More than 40 entrepreneurs packed the Golden Valley Brewery for this week’s “Ask an Investor” OEN PubTalk – Hillsboro with questions ranging from how angel investors view startup investments in payroll and marketing to what they are looking for when it comes to a company’s an exit strategy.
Local angel investors Manoj Garg and Sudhir Bhagwan and moderator Steve Morris of OTBC shared their angel investing experiences and what gets them excited about funding new startups.
OEN captured the following highlights from the lively PubTalk conversation.
For more information on the basics of angel investing, OTBC has created a series of videos posted on its online startup camp.
What is angel investing and how do investors approach it?
There are typically three to four stages of funding for a startup, according to the panel. The first stage is usually self-funded by the founder, followed by seed funding from friends and family. Angels usually get involved at a company’s second or third stage of development (with investments ranging from $250,000 to $2 million), whereas venture capitalists (VCs) invest in later-stage companies with larger amounts of capital.
In the case of seasoned angel investors like Garg and Bhagwan, both approach angel investing from a few different perspectives:
- As a group, i.e. via participation in OEN’s Angel Oregon conference, OEN’s Portland Angel Network (PAN) or Oregon Angel Fund (OAF)
- Co-investing with VC’s
How long does it take for you to decide to write a check?
Garg talked about his experience with the Portland Angel Network, explaining how approximately 30 companies pitch to the group, which ultimately chooses a couple companies for further due diligence. If the group likes what they’ve heard after the due diligence process, PAN will pursue deal terms. The entire process can take about a month, which in the case of a recent potential investment by PAN was one day too late – the founder secured another source of funding the day before PAN was going to make its offer.
Bhagwan, who does group investing with OAF, explained that it can take 2-3 months for due diligence before the group recommends investing. At OAF, a 2/3 vote is required before it makes an investment.
What factors are important when deciding to invest in a young company?
Both Bhagwan and Garg offered a few perspectives that angels consider:
- Management team – do they have the right mix of skills and the right team to move the company forward?
- Product/service idea – does it solve a real problem?
- Market & competition – do they have market validation and are they different from the competition?
- Sales strategy – how will they sell their product or service?
- Financial plan – what is the company’s funding sources, revenue plan, margins, exit strategy?
Looking at the spectrum of companies, where are angels most comfortable?
Angels like the “middle stage” of a company’s development, said Bhagwan, where the company has a product or idea that is demonstrable and a reasonable chance to build up a revenue stream and the right team.
What can you share about exit strategies?
There are a few different “flavors” to exit strategies, said Garg, including:
- Acquisition by a larger player in the market
- Acquisition by equity fund
Why wouldn’t you want to invest in a company that wants to grow and stay independent?
Fundamentally, angel investing is about getting a return on the investment, said both Bhagwan and Garg. Angels want a return and an exit at some point.
When and why do companies fail?
There are a variety of reasons, but a couple of the most common include lack of focus by the management team and lack of market acceptance.
Are angels only interested in investing in technology startups?
According to Bhagwan, there is a preponderance of technology ideas out there but the question angels need to ask is: how much value does the technology add? One rule of thumb that VCs use, he said, is to invest in companies where the technology risk is high but the market risk is low. Garg added that although he has a tech background and naturally gravitates toward technology business ideas, he is “very open and interested” in other sectors and prefers group angel investing so that he can learn about new industries and benefit from the knowledge that other angel investors have in other business areas.