Tuesday, July 7, 2015

Do Angel Groups Belong in Heaven or Hell?

"You analyze me, pretend to despise me, 
You laugh when I stumble and fall. 
There may come a day I will dance on your grave"
     — Hell in a Bucket, Grateful Dead

I attended one of the Grateful Dead "Fare Thee Well" shows in Santa Clara last weekend.  I have always admired the Dead's biz model (sorry Friendster/MySpace/Facebook, The Dead was the First Social Network) and music, although I never became a full fledged Deadhead.  In fact, before this show, the last time I saw them in concert was in 1978! The band closed out the first set with a rousing rendition of "Hell in a Bucket" with Phish guitarist Trey Anastasio energizing the crowd with his licks (pic below).

During the set break (perhaps influenced by the large amount of second half smoke consumed), I thought about angel groups in relation to the lyrics above, particularly the "you analyze me, pretend to despise me" line.

In theory, angel groups are great.  From an investors position, you have a number of individuals with a wealth of experience to source, vet, and co-invest in deals.  From an entrepreneurs standpoint, you can get a much larger investment than with individual angels, have potential follow-on support and leverage skills and network of a large investor base.

In practice, it can be much different.  For entrepreneurs, the process tends to be very long with many different players, information requests, and a lack of transparency with the process.  This is the exact opposite of the preferred angel funding round where investors can make a decision over a cup of coffee and a quick "no" is much preferred to a drawn out process.  I often jokingly compare the process of going through an angel group as falling somewhere between a colonoscopy and waterboarding.

A typical angel group process goes something like this:

  1. Entrepreneur submits application to angel group on gust, proseeder, or similar platform.  To do a thorough job, the application can take anywhere from 2-5 hours to complete.  While there is good reason for angel groups to have a platform to share information, discuss opportunities, and track investments, it doesn't do much for the entrepreneur who could simply provide a link to their AngelList profile.
  2. Initial Screen - groups typically have a process to filter applications and may go through an industry group, be done online, or via a conference call or meeting.  The goal is to decide which companies to invite to pitch a subgroup.  It typically can take up to 30 days to get to the initial screen.
  3. Screening Meeting - the entrepreneur is invited to pitch to a screening committee.  The company may have 10-20 minutes to pitch and answer questions, often from investors that haven't reviewed the application materials and/or know very little about the space the entrepreneur is operating.  The entrepreneur typically doesn't know who is going to be at the meeting or in many cases who is at the meeting.  This might take anywhere from 15 days - 45 days from the initial screen to get to the screening meeting.
  4. Dinner Meeting - the full membership (or as many as can make it) typically meet in the evening either bi-weekly, monthly or quarterly.  Here the entrepreneur hopefully has a deal lead and champion in the group who introduces and leads a discussion after 20-30 minutes of the pitch and Q&A.  Many deals get derailed here as members may bring up questions/concerns with the deal champion that aren't answered properly.  Often, these questions are about competitors or something someone read on techcrunch yesterday.  The dinner meeting may be another 15-45 days after the screening meeting.
  5. Due Diligence - after the dinner meeting, members indicate if they are potentially interested in investing in the deal and/or participating in due diligence.  The diligence period can take anywhere from 2 weeks to several months.  During this time, the entrepreneur may have no idea where she stands or how much investment interest is within the group.
Based on the above, the process can take anywhere from 45 days to 6 months and suck up a lot of time and resources of the entrepreneur while exposing confidential information among a broad group.  Contrast this process to sharing an AngelList profile or meeting individually with a handful of angels and you can see why many entrepreneurs cross this funding path off of their list.  

I joined Sand Hill Angels (SHA) in 2005 and at the time we had 10-15 members vs. close to 100 today.  Decisions could be made faster and investment amounts per deal (counterintuitively) were actually higher.  I took a leave of absence at the beginning of 2012 primarily due to the fact that I felt we weren't serving our primary customer group, the entrepreneurs.  I decided to rejoin at the beginning of this year as I missed hanging out with many of the members as well as the opportunity to be the lead investor in financings, which was something I couldn't do on my own.  I was hoping the process would have improved in the interim 3 years, but discovered it hadn't.

Granted, there were ways to get around the process and I managed to lead two financings this year that were completed in two weeks.  One was a follow-on investment and the other was an opportunity that was closing quickly and I shared with the members, set up a single meeting, and was able to get commitments and fund quickly.  However, these financings are the exception to the rule in SHA and I assume more so in other groups.

By the way, SHA is one of the better angel groups (#14 out of 370 angel groups and #2 in value of network by CB Insights).  Many are filled with service providers looking for consulting work and entrepreneurs only figure this out after they pitch.  Others have the audacity to charge entrepreneurs to pitch to the group!  At SHA, every member is an investor and those that don't invest, are asked to leave the group.  It is also forbidden to solicit work or do side deals with the startups.

So, how can this be fixed?  I've got a few ideas:
  • Kill the screening call and screening meeting.  These provide little value to members and entrepreneurs.
  • Increase the number of general meetings to accelerate investments in companies that are ready
  • Only bring companies to the general meeting that have at least a minimum amount of investment committed
  • Increase minimum investment amount per member/per deal.  At SHA (since investments are done through an entity) individual investments can be quite small.
  • Have groups of 2-6 members work together on sourcing and working on diligence.  These would be angel groups with the angel group and would ideally commit to particular deals and bring to the group
I've got plenty more, but this is a good start.  From my vantage point, most angel groups have a pipeline full of mediocre opportunities.  The best ones don't see any benefit in going to the group and the worst get screened out quickly.  There is currently a void in committed lead investors (Hello Party Round) for pre-seed and seed deals and a big opportunity for angel groups to fill this void if they can move quickly.

A parting thought.  It's hard enough to raise money for your startup without having people who don't understand your business pick it apart like a vulture on a carcass. I'd much rather roll the dice with the entrepreneur and laugh all the way to the bank than have a bunch of founders dancing on my grave.