce some new capital, new leadership, and
    some significant partnerships that will help this company move forward.
    I love how the internet can create so much visibility for a new
    business idea. What used to take years in business formation now takes
    months.

    If you know any angel investors or VCs, please encourage them to signup for FundingUniverse.com (it’s free) and look at some of the 543 business plans that have been posted there in the last few months.

    I’ll be on a panel at the National Association of Seed and Venture
    Capital conference in Philadelphia next week, primarily to demonstrate
    the new DealFlow Suite (TM) which we make available to organized angel
    investor groups around the country.

    It’s nice to start getting both traction and trajectory with this business.

    Finding Angels and VCs

    I think LinkedIn.com is one of
    the best ways to find angel investors in your area. With 3.5 million
    members, including many investors, this is a great service and a great
    way to get introduced through a mutual trusted acquaintance.

    But in addition to LinkedIn.com, I have found value in owning a copy of
    the 1998 Pratt’s Guide to Venture Capital Sources, a 600+ page hard
    bound book that probably cost about $50. Of course, this edition is
    almost useless since it is so out of date. There are probably more
    current editions. Vfinance.com sells a current database of venture
    firms on CD ROM for $299.

    It’s much harder to find a directory of angel investors, and since they
    are many times more likely than VCs to fund your startup company, it
    can be frustrating if you are an entrepreneur looking for potential
    angel funding.

    Our solution? Let’s all work together to create a free open-access
    directory of angel investors (both organized groups and individuals)
    and venture capital firms around the world.

    We are launching a directory of venture capital firms called VCWiki.com and a directory of angel investors called AngelWiki.com.

    FundingUniverse.com will
    appoint a part-time editor to manage the volunteers who want to
    participate in building these community resources. We will use Wiki
    technology so that anyone can easily add their own information to these
    directories.

    Sites like this have limited value at first. But over time, as people
    contribute what they know, they can become invaluable sources of
    information for entrepreneurs. We hope they will become useful to you.

    FundingChina.com

    So we decided to launch our first FundingUniverse.com
    international web site, and thought we would start with China, since
    there seems to be a little economic activity going on over there these
    days. :)

    FundingChina.com is in
    English for now, and it will be a matching service for entrepreneurs
    with ideas and angel or VC investors who want to get involved in the
    Chinese market. Later, hopefully, we’ll offer Chinese language versions
    (although I hear there are over one hundred dialects.)

    Auctioning Consulting Services

    It’s nearly 3 am, and I’m having one of those sleepless nights, where
    my mind is racing with new ideas and lists of things I have to do. I
    know (from experience) that I won’t get back to sleep until I’ve
    written things down. And while I’m at it, I decided to blog about one
    of these new ideas.

    For several months I’ve been contemplating a shift in my career from
    pure startup entrepreneur to venture capitalist. I’ve been studying the
    history of venture capital and have learned that many of the pioneers
    of the industry and many of the leading VCs today don’t just look for
    deals, but they create them. They help form companies, generate
    business plans, recruit management, and act in many ways like
    founders–they just don’t often run the companies.

    This appeals to me a great deal. In fact, it is really what I’ve been
    doing as a so-called "parallel entrepreneur" — the difference being
    that I have been using a bit of personal seed capital for each of my
    startups. How much better, I think, it would be if I became a
    full-fledged VC so that I could invest more significant funds in these
    startups, as well as providing training and mentoring for them.

    So I’ve been pondering ways to make this shift.

    In the meantime, my startups such as 10x Marketing, Infobase Media,
    FundingUniverse, Web Evident, and Worldhistory.com are experiencing
    growth (and growth pains) and overall are looking more and more promising. It
    is difficult for me to take capital out of these companies in the form
    of salary or consulting fees, when every dollar that I can keep in the
    company is one dollar that can be used to help the company turn the
    corner and get to cash flow positive. And my return in the form of
    shareholder value will be far greater than any return I can get from
    mere income.

    Last night a relative asked me why I don’t just get a normal job. I
    responded by asking: would you rather have a normal job with a salary
    of say $100,000 per year or a harvest of $1 million every three years?
    Internet startups can easily generate millions of dollars of
    shareholder value in a short period of time (say 3-5 years). In fact,
    the highest percentage growth in the equity value of a startup occurs
    in the first few months of its existence where reasonable people
    (such as venture investors) look at a business idea and the team that is determined to
    execute on it and they often give the company a $3-4 million valuation
    before it has even finished its product and taken it to market.

    It’s not easy to get a multiple million dollar valuation for a raw
    idea. Only 1-3% of companies that pitch venture capitalists get
    funding. The strength of the team is of course a major factor. But tens
    of thousands of new companies get started every year with investment
    from personal savings and from family, friends, and angel investors,
    and in almost every case there is an initial valuation that is
    significant. If the company succeeds, then the early equity holders can
    eventually cash out and do quite well.

    I totally value equity in startups more than I value a salary or a
    traditional income. But that can create a bit of a dilemma between
    harvests — in fact, I am accustomed to experience serious personal
    cash flow issues as my appetite for being involved in startups far
    exceeds my ability to fund them. The good news is that perhaps 3-5
    years from now the harvests will come more quickly, as multiple seed
    deals per year turn into harvestable businesses.

    But what to do in the meantime? I don’t want to take cash out of my existing startups, but I haven’t yet joined a venture fund.

    So here’s the idea that is keeping me up. I’ve done some consulting
    over the years, but I had a very hard time pricing my consulting
    services. In one instance, I got a wonderful client in Canada, spent a
    few days with them, worked feverishly on a marketing plan and internet
    strategy for them, and delivered it. But while I was working for them I
    discovered how serious their cash flow problems were and how the
    founder was going into debt personally to pay my fees. I also realized
    that my plan would work (of course I thought it was brilliant) but
    would take additional capital for them to pursue it. I felt bad for the
    company and waived all my consulting fees. All they did was cover my
    travel expenses.

    So I’ve learned that I will never been good at charging for my consulting servides.

    But, maybe, I wonder, I could auction off my consulting services
    through eBay or some other online system. The market demand for my
    services would bring potentially dozens of companies into the auction,
    and the ones that want my services most and could afford them would win
    the auctions.

    Since my consulting time during this transition period from internet
    parallel entrepreneur to investor would be very limited, perhaps as
    little as one day a week, then the limited supply of my time might
    drive the prices up to a reasonable level.

    I need such an online system to remove myself from the process, since I can be too soft or generous for my own good.

    At 10x Marketing when we used to help companies set up auctions on eBay
    for their products, we learned that conversion rates on eBay were often
    significantly higher (sometimes several times higher) than our clients
    pre-existing web sites. With that knowledge, we started directly
    pay-per-click traffic to go directly to the eBay auctions. The more
    people you can get into an auction, the better the conversion rate and
    the higher the selling price.

    So with my personal consulting, how could I generate online demand for such an auction?

    I could of course use email, and notify some of my 2,600 personal contacts that I’m offering a day a week of my time.

    Also, FundingUniverse has more than 1,500 registered entrepreneurs who
    are currently seeking funding to grow their companies. Some already
    have dozens of employees and significant revenue. These would be
    candidates for consulting as well.

    Also, I could use LinkedIn.com where I am two or three degrees away
    from more than 650,000 people. I wouldn’t spam my LinkedIn connections,
    but I might get introductions to a few dozen companies that I would
    like to consult for, and invite them to participate in the auction.

    And finally, I could always use Google and other search engines to drive traffic once the auction has started.

    So here’s the question for all my kind readers (so that I can get back
    to sleep): do you know of any individual or consultant or team that has
    auctioned off their professional services? Also, what do you think of
    this concept? Could it work? Could it work for me? Could it work as a
    business model–an auction for consulting services–if the marketing
    engine created enough demand to generate decent pricing for the service
    providers?

    I know there are lots of online systems such as eLance and rentacoder
    where companies post projects and individuals or companies bid on how
    much they will charge to do the work. But is anyone trying the opposite
    approach? Are any attorneys, or accountants, or business consultants
    using market demand to fill up their schedule and determine pricing?

    Okay. So I’ve let everyone know where my career is heading, and I’ve asked you all for advice.

    So g’night.

    Money Looking for a Team

    You always hear about how much venture capital is out there, and that
    there is more capital than there are good ideas or good teams. Business
    2.0, one of my favorite magazines, just interviewed 11 VCs to discover which idea they are most anxious to invest in right now,
    if only they can find a team to execute on it. Someone emailed this
    article to me and suggested that we could implement something like this
    on FundingUniverse.com,
    so that angel investors could list the ideas that they are hoping to be
    able to fund. I love this idea, and we’re going to experiment with it
    right away.