There are a lot of great Angel Funding opportunities in Southern California. Each organization utilizes different processes for the funding process. I have listed below five reasons to bring your deal to the Pasadena Angels.

1) Mentorship: When you submit a deal to our group we select one of our accomplished members to discuss your business with you. The initial conversation will highlight your strengths and weaknesses and expose your opportunities and threats. If you are fortunate enough to continue through our screening, breakfast selection and due diligence you will have experienced successful people mentor through the whole process. This benefit is provided all free of charge. The companies that are funded usually have a Pasadena Angel board member to help advise them.

2) Transparency and feedback. As your business is vetted through the process we will provide insight on our group’s evaluation of your plan and organization. We emphasize key metrics and potential strategies and tactics that may make your plan more robust.

3) Continued relationships: Our members constantly keep in touch with the applicants whether they continue through the process or not. We have an excellent record of bringing back companies to the process who have implemented changes that we recommended. In addition many of our companies return to us for follow up funding.

4) Professionalism: Our unique group of individuals pride themselves on working with all of our applicants in a professional and respectful manner. You will be treated fairly, honestly and professionally

5) Results: Over the past 10 years we have funded over 65 companies with 25 million dollars

Pasadena Angels-More than the Money!!

As an Angel investor and retired intellectual property lawyer I am struck by the amount of money spent by startups for IP.  There are so many cash demands made on a new venture that I think management should consider engaging in more self-help to meet their IP needs.  Government websites offer much valuable “how to” information that can help a new  venture initiate the patent process or  register a trademark or a claim of copyright without an attorney or at least with less attorney expense.

For example, there is practical information at the Patent Office website,  uspto.gov,  that can guide a  user through the process of taking the first step in patenting an invention, i.e.,  filing a provisional patent application.  This is a significant step because it establishes a “priority date” that may be perfected by filing a regular patent application within one year from the provisional filing date.  The necessary  forms and information are available at the  Patent Office website. 

The following points cannot be emphasized enough:

1)  The priority date of a provisional patent application  is often critical because it determines what is prior art;  priority is only established for subject matter actually disclosed in the provisional application.         

2)  There is no penalty for disclosing too much information, so error on the side of too much rather than too little.

3)  Consider including source code for a computer implemented invention.                    

4) A provisional application  is not examined or its self be become a patent  so there is no specific format; its purpose is to establish a priority date for a regular application—the overriding principle is to disclose the subject matter to be patented completely and to submit a claim.                          

5)  To preserve the established priority date, which can  be of critical importance, a regular patent application must be filed within one year after the provisional filing date.       

6)  It is not unreasonable for an inventor with some amount of technical writing experience to prepare and file a provisional and even a regular patent  application without help of an attorney by using other patents as a model or guide.                                             

7)  If an inventor wants to use a patent attorney to file a regular patent application, significant cost savings are still possible  by  providing the attorney with as nearly complete a draft as possible.  

8)  A provisional patent application is not available to the public until a patent on the invention issues from a regular application unless the inventor decides otherwise; the inventor has a choice between  patent or trade secret rights up until the time of patent issuance.

 9)  If the invention is important to the business plan, the regular application should not be abandoned without first consulting patent counsel.

9)  Don’t be shy about consulting the patent examiner that is handling your application; it is their charge to assist inventors obtain a patent commensurate in scope with the invention.

10) Good luck.

I think there are three fundamental truths regarding the valuation of early stage businesses by potential investors:

1. The first is that a pre-money valuation is ultimately an outcome of negotiation, rather than a mathematical calculation of discounted cash flow or any other metric of potential company performance.
2. The second is that, despite the typical non-reliance on formal calculation, investors’ views on valuation are in some way based on a perception of risks and potential return of the investment—or, put another way, of the interaction of fear and greed.  
3. The third is that pre-money valuation is just one of many funding terms and conditions important to investors and companies, and not necessarily the most important one, though it might arouse the greatest angst.  

Investors typically arrive at reasonable valuation conclusions after a process of due diligence. For an early stage investor, due diligence is undertaken to refine initial impressions of factors affecting investment risk and return. There are no “rating agencies” (as in the world of bond investments) that offer third party risk assessment. There are no widely followed “buy side” analysts (as in some public equity markets) who package critical market, financial and other analyses. And finally, there are almost no early stage investments by angel groups or venture capital firms undertaken based on prepackaged offerings marketed through private placement memoranda.

In large measure, at least in organized angel groups and venture capital firms, due diligence work is done by deal leads and other participants in a very hands-on way. They review market data and customer feedback; analyze competition, pricing and distribution strategies; study financial statements to understand margins, burn rates and hidden liabilities or inflated assets; gauge technology risks and product development plans; and of course assess management through reference checks and face-time. Only in the area of legal due diligence do early stage investors typically outsource some of the work required, although the use of student interns by organized angel groups to assist with parts of the process is becoming more common.

Investors’ decisions to move forward to negotiate valuation and structure a deal (usually through one or more lead investors) is the most positive outcome of a favorable due diligence process. The goal is to position the investor for a strong upside while mitigating perceived investment risks, particularly those that surface as most critical during due diligence. The implication is that an early stage company must be prepared for an interactive, potentially lengthy process of dealing with investors’ concerns as they surface in due diligence to set the stage for negotiating and closing a deal at an attractive valuation.

So what is an entrepreneur to do? The first task is to convince the investor that the company should warrant investment at all. This is accomplished by creating interest in the potential opportunity, which is why an outstanding elevator pitch, introductory PowerPoint and one- or two-page executive summary are so important. The second task is to convince the investor that the proposed terms of the investment offer an attractive potential return, given the risk factors.

If a company initially suggests a pre-money valuation much too high—or too low—it raises questions for an investor about whether the company has done its homework regarding valuations for early stage companies of its type (or has done its homework about anything, for that matter) and whether there can ever be a meeting of the minds. To me, it is better for a company to go for a valuation that is “in the ballpark” than strike out in the first at-bat trying to swing for the fences. Alternatively, a company can initially indicate a range for its suggested pre-money value, perhaps a bit on the high side but definitely not out of the ballpark. This suggests both reasonableness and flexibility, good traits to convey to potential investors.

But how can you get an idea of what valuation is “in the ballpark”? Finding out more about the businesses and final terms of other recent investments by the investor you are “pitching” is essential. Why did they decide to fund and support the most recent three or four companies that they have backed?  Have other investors recently funded companies like yours, and if so, on what terms?

The critical task is to try to look at your company in the same way that the investor will when assessing risks and potential returns, and review your strengths (and weaknesses) on the following important dimensions:

1. Quality and breadth of the management team – Have you been able to attract others with strong credentials who share your vision of the company’s potential, and what are they committing to make the business a success?
2. Size of the addressable market – Who does your product or service appeal to, and how much is presently being spent to relieve the pain your company addresses?
3. Uniqueness and quality of the technology – Do you really have a process or product that is truly unique and can’t be, at least with some effort, worked around or duplicated?
4. Evidence of customer traction and a high revenue growth rate – If you are a pre-revenue or early revenue company, what is your best evidence of the potential for rapid revenue growth?
5. Capital and sweat equity investment to date – If both are very limited, what about the company has helped create substantial value?
6. Future financing needs – If significant future investment (in the tens of millions or more) is needed, to even begin to produce strong revenue growth and profitability, how high a value can be supported for the company at this stage of its development? And what is the risk of a “down round” in the future?
7. Future profit margins – As the business scales, can it develop strong gross margins and significant bottom line profitability?
8. Exit options – Are there many bigger players that could acquire the company if it can begin to execute and scale?
9. Management coachability – Is the team really willing and interested in getting the non-financial input that early stage investors can provide to help the business grow?
10. Deal terms – Putting aside valuation, is the company flexible with respect to the   investors’ other objectives in the financing?

This last point is worth considering further. Your negotiation over valuation will probably start, and end, at a more favorable point if you are prepared to offer the investor:

*a “first out” for the investment, through a liquidation preference and a participating preferred structure (rather than just convertibility to common) to enhance return on investment (ROI), particularly in the case of a middling overall company performance;

*a redemption provision in five to seven years, if the company is successful but decides not to be acquired, to enable the investor to monetize his investment and not get locked in as a minority shareholder;

*one or more board seats and a strong set of investor protective provisions including a vesting period for founders’ shares and reasonable anti-dilution protection, in the event of a future “down round,” to address areas of particular vulnerability.

Even the most enlightened and flexible CEO will inevitably look at the opportunity being offered investors to fund his company in a different light than will the people writing the checks. Investors will be very aware of how difficult it can be to get a product to market, gain strong customer traction, and build revenue and ultimately profitability. Since more early stage companies fail than succeed in executing their business plans, most investors know that product development risk is usually higher, capital requirements more substantial, market acceptance slower, management team-building more unpredictable, follow-on funding more expensive, and exits more delayed than most CEO’s project from their perspective as the entrepreneurial founder and chief fundraiser.

These challenges are why entrepreneurs should not expect investors to get too excited about their ROI projections based on a five-year scenario fraught with uncertainties, especially if the company is a recently formed, two person, pre-revenue organization with little funding to date and major future capital needs. Certainly don’t think that a 20 percent return is acceptable, as the potential investors are probably thinking that, given the risks, they need to see the possibility of a 20x return!

So how can this advice for neither over-valuing nor under-valuing your company be summarized?

1. Do your homework on how investors are structuring other early stage investments and valuing other early stage businesses. Research the “comps.”
2. Try to be realistic about the risks and prospects of your business, looking at it as an investor not a member of your circle of family and friends would review it, at least for the purpose of getting an idea of a range of values that might make sense to a third party.
3. Try to address investor risk factors as they emerge during due diligence intelligently; do not deny them or evade them.
4. Remember that value is only one of the terms, and not necessarily the most important one, that needs to be negotiated to close a funding.

When you are presenting to potential investors it is imperative that your presentation answers all the questions listed below:

√ What product will you be selling? — explain your concept and the sales/manufacturing/distribution processes

√ What are the advantages provided by your service, and how does that benefit the buyer? — we’re  looking for something that’s cheaper/better/faster.

√ Who are your expected customers? — specify those that are in the fold now.

√ Any evidence that customers and users need the offering enabled with your service?

√ What is your marketing plan?  – how will you get folks to buy your product?

√ Who are the competitors?  What competitive advantages do you have? —  IP, business process, 1st to market, etc.

√ What are the financial projections?

√ Who are your principal team members? — described mainly in terms of  their qualifications to do their jobs the company.

√ What are the uses of this investment?  Do you need any additional monies?  What do you expect to do w/ the additional funding?

√ Do you have a proposed deal? — investment terms, including pre-money valuation.

√ What is your exit strategy? — potential purchasers and list some comparable sales (if available).

Are there any other items that you believe are critical? Please add your comments below.

As an angel investor I have spent the last 3 years advising companies to be reasonable about their valuation for their A round. This is an incredibly important and contentious decision (setting the bar) for both the entrepreneur and the investor at this stage of the company. Investors point out current economic conditions, loan activity and other negative economic news while the entrepreneur cites the one company in roughly the same space that sold earlier in the year at would appear to be an inflated value. My concern is that in recent months business journals and publications have highlighted some of the extraordinary valuations re-creating unreal expectations from entrepreneurs again. Examples include valuations for Godaddy.com, Foursquare, Quora, Blippy Inc, and even Twitter which all have monetization issue. Entrepreneurs should view these as validations at the top end and are not the expected mean. We have come a long way from dot.com boom and now have relatively good metrics (CPM and CPK, for example) to forecast an internet company’s financial performance. There are always other premiums such as strategic value, synergies and competitive positioning that distort the results of fundamental business valuation models. I really believed we were returning to sound business fundamentals for valuation but these examples are creating some doubt. Are we faced with such a stagnant investment market where funds or companies that are cash flush and are desperate to generate  growth or hope for a better return than is available in the financial markets? Is it simply hype to rev- up the M&A market or are there underling factors that I am missing? Help me by commenting below.

It’s not an investment fund, and it’s not the sleazy individuals that claim to be angels but are nothing more than consultants that don’t really help you raise money. They also don’t charge entrepreneurs fees for their services like some angel groups, which makes it particularly appealing to Jason Calcanis and me.

AngelList was started by a serial entrepreneur, Naval Ravikant and a VC named Babak Nivi. The site has almost 400 angel investors and 267 VCs as members, including ones in Europe, Australia and Canada.  In a short span of time AngelList has looked at over 1000 deals and has helped fund more than 100 companies.

Some of the AngelList investors, like myself, let you contact them directly. Through my profile page, feel free to connect with me and the Pasadena Angels, as some local companies have already done.  Along with my page, Bob Aholt our Vice Chairman, is there as well.  All we ask before contacting us is that you’ve built a minimum viable product and learn something about your customers by putting it in front of them. After that, just send us your informative150-word elevator pitch, and we’ll look forward to talking. If you can’t get that far without some outside help, there’s an informative post on Ideas Investors that’s worth reading.

Like the Pasadena Angels’ application, the AngelList process is easy (~20 minutes) and pretty straightforward. Their process also forces you to focus on the key points for investors that I’ve mentioned in previous posts—social proof, traction, team, how do you compare to competition, elevator pitch, etc.

AngelList also has a blog and sister site, Venture Hacks, that are well worth following. For pitching the Pasadena Angels, some of the best advice on these sites includes how to create a great elevator pitch  and pitch deck. There are also great write-ups on how not to do your pitch, including an example from Ali G (Sacha Baron Cohen) and his Ice Cream Glove. It’s worth seeing, if for no other reason than his explanation of why his company is a  $34.6 Million billion opportunity.  Better yet is the response from the VC—“This is not going to happen.”

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Angels want and need returns

Although Angels invest their own personal funds and often have altruistic motives, they can’t continue investing without returns. Many entrepreneurs dismiss this idea and figure that if an Angel isn’t beholden to an outside institutional investor the way a VC is, then returns aren’t a high priority. Having been both an Angel and VC, and although both scenarios are pretty uncomfortable, I can tell you it’s a lot worse explaining a bad personal investment to your spouse, than explaining one gone awry to your fund’s Limited Partner.

Along with focusing on returns, Angels typically shy away from sectors of past failure. On numerous occasions I’ve been approached by entrepreneurs asking if we’d fund their company in a particular sector, right after closing down a similar company. Please do your homework (see below) before pitching, and in particular do some research on our portfolio companies—particularly noting where we’ve had successes and failures. The good entrepreneurs passionately believe they have lightening in a bottle and that their company is different. However, if your company’s in a market where we’ve had bad experiences, then the Angel you’re talking to will be subconsciously thinking about the prospect of your crashing and burning.

Angels are often accomplished individuals, but…

In pitches to the Pasadena Angels, we’ve had hundreds of entrepreneurs assume that because our group is comprised of very bright people that went to the top Universities, then our members must be very technically oriented. A lot of the recent press about Google, PayPal, or (you fill in the blank) developers becoming Angels and throwing checks around like Johnny Appleseed hasn’t helped matters. Although we do have a few of those technical types in the group, the vast majority are not overly technical, and will lose patience and interest fast if your pitch contains a lot of technical jargon and acronyms. Some of the best pitches we’ve seen have been from entrepreneurs that have taken a very complex technology and/or target market and described it in very simple language in 1-2 slides.

Angels can have short attention spans

If I only had 24 hours to live, I’d want to spend it with Mr./Ms. Entrepreneur, since it would feel like an eternity. This pretty much sums up what many Angels think when listening to a long, boring pitch. Most of the time, the problem stems from the entrepreneur not being succinct and their inability to get their point across in as few words as possible. If you look at the backgrounds of many of our members, these are individuals that have previously had hundreds (and sometimes thousands) or people working for them and tend to be bottom-line oriented. Think about how well a long-winded pitch would resonate with a CEO or senior executive from a Fortune 500 company, which is where many of these people have come from.  The net impression produced here is that if you can’t easily explain your business to us, how will you ever explain it to a customer or key partner. Lastly, if an investor asks “aren’t you like Google, Microsoft, etc.” or another relevant question, don’t be dismissive, as their attention span will get even shorter.

Some of the other pitch pitfalls that will invariably decrease Angel attention spans are story telling (e.g., talking for 30 minutes on the history of the Internet) and stating the obvious. When I fist joined the Pasadena Angles in 2004, one of the pitches I heard was for a company that had developed a dashboard mounted mapping and traffic monitoring device. For most of the 40 minute presentation, the Founder did nothing but try to convince us that Los Angeles had a traffic problem (really?). Although this individual was a visionary, clearly saw where the market was going, and had a good product prior to Garmin and TomTom, the company never got funded and eventually closed.

Angels run in packs

Cultivate a champion early within the Angel group, or better still cultivate champions.  Although Angel groups have become institutionalized, these organizations are people, and not firms, and it is the individual member that makes each investment. Who you initially contact within an Angel group really matters. Let’s say there are two members in the group that might be potentially interested in your company—one who has 20 years of experience in your target market, and another that has no knowledge of your sector.  Within an Angel group we all typically look for a member that has relevant sector experience to either get us excited about a company or tell us we should pass. And if you contact the wrong member, you may be starting with one foot already out the door. For fundraising, you really need to think through who you reach out to for that first conversation. To make that process easier, the Pasadena Angels has provided for many years on our website the bios of our members.

Angels like to co-invest with the smart money

Who you’ve had involved with the Company (e.g., investors, board members, advisors, etc.) is really important when seeking Angel investors.  Having a prominent name and people that are well respected by Angels can be helpful with fundraising. Angels (and most VC) like to be involved with those they perceive to be the ‘smart money.’  For our investments it always comes down to people, and most importantly the founding team and those that do the day-to-day work. However, to Angels it also matters who’s behind the company, what they are willing to do in order to support the company, and most importantly how they are perceived.

It’s show time, folks

In the movie All That Jazz, Joe Gideon (Roy Scheider) looks in the mirror and utters “It’s show time, folks”, which is a good way to think about (minus the pill popping) going into a pitch with Angels.  As is the case with most people, Angels respond emotionally as well as to reason, and it’s critical to show both high energy and enthusiasm.  As I mentioned a couple of years ago when I was on the Frank Peters show, you have the initial two minutes of a pitch to get maximum impact with prospective investors. If you exhibit the personality of Ben Stein (think Ferris Bueller and not his regular NY Times columns), that’s not likely to happen.

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