Jean Hammond Reflects on Recent Angel Capital Association Conference

Jean Hammond has been involved with The Capital Network for over a decade and currently sits on the Board of Directors. She is an active angel investor focusing on early stage high tech startups. She was a founder of the Boston branch of Golden Seeds and is a member of Launchpad and Hub Angels. She plays or played an active board level role with a number of her Boston area investments, including: Crimson Hexagon, Hire Reach, Home Portfolio, iTeam, and ZipCar.

Angel investors were in Boston/Cambridge Massachusetts during the week of April 4th for the National Angel Capital Association National Conference. For many angel investors, the conference provided a venue where they could get insight into 3 or 4 issues that have challenged early stage investors for a long time. The 2011 version of these issues viewed through the lens of angels who like investing in angel groups bring interesting complexity to the problems investors face. I found that a lot of the angels were discussing reaching scale and, interestingly, matching that with “right sizing” what we do.

Scale Baby Scale - Lots of fast, “early” exits:

Angel groups want to invest in great deals and analysis shows that there are a lot of companies that will indeed grow good product lines. As Basil Peter’s book points out, however, firms that take in a last final funding just for the purpose of scaling the sales force and adding a few more customers are unlikely to have a payback at the high multiples achieved in creating the product and getting the first $5-10M of sales. Additionally, even though the buyer community is ready – i.e., US corporations are sitting on mountains of cash, the infrastructure to do these deals at this scale is often lacking as most investment banker shops are still geared up for ‘large’ exits. This problem may be most extreme in the markets with a huge VC presence but finding and training a solid range of exit advisors who are interested in deals pricing out in the $50-80M range is still lacking. I have not seen a deep definition of skills needed in these advisors yet or a listing of those with great track record in deals of this size. Angels want to help quality iBanks support an efficient market from “right-time” exits, as many angels believe the trend towards lots of fast, “early” exits will continue.

Scale Baby Scale – Syndication or Funds or Both

Early stage investment portfolio analysis shows that some of the most lucrative deals will grow to be substantial companies, with a few even making it to an IPO on angel funding alone. How can angels work to meet the needs of a fast growing entity with a growing cash appetite? Syndication has moved the bar — the North East Angel syndication meetings have a track record of raising two to four million for great angel-nurtured companies. Some groups are now joining the venture community with large sidecar funds and all the fiduciary responsibility that these entities involve. In many parts of the country co-investing with local VCs works well with repeated deal flow and long term relationships. This continues to be a hot topic for conversation among angels: which builds a better company — member led pass-the-hat style angel groups that reach scale via syndication, or angels recreating VC type funds. The jury is still out on this one. Getting the “right amount of funds” with investor/entrepreneur alignment on total investment capital and exit target is really the goal.

Scale Baby Scale - More angels, larger and larger groups ….

Everyone agrees that more angels are good for growing more entrepreneurs; but how large can an angel group be? What does it take to really develop trust in your co-investor and create comfortable operating models for co-investing? Since working together to carry out diligence on and support of entrepreneurial companies is the business of the angel group, there are limits on effective involvement if a group becomes too huge. Since angel investing is a contact sport, many groups argue for a strong local focus as well as some limits on size. The arguments for “local” abound: get to know the skills in the companies in which you invest and use your rolodex to help them, really get to know the strengths of your co-investors, and have a good understanding of which other local investors (angel groups or VCs) will make good syndication partners. All of this local knowledge changes outcomes. Maybe the answer is to franchise by geography or perhaps by sector to allow “responsibility, trust and local connections to be right-sized”.

In a way, the Conference just reaffirmed what we’re seeing in the angel community: Angels want to continue to find ways to scale up and do more deals with right-time and right-size investments – and work with groups where there’s mutual trust and chemistry between them.