Clavier’s Lessons for Angel Investing (Summary by Nick Wyman)
Despite flawless 72 degree weather outside, the Wittemyer Courtroom was standing room only for Silicon Flatirons’ annual entrepreneurship conference. The Mile High Tech Entrepreneurship Conference: Angel Financing – Understanding the Early Outside Money In drew a sell-out crowd to hear some of the nation’s foremost authorities discuss angel investment.
A conference highlight came from the keynote address by Jeff Clavier, whom Foundry Group’s Jason Mendelson introduced as one of the original super angels. Clavier’s keynote, “So you want to be an angel?” covered the promises and pitfalls of becoming an early stage investor. This post captures some of the key takeaways.
Clavier started by encouraging attendees to pay attention to the following basic considerations before jumping into angel investing:
- You must be accredited
- You don’t do it to make money
- You don’t do it because it’s cool
- You do it because supporting innovation and entrepreneurs is a passion
Still qualify? Great, but you’re not nearly ready to start investing yet. Clavier recommends first doing your homework: attending conferences, speaking with experienced angels, reading lots of blogs, and getting up to speed on relevant books like Do More Faster.
Clavier recommends developing an investment thesis that will be the basis for your future deal sourcing and screening. Be careful to consider the sectors, types of startups, locations and company profiles that fit your experience and investment objectives. Take note that the vast majority of angel investments are within one day’s travel. This is a perfectly reasonable limitation as coordination and communication become more difficult as distance increases.
Clavier suggests that investors next think about allocation. Typically, Clavier suggests creating an account with $100K to $1M to be invested in $10K to $25K slots over the next three years. Remember, this is an account full of money you may never see again so you have to take your time, diversify your risk and, above all, love the process.
The tricky part isn’t just finding the best deals, it’s getting a seat at the table. In order to attract good deals, you must understand and articulate your value as an investor. Figure out what, beyond capital, you bring to the equation. Hangout with entrepreneurs and build your reputation. Create a personal brand using tools like social media to connect with and support the overall ecosystem. Know what value you can add, and then offer to help and hustle your way into the best deals. Alternatively, if you are fortunate enough to befriend an experienced angel, ask to shadow their investments and learn from them with the aim of cultivating your own unique set of value propositions.
Deal sourcing not a problem? You’ll still need to decide where to invest. This is where your carefully crafted investment thesis comes into play. “If you do random shit, it’s shit,” Clavier warns. Make sure to use your investment thesis as an absolute filter and unless you like the founders, are passionate about the product, and love the deal, don’t invest.
Assuming that you still want to be an angel investor, that you’ve learned everything you can, met with everyone you can, allocated money to invest, weighed deals against your investment thesis, done your due diligence and finally found a deal that makes sense for you, it’s then time to close.
Angel rounds will usually (hopefully) have a lead investor who handles the negotiation on terms/price, completes the lion’s share of diligence, and, if applicable, joins the board. For your part, it’s important that you understand the differences between an equity round and a convertible note. Additionally, be sure the deal terms are standard and won’t scare away future investors, who may be crucial to the venture’s ultimate success. (Clavier plugged seriesseed.com as a great resource for market term sheets.) The deal should be clean and done with reputable lawyers representing both sides. Clavier cautions that even the best of companies, when encumbered by poorly conceived investment terms, can be doomed to fail.
Congratulations, you’re an investor! Now what? First and foremost, remember “it’s not your company, it’s theirs.” You invested in the team and you have to let them steer the ship. Any information and reporting you expect should have been contracted beforehand (Clavier suggests a monthly email from the CEO that outlines progress and identifies the current challenges facing the company). Know where you can add value and let the founders, executives and other investors do the rest. Beyond assisting where appropriate, enjoy the ride. If you get worried, which is perfectly natural at times, compare notes with your lead or co-investors who have more experience dealing with similar situations.
There it is. Time to start from the beginning and repeat as necessary. Be sure to learn from your mistakes and those of the others who have come before you. Define and stick to your investment thesis, develop your value proposition as an investor and be a champion for yourself, your portfolio companies and the ecosystem as a whole. Help when you can and be a supporter from the sidelines when you can’t. And don’t forget, “If you don’t love it, don’t do it. Liking isn’t enough.”
Nick Wyman is a Boulder angel investor who will graduate from Leeds MBA in spring 2012.