Over the last year and a half, we have
looked at 250 companies, met with over 100 and had 36 present to the group. About 16 of
these have received financing and have gotten people involved with the management of these
To find these companies, we meet as a
committee with about 10 companies a month. Each company talks to us for about half an
hour. We have seven or so angels in the room at that meeting. It's creating a very
interesting kind of community and, through doing it, we have helped identify some very
How do we pick these companies? As I
said, first, they have to be in the New York region and they have to be digital media
companies. After that, we are looking for companies that have big ideas, a big opportunity
andalways the keya management team, or at least part of the management team,
who can execute. Of the 16 companies that have succeeded in raising financing through this
program, many have not been high, high-tech companies. They are often content-related like
bikini.com or another company which outsources bookkeeping and CFO-type functions. We
often find that, because New York is not Silicon Valley, some of the angels' backgrounds
aren't in the high-tech area. They are actually more receptive to these other types of
companies. Building this group is the beginning of our effort to participate in what we
see as a growing tornado in New York, an important revolution.
Mario, what are your thoughts on angel
investing and, by the way, how do you have any time to be an investor?
Mr. Morino: The greatest time is with my
three kids. That's the best investment of all.
Guy made a comment that I think is
very important that all money is not equal. It applies to the exchange with angel
networks. You have to be very careful who you work with. Often, the value may be money,
but the greater value for you will be knowledge. I don't want to minimize the exchange of
capital. The exchange has a clear purpose, but I want to emphasize that when you start,
you need a lot of help.
Gerald Benjamin talks about the
importance of self-assessment in dealing with angels, and I think that's very important.
It's hard to do because it means we have to look at ourselves. When Gerald asks, "Are
you financeable?" he is asking three questions. Is your company financeable?
Is it really? Second, are you financeable? That is what the investor probably looks
at harder than any single thing. And, third, is the risk you are representing
financeable? Sometimes I think that one of the best things we do at the Netpreneur Program
(http://netpreneur.org) is to
show somebody that they're not ready to talk to a funder yet because they haven't answered
those questions for themselves.
The idea of getting to the exchanges
is necessary and we must do that, but I will argue that there is a reason for the capital
scarcity, and that's because there is a natural evolution process in entrepreneurship.
Without that evolution, a lot of people would go on who should never run a business. There
is nothing wrong with having a more difficult model that makes you jump hurdles. That's
what entrepreneurship is about. As Guy said, it's about doing the impossible. It's about
doing what everybody says you can't do. The bozos may be saying that your venture is not
feasible today, the trouble is that a lot of your family and friends aren't bozos.
Actually, they can be a different kind of bozo. They're going to be friendly. They're
going to give you the money for the wrong reason. They're going to give you the money
because they like you, because they care about you. That's the worst reason in the world
to give somebody money. It can be like giving heroin, simply extending someone's pain.
Let me moderate that somewhat. We need
balance. Yes, we do need to fund more, especially in this region. We do have a gap because
there are people who are fundable and the money is not coming. That's changing, however,
and I'll argue that there are two mechanisms to look at. First, we are going to see a
growing base of angels in the region. It's slow right now; it's frustrating, but the
evolution is in process, and I believe it's a natural evolution. Second is the idea of
formal exchange. I will argue, by the way, that the consolidation John talked about
officially began this week with E*Trade (http://www.etrade.com). I don't know if you saw the
announcement, but E*Trade announced a new stock exchange for low-capitalization
businesses, new IPOs and new private placements. As far as I'm concerned, it hits
everybody in the field. I have to give you a disclaimer since I'm part of an investment
firm that has invested in E*Trade, but there is a reason why E*Trade is signing up
accounts at 7,000 a day. It's eyeballs. It's investors with money. It's investors who will
move downstream quickly as these markets mature. We are seeing very good efforts like
that, and like what David Amis at Amis Ventures (http://www.amisventures.com) is doing locally. I think these
make a lot of sense. They are each going to have their niches. There will be different
elements but it's an emerging industry in itself right now and there will be activity
there. We are going to see a different monetary flow for private placements and IPOs
emerge, probably near term, within 12 to 18 months. It's a phenomena of the Net. I told
Guy it's a natural partnership for garage.com right off the blockyou graduate from
garage.com's Heaven and go to E*Trade.
The second thing brings us back to the
angels, which John talked about in the region and Laura talked about in New York. Silicon
Valley has had this advantage for years. There is no magic to it. No one designed the
process for how the angels grew in the Valley. It wasn't just creating the angels
organizations; it has been part of the social fabric since the software industry was
formed. There were enough people who made it and who still played with the other kids on
the block. That was the model. We just have to allow time for that model to evolve in each
region, as it's doing in New York, Austin, Boston and as it's doing here.
What's happening here, fortunately, is
that we are seeing people create big net worth. I joke about this because people always
think that I made a lot of money. I did very, very well, don't get me wrong, but I keep
saying, "You don't understand. I don't get a seat at the bar with my wealth in
Silicon Valley." Think about that. Everybody made $150 million out there. We
will grow up when we start seeing those net worths here, and, guess what, it's happening.
Just look at the numbers in the last 18 months in this region, whether it's Yurie Systems
or Ciena or America Online. Go down the list of people cashing out with big numbers. I
don't know the exact totals, but we probably have created billions of dollars of net worth
in this region in less than three years. It's young; it's new leaders. Give them a chance
to start their investments. Some of them already have. There is a wholly different model.
There is hope. Unfortunately, it won't all happen tomorrow, but it's there.
I'll leave you with this thought. I
have had the pleasure in the last two weeks of participating in two events, both somewhat
institutional. One was the founding of the National Commission on Entrepreneurship and the
other was a new economy task force that was on Capitol Hill. Both groups were talking
"new economy" for the first time and both were talking about the importance of
entrepreneurs to the overall economy. They were talking about you. Among entrepreneurs is
a subset which Guy calls "revolutionaries" and others call "the
gazelles." Of the 1,000 information technology public stocks, just about half went
public since 1996. Think about that. You could not be at a better time with your idea. You
may have to hold out a little bit, but that's what being an entrepreneur means. You will
fight, you will do all the things Guy talked about, but you have a wonderful opportunity.
We have a country that's beginning to realize the importance of the new economy.
the audience: questions
Ms. Lew: Our panel will now
take questions from the audience. They are joined by Gerald Benjamin, president of
International Capital Resources (http://www.icrnet.com) in San
Francisco, a pioneering capital-forcing firm that links ventures with investors through 10
licensee offices in the United States, Canada and Mexico. He serves as chairman of the
California Venture Forum and is the publisher of The Private Equity Review, a
bimonthly magazine that reports on promising developmental stage ventures and analyzes the
private equity investment market. He is also Executive Director of the Private Equity
Research Institute and founder of Angel Way Capital Partners, the largest nationwide
private investor network. This afternoon, in the first part of today's Angels &
Revolutionaries program, he presented his seminar, "Finding Your Wings: How to Locate
Private Investors to Fund Your Venture," to more than 350 people. That seminar is
based on his award-winning book of the same title, and he will have a new book out next
Q: How can angels play a
role beyond the earliest stage, for those companies which have gotten off the ground and
are ready to take that next step?
Mr. Morino: It sounds like you
are talking about a venture step which is typically not angel money. You might get second
stage money from another set of groups, such as VCs. If you've gotten angel money, you
have already sent a signal to the VC community that you are fundable, so there will be
people who will look at you. Angels don't have the cash, typically, to play in those
rounds. It's actually one of the problems of angel investing. They may be putting stakes
in venture funds, but angels are usually not doing it as a primary investment. As an
angel, when you start going into the second and third rounds, you start asking questions
about whether you want to keep the money in that business because you will face different
Mr. May: Another way to say
that is that they're often putting their money in merchant banks. What you have to look
for is ways that the wealth is accumulated. It's no longer called "seed," it's
called "private equity," and you have to find different players, other
intermediaries who are accumulating the wealthy family money and the angel money,
but those folks aren't looking at seed stage any longer. They're looking at putting the
money out in different ways. For that matter, five years ago there were no venture banks
here. We now have three. So there are beginning to be different players. Look at the
entire private equity marketplace. One of the big things in Silicon Valley is that the
money's not in little boxes; you are getting the whole array.
Q: These days there is so
much convergence, so many acquisitions and mergers and so many are immense, like NBC
buying Snap. Do you think there is a way that the companies which are getting so large
will be able to take advantage of the entrepreneur community in structured fashion rather
than just coexisting side-by-side?
Mr. Morino: Look at the
software industry, which is your model, candidly. There is a joke in the industry today
that says you are going to grow for a while, then you are either going to be outserviced
by ORACLE, pushed off the shelf by Microsoft or bought by Computer Associates. That's the
end of the line; it's just a question of when. I'm going through a situation with a
services firm today, a very good one, which has gotten the landscape mapped from a top
investment banking analyst. It maps out Web services industries, and it shows that there
are gazillions of mom-and-pop operations here and there, with maybe 50 players that are
really quality firms around the country sitting in the upper quadrant. In the other
quadrants are your major players, Computer Associates, ORACLE and Microsoft, sitting in
the wings, and down here are all the telcos. Inevitably, these latter two blocks are going
to acquire this block with the exception of a few that will make it. Now, don't take that
as pessimistic. It's the evolutionary process. You are going to see consolidation, and
there is nothing wrong with that in the long run. Some will make it all the way up the
chain like AOL. AOL has lived through it, and, in all reality, even AOL's not beyond being
acquired by somebody with a lot of money.
member: Then, should entrepreneurs always have some sort of an exit strategy?
Mr. Morino: Absolutely, but do
it in the right way. I always hate to see somebody thinking about exit strategy too
strongly. I want you to be hungry to dominate your market. I want you to want to win.
Still, at the same time, you should understand that there may come a time when you have to
make a business decision knowing what your options are. Any company of any size today in
the Web services business is in play, whether they know it or not. We were involved
in a deal, and, within a day, several other transactions occurred in the space which, by
nightfall, had eclipsed the strategic plan we had defined that morning.
member: So an entrepreneur must grow or die?
Mr. Morino: Oh, yes, I
absolutely believe that.
Mr. May: But you should be able
to tell the investor what Mario just told us about how you fit into those quadrants, and
you can't expect us to teach you the exit. We are backing you with our money and our time.
You, as the entrepreneur, are telling us what you are doing with all of your data
gathering, all of your Web searching, all of your analysis of the market. You are supposed
to tell us how you are going to help us guide the market and how you are going to fit into
its landscape. If you can't answer those questions as Mario posed them, you don't deserve
to get the money.
Mr. Morino: That's the hard
Ms. Lew: It's also important to
recognize that you can have more than one exit strategy. You can have different scenarios,
but it's critical that you have an exit strategy for the investors. Otherwise you don't
deserve to be funded.
Q: First, could you define a
"super angel," and, second, what kind of action have you seen by socially
responsible investors within the netpreneurial group?
Mr. May: Well, the latter
is a little tougher, but as to the former, I recommend that you look at the 12 categories
in Gerald Benjamin's book, which you should use when you're identifying your best match.
My three categories start with the "small a" angels, or the "checkbook
angels," who provide $5,000-$10,000 and doesn't use a lawyer. They probably aren't
all that sophisticated and have very few coat tails.
"Super angels," to me, are
on the other end, the kind of people Mario mentioned who are really their own venture
capital fund. They are capable of making multi-million dollar investments, but they are
still principal-to-principal. They deal with you. You are a principal and they are a
principal, yet they control wealth equal to what venture funds have.
What we're finding in the Private
Investors Network is the "capital A" angels. These are the
$50,000-$250,000-a-year angels who like to co-invest and who are willing to do multiple
transactions. Those are the people we need in this community, and the kind we are finding.
There are a lot of people who get
psychic reward from a lot of their investments, as well as being more patient capital.
That's the big difference from venture capital that is managed by fiduciaries. Those folks
have bosses, they're limited partners and they live or die by their rate of return only.
An angel can have multiple objectives, some of them other than pure rate of return.
Whether you call them "socially responsible" or "mission-related," or
whether you just call them good community citizens, there are a lot of angels who believe
in long-term corporate growth and the growth of entrepreneurs as much as they care about
the short-term finances. That's what we hope to grow in the community as well.
Ms. Lew: I think it's
extraordinarily rare to find the sort of super angel, but I recently came across a
situation where one private investor invested $7 million of his own money as a private
angel investor in one company. It was principal-to-principal, and he was able to go
through several rounds with this company and grow it. It was in the Midwest, actually, but
it's a community that is starting to grow.
Q: Some people have spoken
about the importance of branding this region. Some have rated our nation's capital city 51
out of 51 for the well-being of children. Working as I do with a non-profit organization,
my question is what are your views on how we can address these bottomline issues and brand
this region as a place that we can all be proud of, one that people will want to leave
Silicon Valley for and come here to work?
Mr. Morino: You don't brand
a region. The world has already branded it. It's the nation's capital and it's the world's
capital and we should be proud of both. For some reason, we keep thinking we've got to be
somebody else. We just have to recognize that we're going to be the capital in a new
economy. That's our future. We can go through all the naming. We can go through all the
drills. We can play all the charades, but some reporter some day is going to just pin a
term on us and that term is going to stick the way it did with Silicon Valley or Route
128. Austin, Texas, doesn't have a brand name. It's Austin. Is that a problem? I don't
think that's our job, and, if we perform, it won't matter. Let's stop worrying about how
we sell ourselves and just perform and we will prove our point.
To your second point, I think you have
two very divergent issues. The branding has nothing to do with the kids in the District.
That's a different problem, and I think we're seeing a group of leaders emerge today who
are very young, who have net worth and who care about those issues. It perhaps hasn't
surfaced visibly yet, but I'm very lucky to see and be around some of these folks. They
are a new breed who want to do something positive in the region. It's not there yet, but
they are willing to open up their pocketbooks. I was just with Jonathan Ledecky this week,
a man who has poured money into the District. He's ready. He's creating a foundation. Jim
Kimsey has just created a foundation and so has Steve Case. They want to do something to
help. They are not going to sit back and wait on anybody else. They are going to make a
contribution, and we are going to see our industry step forward aggressively and lead,
just like others have done before.
Mr. May: Yes, right now it's
still somewhat subterranean. Almost all of our angel clients also have foundations, and
they are doing things with their time as well. That's not where we deal with them, and
it's not our subject tonight, but you can look at how the regional leaders are trying to
make sure this stays a community, as Mario has done with the Netpreneur Program, or the
fact that the Mid-Atlantic Venture Association (http://www.mava.org) is having its big venture fair downtown
next year, not out in the suburbs, or the way that the Private Investors Network rotates
its meetings between Maryland and DC. The main thing is for the key leaders to put their
money where their mouths are in terms of wanting to live here and keeping their kids in
schools here. That's sort of an underground story. We're just starting to have an angel
story, so it's pretty hard to talk about their community-building.
Q: This has been a great day
with a lot of very important information. You have presented me with a conundrum, however,
by saying that if my first round of financing is from an angel, my second round is likely
not from a VC. My business plan currently calls for that scenario. Should I avoid the
angel in the first round or avoid the VC in the second?
Mr. May: Never avoid them.
Ms. Sachar: In New York, we
made a conscious decision to select companies that were raising money before they would go
to VCs so that way we wouldn't compete against the VC community. We look for companies
that generally are raising less than $2 million and will take lower amounts from each
individual because we want people to be able to come in and truly participate at different
levels. We ask everyone who participates to make a commitment that they will invest in at
least one of these companies through the year, but we don't set a very rigid minimum. Why
wouldn't you want to approach angels and VCs?
member: Well, I do, but the statistics presented by Mr. Benjamin earlier this
afternoon were that only 10% of companies who got their first round through angel
financing are successfully getting venture capital later. It seems as if that is
detrimental to getting the larger investment in the second round.
Mr. Benjamin: It's not exactly
detrimental. The issue goes to the relationships and you have touched on a major issue.
Last year, I was invited to speak at a conference of about 350 venture capitalists. They
asked me to speak on the issue of how angels and institutional investors could work
together better. There are biases that exist in both of these communities. There are
companies, for example, that come to me saying they would never think of going to an
institutional investor. They are so strongly convinced that it's nothing they would ever
conceive of doing. At the other end, there are companies which are very appropriate for
institutional investment, so I think that there is a conflict within the funding arena
between angels and the institutional community that has not been worked out. It's not your
fault. It's confusing to you and it's difficult for intermediaries, but it's a fact of
life. That statistic is a legitimate one, but the thing you have to understand is that
it's part of the problem. We are at the stage where the angel community is so active that
we are starting to address that issue and the institutional industry itself is looking at
I believe there is a bias where an
institutional investor says, "I don't want to get involved in a deal that has 50
checkbook angels in it and have to deal with those people. That's the last thing I want to
do." Education is clearly an issue, not only for entrepreneurs trying to learn the
skill of raising moneysomething we don't learn in any MBA programbut also for
investors who have to learn the art of investing. Just because someone made a million
dollars in an investment doesn't mean that they are a sophisticated angel investor or that
they understand the dynamics of this market. We must have the guts to stand up and educate
the angel capital community as well. That's a difficult task, and it's why we have to
address those values about money.
I have opened 10 offices in the United
States and Canada. It's taken me 10 years. This is the tenth office here in this region.
It wasn't my first one. My first one was in Silicon Valley. It wasn't my second one. That
was in Boulder, Colorado. This was the last place I came, but I didn't come here by
accident. It's time to be here now. There is an evolution that has occurred. Part of it is
deal flow, which is starting to come out of this region. Number two is money. There is
money here now and 40% of those deals can be pulled together with that deal flow. Number
three, there are intermediaries willing to take the risk and work on these deals. You are
emerging as a community and, because of that, you are going to draw people, you are going
to draw networks, you are going to draw the kind of resources to make it happen.
Nonetheless, what you have touched on is a significant issue and, although we are not
going to answer it here tonight, it's a very real problem.
Mr. Morino: I'll give you an
example of the frustration a VC can sometimes feel for an angel. Typically, the kiss of
death is families and fools. You can't stand them in dealsI can't be any more blunt
about it than thatbecause they don't know what they are doing in a deal. You start
getting into a transaction and they hold it up. All of a sudden you have a nuisance
problem. I'm just being candid with you. To Gerald's point, this requires education across
the board. We have a situation right now where a number of us are going into a deal where
there is an angel involved who has antidilutive rights. The angel is a friend of the
entrepreneur. I've said to him, "You have the choice. You can either tell your friend
that the antidilutive rights are over, or you are not going to see money. I'm telling you
that as a friend. The next time they will not be as polite. The book will just shut and
you'll be out of the room."
Mr. May: Another way to look at
this is to think of the new, more sophisticated angels not as the last round of friends
and family who come in before the VCs, but as the first round of professional money. You
should almost approach it as if they are the "series A preferred." Effectively,
they will be training you and starting you on the path to accept more and more money,
professional money, with all the baggage that goes with that. That's instead of assuming
that you are going to take them as the last round of the "good guys"the
ones you know, who are your friends and who screw up the deal later because they are
impeding the professional money. In the new world, look at angels as if they were the
first, early VCs, not as if they were the last of the friends, families and fools.
Mr. Morino: Let me add to that
by giving you a positive example. There is a firm here in which an old friend of mine is
an angel investor. There are a ton of VCs who know him very well, and I guarantee you
that, when that company is ready, the VCs will be there because he's in the deal. You want
to make sure you have someone like him somewhere in your chain.
Audience member: John, one of your predictions was that there
would be a shakeout in the Internet matching sites. Why do you think that and what will be
the characteristics of the survivors?
Mr. May: If it is a purely
technological approach to introducing people, it is less valuable than if it has either a
quality screening or education component on one side, or if it is has active, quality
angel investors on the other sideas opposed to playing a technology fix or a numbers
game. I think the ones that will win will either have connections in other parts of the
food chain, like E*Trade or Witt Capital, or they will be the ones that are connected
through on-the-ground, interpersonal ways of meeting the entrepreneurs tied to the use of
the technology. I don't think it's so much that they will fold, they will just have to
find the right way to use their particular excellence, their niche, their technology in a
way that is meaningful to the processa process that has been face-to-face
historically. You have to integrate the best of their "getting to know each
other" and the principal-to-principal practices with the new use of technology and
communication. The ones that know how to marry the two will be successful and the ones
that are trying just to use a telecommunications technique may not be as successful.
Mr. Benjamin: It goes to the
issue that you are selling a highly liquid storysecurityand the attempt to
sell a highly liquid story cannot be done through any electronic matching mechanism. The
electronic matching mechanism was a very important development in the evolution of this
"market," and I use that last word loosely at this stage.
Given the securities loss, given the
well-intentioned nonprofit executives and bureaucrats who started those mechanisms 10
years ago, and given the lack of a profit motive driving it, it served a very important
function. It started to develop small clusters around the country, primarily fueled by
institutional investors initially, not angels. VCs supported those networks initially, and
those networks evolved over time. The angels, perhaps, evolved, but the technology did
not. Matching networks that use software to match an investor and an entrepreneur through
a questionnaire, that is not a relationship. This is a psychological transaction that
requires the building of trust, the building of a relationship, one sale at a time. It
cannot be done with a questionnaire, no matter how much we would like to vest ourselves of
that task. All the Internet has done is to make that process a little bit more glamorous,
a little bit more sexy, and, perhaps, give it a little better chance of happening. But,
the fact is only $44 million was raised last year in Internet transactions at this stage
of development. That is a drop in the bucket relative to the $30 billion in transactions
that were closed, so why spend time, money and energy at this stage in that mechanism's
I'm not saying that without the
development of changes in the securities laws and some of the other issues, the mechanism
cannot become effective. I believe it can become effective, but it will become effective
when it has the same structure as a Charles Schwab or when an investor can invest in a
diversified set of private placements with a $25,000 amount, where all of it is not into a
blind pool, but the money is going into a specific set of deals. I think that there are
models that will make that work. Those models are not here, and the securities laws, very
frankly, make it too dangerous to do it. I think it's better to go back to, as Guy was
using the word, analog.
Take this situation. You can do
research digitally. I think that there are some magnificent education and research sites
that will open up your eyes and help to educate you in real time, but there is no
substitute for meeting an investor eyeball-to-eyeball, making the pitch, working through
the process and providing them the summary first, asking for an appointment, giving them
the business plan, doing your road show presentation, weathering the storm of objections
and learning to go through the due diligence process into the negotiation and deal
structure and valuation discussionand failing a couple of times for every guy you
finally convince to write a check. There is no substitute for that.
Mr. Morino: I think you are
going to see these match networks evolve officially, short of the PPMs and IPOs, when they
are focused regionally, for the very reasons that Gerald went through. It's like Kleiner
Perkins saying that they want to do deals in the Bay Area because they can get to the
companies. When you are dealing with early stage companies, proximity is vital. I wouldn't
be surprised if the evolution is an emphasis on proximity even though it's electronically
facilitated. As Gerald has pointed out, the fact is that people will still like to get
together for these types of relationships.
Ms. Lew: This has been a
terrific evening. I know all of us have learned a great deal, and I'd like to summarize it
with two quotes from our two speakers.
One is from Mr. Benjamin, who wrote in
his book, "Enthusiasm, courage, patience, persuasiveness and tenacity, these are
foremost among the traits of a successful fundraiser and entrepreneur."
The other, in Guy's prosaic terms,
"Create like a God, rule like a king, and work like a slave."
Welcome to entrepreneurship.
We would like to express our
appreciation to Gerald Benjamin, John May, Laura Sachar and Mario Morino, for sharing
their insights and experience.
Please join me in giving them a
well-deserved round of applause.
End, page three
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