Jones: Hard truth about angel investing

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Jones: Hard truths about angel investing” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Angel investing is a critical part of the high impact startup world, particularly outside of the big venture capital centers. A good portion of Wisconsin startup success stories achieved liftoff with critical assistance from angel investors and their capital.

But what about the angel investors themselves? How does angel investing work for them?

Well, you don’t have to look very hard to find blogs, books and speakers extolling the virtues of angel investing for the angels. And a lot of them make a pretty good case that the angel investing community makes a nice profit for its efforts. A good case, but also a misleading case.”

Click here to read more.

Thoughts on Why Good Venture Investors Turn Down Good Deals

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, the newest blog addition to the Milwaukee Journal Sentinel covering start-ups and other Wisconsin technology news.

Paul’s most recent contributed piece “Thoughts on Why Good Venture Investors Turn Down Good Deals”  can be found under their Business Tab in the Business Blog section. Click here to view his latest blog.

Here is a short excerpt:

If you know anything about venture capital investing, you probably know that most plans that come across the desks of venture capitalists (and angels, for that matter) are not fundable. That is, they are of so little merit that no half-way competent investor would back them at any price.

While lots of plans get rejected because they are frankly bad, in my own experience as an entrepreneur, angel and institutional venture capitalist I have been struck by how many fundable deals get turned down by so many competent investors. (If you don’t believe me check out http://www.bvp.com/portfolio/antiportfolio, where Bessemer Ventures reviews some of the ultimately hugely successful deals that they turned down over the years.) Herewith some of the reasons good venture investors turn down good deals. Click here to read more of Paul Jones’ OnRamp Labs blog post located under the Business tab of the Milwaukee Journal Sentinel’s website, www.jsonline.com.

 

Angel Investing Outside of the Major Venture Centers: Unique Challenges and Opportunities

By: Paul A. Jones 

High-impact angel investing in the major venture centers is not without its special challenges. Problems like a target-rich environment of experienced entrepreneurs and a plethora of alternative funding options are pretty high quality problems to have. Outside of the major venture centers, angels face another set of problems; problems that on the whole make successful angel investing in these locales more challenging than it is for their venture center counterparts. Herewith some thoughts on the special challenges of high impact angel investing in places like the Midwest, and how those challenges might be addressed.

Challenge: Good angel investing “people” resources – experienced angels, venture investors, entrepreneurs and high-impact investing and entrepreneurship service providers – are much more scarce. This makes it harder for the new angel to learn about and keep up with “best practices.”

Addressing the Challenge: First, try to find locals who have venture center experience and/or perspective, and people who acknowledge and understand the special challenges of high impact angel investing outside of the major venture centers. Focus as well on other angels, lawyers, etc. who not only talk the talk but have a verifiable record of walking the walk.

Challenge: The supply of less sophisticated “wannabe” angel investors and advisers is relatively plentiful. These folks don’t know a lot about the subject but often think of themselves as experts and create a lot of noise in the market.

Addressing the Challenge: Be very careful who you take advice from. Be especially wary of folks who tell you their approach to an issue “isn’t the way they do it in Silicon Valley, but we know better around here. It stands to reason, even allowing for the occasional outlier that the venture centers are the more likely source of best practices than the hinterlands. Further, no matter how tempting, don’t get sucked into a good deal that a less sophisticated set of local investors have gone into at a ridiculous price. Finally, if you find yourself playing a follower role in a deal led by a local lead of questionable capabilities, discretely do your own due diligence as if you were instead leading the deal.

Challenge: Entrepreneurs outside of the major venture capital centers are generally much less experienced in terms of working with sophisticated angel and venture investors, and building startup high-impact businesses. Worse still, they have often sought the advice of well-meaning folks in the community who may have a lot of knowledge about small and big business management and investing, but little or no knowledge of high-impact entrepreneurship and investing (see preceding challenge).

Addressing the Challenge: This challenge is best thought of as an opportunity in disguise. If (i) you can sort spot the diamond in the rough entrepreneur among all the fool’s gold; and (ii) you are willing to invest the extra time and energy polishing that entrepreneur; you can often find and invest in hidden gems that other angels either can’t identify or can’t/won’t put the time and energy into value added mentoring. That can be a great way to get into great investments at below market prices.

Challenge: Venture capital – the primary source for post-angel, high-impact investment capital is very hard to find outside of the major venture centers. This is true in terms of the number of investors and the total investable capital under management. Unfortunately (if not altogether without justification) venture capital investors on the coasts are generally cautious to a fault about the notion of investing in post-seed but still early stage opportunities very far from their coastal homes.

Addressing the Challenge: Angels in venture-scarce locations must generally include elevated financing risk as a critical part of their investment decision making and management. That can be one reason deals outside of the major venture centers are generally done at lower valuations. But at least as important, it means that deals should be structured to match the likely limited supply of local downstream investors and capital. Think in terms of capital needs, early cash flow, and time to exit. Focus on business models that call less than $5 million of risk capital and three to five years to the exit.

While high impact angel investing outside of the major venture centers is not without special challenges, so it can have its special rewards. If you are thoughtful about dealing with these challenges, there are good investments to be had at good prices. An opportunity to help build a high impact entrepreneurship and investing community in a region not already blessed with the same.