The disconnect was simply that the philosophy of angel investing is to get very involved and that what he really disagrees with is very passive angel investing……

The venture model makes sense for a very very small number of companies; angel investing makes sense for many more. These two sets do not typically overlap much.

One dis-service done by the venture-world-hype is to encourage the idea that the only path to real success is to do a venture-funded startup. I think this is discouraging to the vast majority of entrepreneurial ventures & entrepreneurs out there where a VC path/growth curve/expectations are simply inappropriate; if we only had VC-appropriate companies in our economy we’d have nowhere to eat, no way to get gas for our cars, few services to make our lives easier, etc… and many of these are great businesses.

Interesting discussion. Nice to see some disagreement among participants to help explore the edges better.

One of the subtle yet poignant one-liners (which Kimbal mentioned a couple of times) is, “does the angel investment reduce or mitigate risk in the venture?”. Any “smart” investment in an early stage company should be coupled with a timeline and set of obectives. And the objectives should include elements that directly lead to risk mitigation. For example: Reaching a development milestone that shows the software actually does what the idea claimed. Allowing a prototype to be put in the hands of a customer to validate that it solves the claimed problem. Creating the training materials allowing you to sign & support that first channel and prove the sales model. Or to put up a base-salary to hire that first sales person to see if you can replicate that “first customer experience” without the CEO/CTO making the sales call.

Adding to Brad’s “three kinds of startups”, there are 2 kinds of companies that get angel funding: those that already have boot-strap mentality and spend 250 or 500K like it was a million bucks. And those that churn it away and don’t mitigate risk.

It’s one thing for a couple or three founders to stay hunkered down and go without salary for 3, 6 or 12 months. Its quite another thing for that same trio of founders to put up $50K of hard cash to buy the quad servers and guarantee the datacenter space to transition from onesy-twosy pilot customers to 10+ real customers. Also, its one thing to get a fellow technogeek to share your vision and go no salary to build a prototype. A completely different deal to bring on a seasoned sales-guy that (if he/she is worth their salt) is probably making $200K to 300K low-risk now. I’ve seen a LOT of companies with good products/ideas blow 6 months or a year enlisting 1 or 2 “commission only reps” not realizing the high cost of free.

I for one am a believer that $250-500K in the hands of a buckle-down entrepreneuerial team can leverage that money to get them over a first revenues or repeatable revenues hump.

Jim

Haven’t we veterans mostly agreed that, somehow, the most surprising and successful startups DO NOT take vc money?

Why is it that most startup founders, in retrospect, wish that they hadn’t taken VC money?

I realize there are different kinds of startups, and some may want to trade time for money in order to reach the ‘next level’ sooner. But a large investment is not required for success.

David, even your experience asserts this. I wish the coloradostartups blog was more focused on our headstrong rocky-mountain way of ingenuity and creativity in overcoming our obstacles and building dreams, rather than money, money, money money.

Didn’t we go over all of this in the 90s?

I have to agree with Kimbal. Having been in this “business” for 16 years I’ve raised all kinds of money. And here’s what I’ve learned. It has to be “meaningful” money. Most startups lack discipline and without careful management, money compounds the problems.

Here’s what I focus on - what problem, for “whom,” are you solving? Once that’s figured out, can you make meaningful, sustainable, profitable revenue from solving that problem? If the answer to both of those questions is yes then move to the next step.

The next step is can you convince 10 other people that this really is a problem worth solving. So far total capital spent is $0. Next build a prototype - time allotted is 90 days. Next showcase that prototype to an additional 10 people for “customer validation”. If all is well so far pursue two vectors - customers and funding. Up until this time total investment is still $0 dollars (excluding the time). Total time elapsed is now 6 months.

You now have 6 months to get what you have into the end zone. What you will have done so far is to mitigate both technical and business risk, AND you will have validated with potential customers. If you’re a product company it’s unlikely you can ship without funding, if you’re a service company it’s unlikely you can accelerate growth without funding. From this point the funding now becomes the accelerator. The “type” either Angel of Series A all depends upon risk mitigation.

It all boils down to two things – risk mitigation (think customer validation) and value (think customer validation). Solve both and you will be creating value. Investors invest in value.

Cheers.

Peter