Some of you know that in addition to may activities with Venture San Diego, I also serve on the Board and am active in the Tech Coast Angels. TCA is an angel investment group that spans 5 chapters across Southern California. When I mention my TCA affiliation with local entrepreneurs, they sometimes share that they have been advised to “not waste their time” with TCA or angel groups in general. I have spent a bit of time exploring this, and it appears that the bad reputation of angel groups seems to stem from the following:
- 1. Perception that members in angel groups rarely write checks
- 2. Fear of the process – time consuming, complex, etc.
- 3. Concern that the entrepreneur will not be treated well
I thought I would share some of my experiences with angel groups and hopefully provide some insight on how best to navigate angel groups if your venture is in search of seed level funding.
First, a bit about my background. Before I joined TCA, I was the founder/CEO of a company that raised $2M led by TCA. That’s right – TCA led two separate rounds of $1M each for my company, AIRSIS, Inc. Overall, I thought the process was fair and ultimately we reached terms that were acceptable to all. Several years after funding, TCA members also assisted with additional debt financing for the company. Along the way, I found the TCA investors in my company (and their designated board director in my company) to be patient, entrepreneur-friendly, and fair. That is a big part of why I chose to join the group after the sale of my company.
With that said, it is important to understand how raising money from angel investors differs from other forms of capital. The following are some of my observations that I shared several years ago on a review that I posted at TheFunded.com…
1. You have to go into the process realizing that you are not pitching to a VC fund – you are pitching to a group of angel investors who have been conveniently assembled to allow you to make a single pitch to 50+ accredited investors. Some of these investors can invest $500K+ in your deal. Most will likely invest $25K to $50K.
2. If you get the attention of a TCA member to lead your deal, he/she will do much of the heavy lifting to rally others into the deal. You will also have an opportunity to present in other regions and syndicate to other angel groups. While this takes more time, you have the advantage that you have already been vetted by existing members. In both of my investment rounds, we received funding by members in San Diego, Orange County, Los Angeles, and Santa Barbara.
3. The closing and funding process is typically handled by the angel group (and their hired attorney, who’s fees will come out of the transaction). In the case of my company funding, the TCA term sheet gave us a mechanism to bring our own non-TCA contacts into the deal, with these contacts knowing that terms were set in an arms-length manner (as opposed to friends-and-family deals). This allowed us to leverage the angel group funding to raise additional funds outside of the group.
4. After our equity funding rounds TCA investors have loaned my Company additional funds when we needed it (over $400K), and have provided strategic counsel and even access to customers, partners, and related business development. I had 30 TCA investors, and without exception all were patient and entrepreneur-friendly. I did my part in this by keeping all investors informed on the Company’s progress through quarterly investor updates and annual audited financials.
The bottom line: It is extremely difficult to raise $500K to $2M from any source. It is usually too big for friends and family (or a single angel investor), and too small for VC. Thus, for my company (raising $2M), pursuing an angel group for funding was a very good fit.
It my next post I will dig further into the first objection raised above: Do angel groups really write checks?