This post is taken from a lengthy comment by local techie Aaron Sylvan on a recent Betabeat story on NY Angels. We felt the comment was in depth and deserved its own forum.
Boy am I gonna get chewed out for this one… I hope my comments are useful to someone, because I expect to be flamed for this commentary. Hopefully I don’t burn any bridges by presenting a somewhat unpopular view.
The NY Angels is a great group, but I agree that the business model around “Angel” investing has changed considerably. Once upon a time, there was such a thing as a bright kid with an idea who just needs a few $ to pull it together, and a bunch of wealthy older folks who would kick in a bit to see where it goes… they get to be mentors, and if they really pick a bright star, then the might get to brag about being one of the first investors in the next Google (or whatever).Nowadays, that’s not what “Angel” investors are. Have a good idea? Forget it. You must think you’re back in 2007, or 1999, or some other millennium completely.
The NY Angels have told me on numerous occasions they are only interested in companies with revenue, and ideally positive cash flow. There needs to be not only a concept, but also a great product, a great team, anchor customers, and rapid growth into a large sector.I daresay, a tech company with all those attributes must be under terrible management if it’s still willing to consider taking on the burden of outside investment!So what’s this all about? Don’t get me wrong — I know a few of the NY Angels personally, and I feel privileged to accept occasional mentorship from three of them. But it’s not a consortium of people who plant seeds of entrepreneurial charity into a garden of aspiring youngsters…
There are really two “types” of angels: “Type I”, which you’re probably thinking of, is the ex-entrepreneur who has cashed out for tens of millions (or hundreds) and now just wants the excitement of being a Santa Claus to the next wide-eyed kid who reminds them of themselves in a younger day… whereas “Type II” is the compulsive gambler or show-off wannabe who has a few hundred thousand to play with, and is hoping that Angel Investment will be like a high-yield savings account. Or he just wants to be able to tell his friends, “Yeah, I’m an Angel Investor these days. I roll like that.”
The NY Angels has a lot of “Type II” angels… So, the investments have to be “conservative”, which means nothing exciting. Which is why they really haven’t “knocked any out of the park” lately.The level of traction the NY Angels require of a business is comparable to what VC Firms used to do… but when the economy crashed in 2008, the VC firms pulled out of risky early-stage ventures and saved what little cash remained for bail-outs of their existing portfolio companies. This left a void, which groups like the NY Angels filled.Instead of investing $200-$500k in a really clever idea, mentoring that idea, making some introductions to hook up the first good sales, and so forth… they lowered their risk profile to only include established and proven businesses.
In addition to the crash drying up “Series A” Venture Capital funding, the onerous Sorbanes-Oxley rules increased the legal fees associated with a VC transaction to the range of $200-300k… which means there’s no practical way for a venture capital firm to do a transaction smaller than $1-2M. Even if they were willing to (nowadays some are, again, although not for early-stage companies but for later-stage businesses in distress where they can buy a big piece for pennies-on-the-dollar).
The NY Angels, are (in my opinion) avoiding risk in an effort to appease the lower-net-worth members. The investment profile is “must have great team, great product, great traction, selling into a giant and growing market segment”… but if the product was built on <$100-200k, then it’s unlikely to have all that. Unless the company’s activity is so simple that a competitor could knock it off, which the Angels will be quick to point out.I would hate to be mistaken for being a case of “sour grapes”, as someone who had a plan rejected — I freely admit the plan I pitched was far-fetched and the progress I demonstrated at the time of the pitch was shaky.
What disappointed me was that I was warned in advance “we only look at things that have tremendous opportunity and defensible positioning, which have already proven themselves using their seed funding”… I realize that a software project which would have cost $200k in 2006 might now be done for $20k in Rails or WordPress… which means there are more seed-funded startups that have demonstrated pretty cool traction… but many things, such as enterprise business software, cannot be written AND proven on a shoestring.Once upon a time, Angels filled that gap. Now they’re just mini-VCs.The only way to get $500k+ funding without having a ton of customers… is if you already cashed out for millions. I believe the risk in their investments comes largely from picking companies which got big enough to impress them, using a tiny budget, and then petered out.
If the NY Angels want to get more exciting, maybe they should tell their smaller investors to grow a set, and stop “playing it safe”. Make moves that are more exciting, to attract more of the big players — who can afford to take a bunch of 100% losses while hunting for the 10000% headliners.My advice to the entrepreneur seeking Angel investment: forget about it. They won’t take you until you’re big enough you don’t need ’em. And by that point, you’ll have no interest in giving them board control, liquidation preferences, and all the other stuff they expect.
-Aaron Sylvan, President
Sylvan Social Technology, LLC
(By way of full disclosure, I have raised $3.6M in seven private offerings I closed, funding two businesses at which I was CEO. In 2009 I pitched a project to the NY Angels, which rejected me, although I remain in contact with several individuals in their group, and consider them to be among my personal friends and most valuable mentors.)