FOA Angel Series #6: looking for superior deals? Then do something different.
This excerpt is serialized from a whitepaper by The Family Office Association. For a complete copy, visit the FOA website.
I am often asked- by both entrepreneurs and angels- about where the best places to find superior deals and superior angels. Well, your hang out Group will determine Your Structure (for better or worse). One of the most important – yet frequently overlooked – elements of angel investing is how an SFO or angel arrives at terms for investing in a company. How you source and who you associate with will dramatically affect how successful your investment might be, regardless of how well the company does.
I’ve always trised to keep an open mind as to where ideas come from, and avoid getting locked into all the same sources.
On this point, here are some things to consider:
EIR Program– “create your own deal” is the scenario in which an SFO has the greatest control over terms. They literally dictate. While this seems ideal for an investor, it does leave out of the equation market forces, setting up surprises if outside financing is ever sought. The venture landscape is littered with rejected companies whose cap tables and governances were reflective of a controlled situation — that don’t fit into real-life market conditions.
Angel Networks drive a unique dynamic in funding companies, often referred to as “herding cats,” a/k/a the Syndicate from H*LL. Companies on the prowl for more investors than they can naturally attract will show up at any number of angel networks. They often pay a premium to present to “qualified investors”, and even endure a vetting process to get into the room. But once they present, something troubling occurs: many of these angel investors don’t have the resources or the confidence to take down the entire round themselves. And so, the company attempts to set the valuation and the terms of the placement. The results are often disastrous, with unwieldy expectations and no one investor to keep them in check. The typical result, especially in a frothy market, is that the angels do deals with terms that are not negotiated with any sort of leverage, and no hopes of control or influence on the future of the company. While some companies do get funded this way, and some angels actually emerge with decent returns, the odds are stacked against it.
The Angel Alliance [or, “Buddy Deal”] there’s one significant advantage to a small group with the resources to do an entire round: leverage. If an SFO is fortunate enough to align itself with a group capable of filling every round, it offers the entrepreneur a solid financial partner that allows them to focus on growing the business. This typically results in enough equity for the angel group to share some with the member stewarding the deal, and still leave room for attractive valuations and reasonable governance structures. If the economics aren’t there, most groups have the benefit of enough deal flow to move on to the next opportunity in the sector (as opposed to the EIR), while still maintaining their leverage.
So, while many angels are wondering how they arrive at better terms on more interesting deals, what they sometimes fail to realize is if they look in all the same places, they are likely to see all the same deals, and all the same types of structure.
Said another way: get out more often!
For a complete copy, visit the FOA website.