AGILEVC My idle thoughts on tech startups

June 21, 2010

I attended the inaugural Open Angel Forum event in Boston last Friday night with a handful of other angel and seed stage investors.  There were six companies that presented at the event, some of which I’d previously met with but several were new to me.

I take my hat off to Jason Calacanis and his OAF collaborators for launching the program in 8 cities thus far less than a year after inception.  Some things I particularly liked about their approach:

  • Cultivated Dealflow - OAF famously doesn’t charge entrepreneurs to pitch, and in fact they started at least in part in reaction to some “pay to play” angel/seed forums.  But there’s a handful of interesting, quality startups presenting that have been evaluated by a team of entrepreneurs and investors.
  • Short Pitch - Startups have a 5 min pitch/demo and 5 min Q&A, and the OAF team makes them stick to it.  It’s ample time to quickly learn what a company is up to and whether you’re interested in hearing more in a follow-up meeting or not.
  • Valuation Expectations - Companies have to state how much capital their raising and provide some expectations around valuation.  Many other pitch sessions like Y-Combinator and TechStars do the former, but few do the latter.  Of course angel participants are asked to keep this info confidential and all things in life are negotiable.  But it gives potential angel investors some sense of the investment opportunity itself again so they can independently decide which ones they might pursue.

I know OAF has been successful with these forums in Silicon Valley, New York, and elsewhere.  I’m pleased to see them active in Boston and look forward to future events.

  • http://twitter.com/Croaky Dan Croak

    Sounds like a great program!

    Lee, I’d like to learn more about your last bullet point. What sort of expectations around valuation do you mean? Do you mean a flat number (“We think we’re worth $8 million pre-money.”) or more tangential stuff like these?

    * “We expect investors to own 30-40% of the company.”
    * “We expect an option pool of 20%.”
    * “We want all investors to have pro rata rights.”
    * “In this early round, we want investors to take either common stock or 1x non-participating preferred stock. We’re open to other participating schemes in later rounds depending on what makes sense if and when we get there.”
    * “Here are three exit scenarios with your share and our share at that time. You’ll see you make five to seven times your money.”

    Just brainstorming, but is that the kind of thing that is appropriate or valuable for investors? Are some of these things so standard that they aren’t worth mentioning?

    Why might other pitches not include expectations around valuation?

    Also, does this (the expectations, not the example numbers) apply equally to companies seeking $250k-$750k angel-style investments as it does for $2-$8 million VC-style investments?

    • http://www.agilevc.com/ leehower

      At OAF startups just talk about how much they’re raising and valuation expectations, e.g. “we’re raising $500K on a $1.5M pre-money valuation” or whatever. Again it’s a quick pitch session format, so the purpose isn’t to negotiate a term sheet on stage but simply to give potential investors a sense of what the founders are looking for in terms of valuation. That obviously tells you what % of the company investors will ultimately own if the round closes.

      My experience has been that even if I’m really excited about a company, if the founders are looking for a valuation that’s way out of typical range you’re unlikely to be able to negotiate into a zone of “mutual acceptance”. In these cases you as a potential investor are better off just moving on to another opportunity. This has been true both in my experience making multi-million dollar investments as a VC and smaller investments as an angel.

      The other points around option pool, pro rata rights for future rounds, liquidation preference, etc. are important ones but IMO not appropriate to discuss in a group pitch session or even first meeting 1-on-1. Prior to beginning a fundraise, founders should understand and have an opinion on the mechanics of these issues. But if a potential investor is excited about investing in a startup, the founders will negotiate these with whoever is ultimately the lead investor. I think it’s most productive if founders seek out the more sophisticated angels within the universe of potential investors to manage this negotiation.

      I’m not sure why other group pitch sessions don’t touch on valuation expectations. My hunch is some entrepreneurs aren’t comfortable putting a stake in the ground, or perhaps if pitching to a large group there are concerns about confidentiality.

      • http://twitter.com/Croaky Dan Croak

        Got it. Thanks, Lee.

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