Angel groups - how do they invest, how do they cooperate and how San Francisco angel groups are different from the rest of the world by Alan Fisher

This is Fundraising Radio and today as a guest speaker, we have Alan Fisher member and angel investor at Sand Hill Angels and in this episode we'll talk about different angel groups – how do they compare, how do angel groups cooperate? And since Sand Hill Angels is a pretty big angel group in Silicon Valley, we'll compare Silicon Valley angel groups and angels in general to other big cities in the United States, specifically to my recent speakers - Tech Coast Angels.

Allen let’s kick off by you giving us some background on yourself and on Sand Hill Angels. Well, thanks very much for having me.
My background is software development.
I am a software engineer, computer scientist.

I usually write code for a living.
more relevantly though, I'm one of the Silicon Valley serial entrepreneurs that you read about from time to time.

I've co-founded a series of companies over the years in particular, I co founded and took two companies public and the nineties one in the electronic document management space and the other was an early eCommerce company.

More recently I've been working in FinTech financial technology.

That's really, that's really interesting.

FinTech is something that's so huge interest to me specifically from the legal side of you.

let's talk about central Angela first.

What what does it do? What does central angels, intestine,

sure.

A sand Hill angels is a Silicon Valley based angel investing group.

We have about 135 members and we are a broad spectrum investor.

we invest in enterprise companies, kind of what you think of as traditional Silicon Valley hardware and software internet companies.

We invest in consumer companies, that have consumer products.
we invest in medical technology companies as well.
pretty much across the board, we tend to find our sweet spot, in early revenue stage companies. companies that are have had kind of the first 250,000 to maybe a million dollars in trailing revenue. That's really interesting.
let's talk about how investments are actually made in central Angeles.

for example, in tech coast angels, I know that, for a project to go up the chain to, to this, to even to the deduce and sports at police, three members, I think in San Diego at least three members have to be interested in that project.

How does this work in central angels?

We'd probably have a similar process at the end of the day, it's a sales funnel if you want to think of it that way.

all deals start by being uploaded into an application we use called procedure that's widely used by angel groups and our members.

then review and read those deals.

we have a couple of screening conference calls where interested members get on the call and we discuss those deals and then basically take a vote as to which ones to invite into formerly pitches in normal circumstances, in a face to face.

A pitch meeting that evening dinner that we host once a month.
Now we do that via zoom, but this fall I'm sure we'll resume back to our normal in person meeting. We typically invite to between six to eight companies to formally pitch us each month.
that's typically out of about 40 to 70 companies that submit to us each month.

once we have those pitches, we kind of vote with our wallets that we have to have a minimum of three members and $50,000 of expressed interest in order to invite that company in for a second and final round of presentation to us.

in the interim, between that first pitch and the second pitch that we will have a certain amount of due diligence on the company so that, our questions to the company can be much more involved and detailed based on the due diligence that we've done.

Got it.
how many, you mentioned that you get enormous number of, requests basically for funding.
how many portfolio companies do you have at the moment?
Oh, I'm not even sure.
I know that a number of sand Hill angels was founded in 2000.
So we're a 20 year old organization.
the number of active portfolio company has measures in, the many hundreds.
on a typical month we'll invest in about three new companies.
how do they present to us? Typically a two to four, so say on average three, actually get investment from us. of course we also invest in follow on rounds of those portfolio companies.
we also invest in, series a, B and C deals that are brought to us by venture capitalists.
we also from time to time invest in VC funds as well.

in addition to, investing in normal startups, would you think of as a traditional role of angel investor? But we do also invest in companies raising follow on rounds as well as a few VC funds so that those combined tend to triple the amount of money that we actually invest.

that is something that's really interesting for me.

I actually had a couple, VC firms that are raising at this moment, present on fundraising radio and they were telling about their process of fundraising and some of it's so much harder than fundraising for stirrups.

Can you tell me how do you choose, what's the difference between investigating a regular stirrup and investing in a venture capital fund?

Sure.

Like most angel groups, our members make their own individual decisions and while we pool our investment so that you have one entry on the cap table or one entry in a list of investors, limited partners, every angel does make his own individual decisions.

It really kind of depends on that individual member as to what criteria they use to evaluate it.

In my case, I tend to look for venture capital funds that have either proprietary deal flow, they're getting deals from places that other agencies don't source from or they have a unique perspective, in terms of how they invest.

for example, venture funds or they've invested in align capital partners, looks for very capital efficient companies that are going to raise one and only run one round of venture capital because they're very good at deploying that capital and don't require a lot of capital, other funds like right-side capital management using a statistical investing process.

they look for teams with certain characteristics and certain characteristics in terms of revenue traction that these early startups.

they typically make an investment but it within one to two weeks of being contacted.
those are two very different approaches that'll just use to illustrate kind of dietary way or unique way.

Other than just saying, well, we have our own individual networks and people send us deals sites, I tend to look for something that really is unique out there.

Absolutely.
let's move on to actually comparing a sand Hill angels to some other big sea.

for example, what do you think is the major difference between sand Hill angels and for example, deck coast angels, which is prevailing in Southern California?

That's a great question.

Both groups are similar.

In a lot of ways.

We both focus on investing in what I call early revenue companies.

Like I say the first quarter million to a million dollars in revenue, but tech coast angels and sand Hill angels, different at least in one material aspect as well.

Samuel angels is a single, chapter entity, meaning we have one group we meet in one location.

Tech coast angels is a multi chapter organization that has a half a dozen chapters or groups of members greater than Los Angeles Metro area.

they have groups in Los Angeles, San Diego, orange County and so forth.

In that respect, tech coast angels is similar to another nationwide organization called , which has, I don't know, eight or 10 chapters now around the country, only found them at sand Hill angels while we are in one location, we do have members also from around the country.

They typically join us by video.
We have members in New York city and Florida, Arizona, as well as the greater San Francisco Bay area.

The other interesting thing that we've seen at San Emily angels is we certainly get a fair amount of email flow from, the Silicon Valley area, but we get at least as much from outside of Silicon Valley, every place from, even New York city, Texas down here in Arizona, Los Angeles, Seattle, and even internationally.

we have companies come to us from all over the U S and increasingly from around the world because they can get access to capital in Silicon Valley and that's more difficult to get access to in other parts of the country.

Got it.

that's pretty interesting that you were, I think San Francisco is becoming more and more global instead of local opposed to some other seas like Los Angeles.

here I want you to discuss this or that's, we'll see, in this show Silicon Valley, where, venture investors compete with each other where they're fighting for great deals.

What can you say ball competition in, the angel investment field to annual investors to compete where rather they cooperate on everything.

You'll find angel investing groups are much more cooperative with each other.

Angel groups typically invest prior to the first VC round and unlike VC's, angels and angel groups are trying to purchase a 10 or 20% ownership stake company.

if I'm DC buys a 20% stake in another VC, the second VC effectively misses out on that deal because he is not going to be able to acquire a 20% stake.

Angels on the other hand are investing early on in a company's life span and typically not at the same time.

as companies move towards your first professional VC round, typically a seed round, they're taking investments kind of piecemeal from individual angels, from angel groups, maybe a family office, but typically angels and angel groups.

so, since we're not trying to acquire a particular ownership, we're more than happy to syndicate good deals with other internal groups and sand Hill angels.

We do that regularly with angels, band of angels and other Silicon Valley based group, Sierra angels, which is a Sacramento based group and so forth.

That's, that's really interesting to see this non-compete environment in angel investing.
how many investors, how many angel groups usually participate in one a fundraising round.
you said that's usually they don't invest at once, at one round.
until how many angel groups can you see on the cap table of a startup?
It's really common to see two to four or five angel groups in a startup, varying those early finance things.

in fact, I'm an investor through sand Hill angels in one startup now that we're some that kidding with tech coast angels and also taking out two Sierra angles.

So this was a fairly common, process.

like I say, usually it's the case that we don't all invest at the same time as part of a coordinated round.

That's usually not how early startup financing occurs.

It occurs piecemeal kind of in bits and pieces.

once one angel group makes an investment decision to proceed and funds that company, then they'll take that out to other angel groups and continue the process.

Got it.
let's discuss, the investing methods.

right now, one of the major investment type that's especially on the early stages the investors are doing, it's, they invest through safes.

Why do you think it's so popular? And you can actually see saves even on later stages.

on round a round, I'm not sure if I've ever seen on round BCS, but I pretty sure that happens.

why do you think perceives, sell popular?

A safe or simple agreement for future equity and convertible notes? I'll just call them convertible notes.

really the way that early stage companies raise money.

As I mentioned earlier, that financing tends to occur, piecemeal, one financing after another, but in much smaller amounts.

Whereas a priced round, like a seed round or a series a, B and C and so forth require a couple of VCs to come together and they do a priced round at a specific valuation that closes on a specific day.

All the money goes into the bank on a specific day.

That's not the journey of a company that's just a few months or a year and a half old at the very first revenue.

convertible notes in general and safes really lend themselves well to that piecemeal financing where you collect a hundred or $200,000 from one angel group and then four or five months later you get another hundred K from a second angel group or more angels and so forth.

The convertible notes, safe note mechanism allows incremental financing, whereas a price round is really much more structured for a simultaneous financing where you have everyone closing, exactly the, at the same time.

That's, that's a perfect answer. I love it.
And here.

I want to move on to actually to go back to the beginning of our interview where you mentioned that you're receiving, hundreds and hundreds of peach stacks every month.

what do you think? and I imagine that, first of all, I show it, I was curious to give feedback on each deck that you get because, for example, the president of tech coast angels in, orange County said that they actually give specific feedback on why they don't want to invest in or what's missing on the beach stack.

each application that they receive to do the same thing at Santo angels as well.

we provide that feedback differently because we do get so many deals from not only North America but around the world as well.

It's difficult to have individual conversations with each applicant, but what we do is once a month we run a practice pitch night.

We call that RA and it follows a very, regular format. Companies have five minutes to present with no slide decks.

it's just the entrepreneur talking followed by five minutes of Q and a with the angels, followed by five minutes of feedback where you just have to listen and take it.

that's where we give you our raw unfiltered feedback.

This is the type of feedback you're never going to hear a VC tell you or in general, angel group tell you this is a feedback.

we discuss amongst ourselves but not with the potential, investee.

that turns out to be a really great way to help companies practice their pitches, but also hear what are kind of unvarnished thinking is after just listening to talk for five minutes and then answering our questions.

that's how we provide feedback to the folks.

That's, that's really interesting approach.

that, are they talk somehow recorded or is it only available to people who are joining a life?

no, all of these are recorded whether we do them in person, which is what we did prior to March or another.

We do these virtually with a zoom call.

they're all recorded.

you can watch your pitch as an entrepreneur, watch your pitch as well as those of others.

You can listen to our questions and our criticisms and you could watch that as many times as you want.

if you've ever had the experience of listening to something that you said or watching yourself in a video recording, it can be a very humbling experience.

it really helps the entrepreneur hone their pitch when, when they realize, what, I did waste the first three minutes of that pitch rambling and a story that wasn't interesting.

Yeah.
Yeah that's true. That's true.

I've seen a lot entrepreneurs sexually record their pitches themselves, even if it's not provided by the organization.

It's really nice that you do that for them.

it like an actual peach where you're considering the investment or is it a pitch where you're just, the only purpose of that beach is that you will give them feedback?

Yeah, the purpose of our monthly RA event is strictly the latter, providing feedback to you, as to how we would view your pitch.

It is not a pitch for money.

Now a number of companies that do present at our raw event, do subsequently apply to sand Hill angels.

we've invited some of those folks in to actually catch us formally ended, have invested in several of them.

it is a part of our process.

the principle goal is not to pitch us for money, it's to pitch us for advice and comments on your presentation.

I think a thoughtful entrepreneur will realize that by crisping up their pitch, not only are they making a better future presentation to investors, but in fact to their customers as well.

Entrepreneurs need to learn how to express the nature of their product and one or two sentences and going through a a pitch process actually hopes you hone that message.

yeah, that's true.

I'm pretty sure that many of my listeners right now actually want to check that event out.

We're working to find that.

I'm sorry, can you repeat that?

I'm pretty sure that a lot of my listeners right now w actually want to see, the recordings of those events were working with find it.

there a YouTube channel that you host or is it on your website somewhere?

we don't share those recorded videos with anyone outside of the companies that presented to us, but you can sign up to come or even participate in one of our raw events just on our websites.

So sand Hill, angels.com.
all got it.
I will definitely include that link in the description of this episode.
if you want to check it out, check out the description first.
here less talk about the wrath, like, so we kind of talked about the pitch deck.
what do you think are the major red flags that you see when the entrepreneur is presenting? In my opinion, a great pitch deck really only needs three sides.

There are just three things that you need to cover. Everything else flows from that.

those three things are, what is it that you do? And you should be able to express what your company does in one slide.

The second is what is your revenue model? How do you make money? And the third is where are you? What level of traction do you have? How many customers do you have? What's your revenue? Whatever the appropriate metrics are.

I think if you've got those three things covered very early on in your presentation, everything else then is really just building upon that.

subsequent discussion about, competition market, the team, the raise and so forth, none of that matters if I'm not interested in what it is that you do, what's your revenue model and what your traction is.

If you don't have those three bases covered, the rest of it isn't terribly interesting.

I think if you can cover those things, right up front in your presentation, you'll get a lot farther than that.

You will.

Otherwise it's important to remember that with angel group, your initial presentation to us is online without you being present.

Every angel group works the same way.

You're going to upload a pitch deck and maybe some other materials, but a pitch deck, to us, online, and then folks are going to review it.

you have to remember, you won't be there to tell your story. Your pitch deck has to tell the story.

if we're going to look at 40, 50, 60 pitch decks a month, and we typically do that in a one week timeframe, the pitch deck really has to stand out.

It can't have 12 slides describing the market and a bunch of screenshots to your solution to the product that go on for six slides.

It really needs to grab us in the first few slides. Got it.
So I'm sorry.
All right.

I was wondering what is the major, was the, I started doing this, just to entertain my listeners just.

It's what is the weirdest presentation that you've seen? So one of my earliest, speakers on fundraising radio said that he saw a couple presentations on teleportation.

Do you have some stories like that? I do.

there are, I'll give you a couple of, for instances of things that on the surface just sound like crazy ideas that I have personally invested in.

the first is a kitty litter by mail company.

They send you a bag of kitty litter, every month, just like you would with dollar shave clubs sending you shaving supplies.

Now that sounds goofy.

How could that possibly work? I will say after making the investment, they turned profitable immediately and have been growing by leaps and bounds.

it's going to turn out to be one of my most successful investments.

I would predict, but it comes back down to understanding a couple of characteristics about their consumer that wouldn't be instantly obvious.

First most people don't like carrying 20 pound bags of kitty litter home from the grocery store.

They'd prefer it just to show up on their doorstep.

The second is they're literally as a secret sauce.

this kitty litter, the entrepreneur who was Harvard business school graduate, had a cat that died from a disease he didn't know his cat had.

he found a way to infuse kitty litter with a handful of chemicals that turn different colors when the cat urinates on the kitty litter, telling them if they've got a liver disease or whatever.

so, when it turns these different colors, you need to take your cap event. It's it's got some issues.
So Kim letter by mail.
The next is a company that I just invested in last month called siren care. they make a kid you not fiber socks.

These are tube socks that you wear on your feet, socks that come with an app.

Now how cool is that? Now you might ask, why do I need socks with an app? Well, it turns out they've developed a, a fiber sensor that's woven into the fabric of the sock that detects heat.

it turns out that diabetics in particular have foot problems that turned into a ulcerated lacerations that can sometimes lead to amputation.

that is preceded by a different temperature patterns.
what the app does is tell you if you've got hotspots developing on your feet. so this really is a temperature sensor.
Medical device is what it is.
And they have FDA approval for this.

It's covered under a, Medicare reimbursement code and they've got about $20 million of, letters of intent and purchase orders for these.

They're starting to manufacture now.

like I sit on the surface cyber socks, sounds kind of crazy, but it turns out there are these applications for these wacky sounding ideas that aren't instantly obvious except once they're explained they make a ton of sense.

That's true.

those do sound like crazy ideas, but I do a wife those ideas.

So thank you for sharing that.

we're moving on to the last question of this episode and it's this small culture action that I like my speakers to give to my listeners.

what's that one thing that the listeners should do as soon as this episode is over? Something specific like going through LinkedIn connections or following someone on Twitter or reading some specific book on fundraising.

What's the one thing that they just have to do as soon as this is over?

Well, if they are an entrepreneur and they're raising money or considering raising money and are going to go the angel route or the professional VC route to they're far enough along, I really think they need to pay attention to what their pitch deck is saying.

Like I say, my big red flag is you see so many of these pitch decks where they spend so much of their time talking about the market and not about the company.

there's an old saying that investors invest in companies, not markets.

make sure your pitch tech tells us about your company, much less know about the market.

So you know, don't tell long-winded stories.

don't focus on the market.

If you're pitching in person.

Don't ping pong between multiple founders.

just have one person do the entire presentation.

my call to action is if you have a pitch deck put together, go run it by several neutral third parties that will give you honest feedback on it in terms of how it captures their imagination.

put yourself in the perspective of someone like me who does look at, sometimes 40 or 50 pitch decks a month. I'm only gonna spend a few minutes with each pitch deck.

Think about what it takes to capture my attention as opposed to telling your story because that's really what you need to do is capture my attention.

think of it from that perspective from your reviewers or your audiences perspective.

I wish I could point you to a book or a link or a sample pitch deck out there, but I actually haven't found any that do a particularly good job.

even the, the famous ones out there, that's our own VC funds have published. Yeah, the APU wanted, have some, some sample APF.
I've never done PhD before.
You can check out Google why common area pitch deck.

They have plenty of great templates to use.

by the way, my personal recommendation, I know that most founders are prepared with design, so I highly recommend you hiring someone just to go over the design of your pitch deck.

It's not going to cost you much, but is it going to give you significant improvements because the visual appeal is really important in that case.

I think Alan, that was a great culture action and the whole episode was wonderful.

I love how we touched onto so many topics at once and steel, I hope didn't sound too confusing to the listeners, so we'll wrap it up here.

Thanks a lot for coming up and for taking your time to share your knowledge and experience in that field. I think that was pretty helpful for our listeners.
Thank you.
My pleasure.