Sal Daher, "Secrets of Fundraising"

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The secrets of startup fundraising revealed by an angel steeped in Boston’s tech investing scene. 35 minutes is all it takes to make you a better fundraiser. Sal Daher, CFA of the Angel Invest Boston Podcast is your mentor.

Click here to read the full episode transcript.

 

Topics covered include:

  • Introduction

  • Why Do You Need Funding?

  • “So, raising money has to be for a purpose. There's a real danger of getting money and it killing your company.”

  • Secret #1: Raising Money Is Selling – Stephen Hawking vs. Willy Loman – Warm Calling not Spamming

  • Secret of Fundraising #2: Ask for Advice to Get Money, Ask for Money to Get Advice

  • Secret of Fundraising #2.50: Start with the Least Likely Prospects – Your Pitch Will Improve

  • Secret of Fundraising #2.75: Angels & VCs Require Different Pitches

  • Secret of Fundraising #3: Fundraising Can Paralyze Your Business

  • Types of Funding

  • “The problem is, early on, who knows what your company's worth?”

  • Understanding the Difference Between Angel Money and VC Money

  • “…do not underestimate the value of a functioning board.”

  • Sean’s Question on Picking VCs

  • Nathan’s Question About When to Raise Money

  • Matt’s Question About Better Ways to Match Founding Teams with Investors

  • Elizabeth’s Question About How Angels Put Together a Portfolio of Startup Investments

  • A Question About Investment Theses

  • Please Leave a Review on iTunes, It Helps Us Get Found


Transcript of “Secrets of Fundraising”

GUEST: Sal Daher, CFA

Introduction

SAL DAHER:      Welcome to Angel Invest Boston, conversations with Boston's most interesting angel investors and founders. I am Sal Daher, an angel investor interested to learn better ways to build startups.

SAL DAHER:      My format today is different. Rather than my asking questions of one guest, I'll be giving a brief talk and then taking questions from the audience, which as you'll discover, is a pretty sophisticated audience that asks great questions.

SAL DAHER:      The venue for the talk was a course on startup financing, taught by Steve Femino at Northeastern University. I'm grateful to Steve Femino for this invitation to address his class of MBA students. Northeastern is one of the great institutions of Boston. Actually, my guest on the previous episode of this podcast, super angel Joe Caruso, studied engineering there. One of the things that sets Northeastern apart, is their work study program known as Co-Op. It allows students the opportunity to work in their chosen field while attending school. It was through this program, for example, that Joe Caruso found out he was not cut out to be an engineer. He could do the math, but he did not have a good mind for engineering. It kept him from wasting time and money going to graduate school of engineering and so forth, and instead led him to the Harvard Business School. In this talk you will learn why I hold northeastern in such high regard, and why it has such a special place in my heart. I hope you will profit from this talk and from the lively Q&A afterwards.

SAL DAHER:      If we can get started now ... Hi, I'm Sal Daher, I'm an angel investor here in Boston. What I do is I invest in startup companies. I'm invested in, by this time, about 50 startup companies, and I work with them to try to get them to succeed. Some of these companies you might have heard of. Here at Northeastern. Mavrck is a big name, Lyle Stevens is a grad and Chris Wolfel, both alums, and a dozen other companies of that type. I'm an early stage investor as an angel. I'm here to talk to you about a topic that is very close to my heart, which is funding for startups, for early stage companies.

SAL DAHER:      Now, the way I'm gonna organize this is that the beginning I'm gonna give you the why you might want to finance a company. Then I'm gonna talk really important stuff, because it'll help you figure out who your target investor is.

SAL DAHER:      First I just want to tell you that Northeastern holds a really special place in my heart, because when I was a 14 year old high school student I was doing really badly. My dad was a mathematician who was doing his PhD in math here at Northeastern, and he was really embarrassed. My dad was always a brilliant student, and I was just a complete screw up. I never did any homework, and I barely got by. He's telling me, "Look, you can do math. Why don't you go to your teacher, ask her if you can get into the honors classes where you learn more advanced math?"

SAL DAHER:      So I talked to the teacher, who said, "Talk to the head of the department, Mr. Davis." Mr. Davis, I went to talk to him, and he said, "What? What are your grades? You can't be in calculus with your grades!" There was no such thing as self-esteem in those days, this is how they talked to students. "So listen Daher, if you get a 700 or better in the SAT II ...", which then was called Achievement, " ... I'll let you into calculus. Otherwise, forget about it because you're not gonna make it."

SAL DAHER:      That kind of got me really steamed. I told the story to my dad, and my dad said, "Look, next to my desk in the department there is a very nice desk that was empty, nobody using it. You come with me every day during the whole summer to Lake Hall, and you're gonna really ace your SAT's." And I did that. I spent a very productive summer here at Northeastern. Not as a student, I was 14 years old. So I have really fond memories of this place, I really love Northeastern, and I think it's done tremendous stuff.

Why Do You Need Funding?

SAL DAHER:      Anyway, back to the topic of funding. Why do you need it? Now, this professor at Harvard Business School, Howard Stevenson, whom I have interviewed for this podcast. Who is… This guy is… Who here has heard of Baupost? He's one of the founders of Baupost. Baupost is one of the most successful hedge funds ever, here in Boston. So Howard Stevenson has an amazing angel portfolio and so forth, and he has a definition of entrepreneurship, which it really applies to startups. He says, "Entrepreneurship is the pursuit of opportunities beyond resources currently controlled". Meaning, that you're doing something with money you don't have. You're doing something with customers you don't have. You're doing something with stuff you don't have, because if you start trying to do something the way that it's being done now, you're gonna get run off the road. You cannot compete with Procter & Gamble on their advertising budget. Okay? You can't compete with Google on the reach of their search engine. So you have to find a clever way of doing this.

SAL DAHER:      Now, another company that I've interviewed, and a really compelling company is a company called Wistia. It's a Cambridge-based company, and they're really very impressive guys. You talk about capital efficiency, doing a lot with a little. This is what Howard Steven's was talking about here, is getting a lot done with very little. Wistia raised $1.4 million. They don't publish public numbers, but they do like $40 million in sales.

SAL DAHER:      Compare them to a couple of companies that are in similar space. Bright Cove has raised almost $200 million, and they have annual sales in the neighborhood of 160 million. Hub Spot, everybody hears, "Oh Hub Spot, amazing!" They've raised about 100 million, and they have sales of about 440 million.

SAL DAHER:      These three companies, the most productive in terms of capital applied is by far, Wistia. They're smaller, but they're growing very fast, and they've been profitable all along. And their investors are happy as punch. These other companies, who knows? Have you made money? You have to time it really well to make money. And also for Wistia, they own their company. They're doing a deal where they're gonna borrow some money and basically buy out any investor who wants to leave. Those guys own their company, they control their company.

“So, raising money has to be for a purpose. There's a real danger of getting money and it killing your company.”

SAL DAHER:      So, raising money has to be for a purpose. There's a real danger of getting money and it killing your company. Money that you raise is for seed. It's like, you think for seed, it's not for buying a farm, it's for buying seed that you're gonna plant. The farm are your ideas, and the capital is the seed. Because if you don't have that attitude, you're gonna buy the farm. You know the expression, "Buy the farm"? It's like a jet plane crashes, your company is gonna die because you're gonna spend all the money, you're gonna run out of capital, and nobody is gonna give you any more.

Secret #1: Raising Money Is Selling – Stephen Hawking vs. Willy Loman – Warm Calling not Spamming

SAL DAHER:      Let's flash forward now to the absolute secrets of fundraising. Don't tell anybody, but you will hear it from an angel investor. The first secret about raising money ... Guess what? Raising money is selling, and a lot of people, particularly PhD types ... How many here are PhDs? Okay. Wow, anyway, we can laugh at the PhDs.

SAL DAHER:      PhDs are the worst fundraisers you can imagine, because they're used to always getting accepted everywhere. They were always a top student, like my dad. And they never get a rejection, their papers are always cited, a lot. And they're really successful people in getting their peers to accept them. When you're fundraising, guess what? People like me shoot them down, say, "No, your presentation is full of holes, you gotta do better." And they can't handle it.

SAL DAHER:      Who here knows who Stephen Hawking was? Right. Brilliant physicist, right? PhD, a brilliant PhD. Who knows who Willy Loman was? Yeah, he was a really poor salesman who ended up killing himself for his life insurance money because he was so desperate. But let me tell you something, if I had to put my money on who is the better fundraiser, I would put it on Willy Loman any day over Stephen Hawking, because Willy Loman knew something about sales that Stephen Hawking didn't. It's that, you need a sales funnel, you need to treat your fundraise as a sales process. You have to use Sales 101. It means that you have to look for a lot of leads and qualify those leads into prospects. And from hundreds of leads, you might end up with a handful of investors in your term sheet.

SAL DAHER:      Now, that doesn't mean that you're gonna start spamming people. You need to do warm sales, because raising money means trusting you. They have to like you and they have to trust you. The point is that angel investing, it's somebody that you're gonna be involved with for six, seven, ten years. You've gotta like each other. All right? And that's not something that you're gonna develop by sending people hundreds of emails and so on. You're not gonna develop this sudden affection from someone by sending them emails, you have to connect with them somehow.

Secret of Fundraising #2: Ask for Advice to Get Money, Ask for Money to Get Advice

SAL DAHER:      And that gets me to the second secret of fundraising, and you hear this over and over again, it's a common place, but it's actually a secret among people fundraising. If you want to raise money, you'll ask for advice. And if you want advice, you ask people for money, because people get defensive when you ask them for money. So before you start your raise, talk to a lot of people. Pick their brains, ask them, "Here's my pitch, what do you think? Tell me honestly, don't spare me. Don't be nice. Shoot it down, tell me where you think there's a hole." That will make you a better pitcher.

Secret of Fundraising #2.50: Start with the Least Likely Prospects – Your Pitch Will Improve

SAL DAHER:      Now remember, when you start pitching for real, don't pitch in front of the people you think are your most likely investors. Go to the people who are the hardest investors most likely to turn you down, and most likely to shoot you down, because your pitch will get better. And believe me, I have seen companies improve their pitch over a three month period like you would not believe. You say, "No, but it's the same business ...".

SAL DAHER:      No. After you explain your business over and over and over again, it's a matter of communication. You get better at explaining to people what it is that you're doing, you understand better what your business is. This is an important thing. So it's not just messaging, it's also understanding of your business. And then you refine your message, and you shrink it down. If you have a big, honking pitch deck, you're not gonna get anywhere.

Secret of Fundraising #2.75: Angels & VCs Require Different Pitches

SAL DAHER:      Remember, if you're pitching to angels, it's very different from pitching to VCs. VCs, they want to see a 60 page pitch book with all kinds of cash flows and so forth. But if you're pitching to Angels, that doesn't exist yet. The data isn't there to provide that sort of detail.

Secret of Fundraising #3: Fundraising Can Paralyze Your Business

SAL DAHER:      Another very important thing to keep in mind is that fundraising can paralyze your business. Once again, you're in the business of doing a lot with very little. And if your fundraising isn't going anywhere, guess what? Getting your business going somewhere is more important than raising money. If you have to moonlight, if you have to do whatever it takes to get money to support your startup, you do that and you work on your startup first, fundraise second. Believe me, if your company is ready for fundraising, it's a snap. If your company is not ready for fundraising, it's like running through molasses, you get absolutely nowhere, and you get very sticky. It's terrible, leaves blow on you, it's even worse.

SAL DAHER:      Remember that. So, if you're not getting any traction, if you're not getting anywhere with your raise, that means you have to improve the proposition to your potential investors. And what does that mean? That means figuring out a way to prove traction. To prove that you have a business that could work. You have three, four, five paying customers, the whole picture changes.

SAL DAHER:      Anyway, that's the secret, you guys can now walk out. Keep these things to heart because this is really, really important because a lot of people don't know this and they come out with these enormous pitch decks and so forth. Let's go to the more mundane things, we can talk about those briefly. And as I said, feel free to interrupt at any time.

Types of Funding

SAL DAHER:      Forms of funding. If you're a scientist, you're very familiar with grants. You go for grants first. The good thing about grants, is that they don't make you give up any part of your business. Bad thing about grants, is they're confining. For example, it has to be for basic research, it cannot be for commercialization.

SAL DAHER:       I invest in a lot of tech companies, tech startups, and in order for them to develop the basic science underlying the technology, they can get grants. But to commercialize it, there are some exceptions. There are situations where the NIH wants to commercialize a particular technology that might be useful, for example, in creating vaccines and so forth. That sort of thing you might be able to get grants.

SAL DAHER:      But anyway, just in general, I'm talking also to my audience out there and not just necessarily you guys here, but grants are always an interesting way to get funding. I'm invested in one startup that because the technology was developed in Italy, they've gotten a lot of free funding from the Italian government, because they know that there's a company in Italy that will eventually get royalties when this technology is commercialized.

SAL DAHER:      Now there's a second type of funding which is debt. And it's usually the form of a note, a promissory note. Another type is something called a SAFE, which is simple agreement for future equity, which is ... I don't know if you guys know what a warrant is. It's like a right to issue stock in the future. It's more like that. Investors hate that. Investors want equity, meaning they want to own a piece of your company. They want to know how much they own of your company.

“The problem is, early on, who knows what your company's worth?”

SAL DAHER:      The problem is, early on, who knows what your company's worth? How much of your company are you willing to give up for a million dollar round of investment? If you think your company's worth $10 million, that might say 10% of the company, pre-money, meaning before the money is added in. When the money is added in, it becomes post-money 11 million valuation. If you think your company's worth five million, then you're going to be giving up 20% of your company, and so forth. That's close to 20%.

SAL DAHER:      There's this conflict, there's a tension between the investors wanting to know exactly how much they own and you sort of saying I don't know. I don't have any sales. I don't really have much of a company. It's just a bunch of people working together. Let's wait until we get to a venture around Series A. And this is why the notes are called convertible notes, meaning they will convert to equity in some future time. And when they do convert to equity, very frequently there is a cap, meaning to convert into equity at a valuation of no more than X.

SAL DAHER:      If the venture capital is coming in at a post-money valuation of 20 million and your cap is five million, hey, you've gotten a bargain and you're way away of the VCs. Why? Because you took risk very early on in the company when there was nothing going for it, and now there's something going for it.

SAL DAHER:      And then later on, the VCs look for what is called preferred equity. Preferred equity means that in the case of a liquidation, they get paid out way ahead of everybody else. And sometimes it's multiples of that. It might be two or three times their investment before anybody else gets anything. And VCs also like to have a certain amount of control of the company. They want to have a seat on the board, and they will stage the money to the company, and so a little bit of money at a time so that they can gauge how the company's doing.

Understanding the Difference Between Angel Money and VC Money

SAL DAHER:      Now let's go back and understand a little bit these types of funders. Angel investors usually are investing in the note stage. They want equity but end up with notes with a cap. And they are wealthy people who've made their money usually building a company, so they understand the business and they're willing to put a little bit of money to work and to put a lot of sweat equity into the business in helping the founders get off the ground. But the important thing is that the angel are investing their own money. Really important that angels like you, because they have no reason ... it's not as if someone, some institutional investor's going to say, oh, you could have invested in Facebook and you missed out. Who are you going to talk to? Maybe your wife, and that's it.

SAL DAHER:      You're only responsible to your spouse or your kids as an angel investor. Whereas venture capitalists are responsible to institutional investors, the wealthy individuals, so they're investing other people's money, and there's a different standard of care. There's a completely different set of due diligence and so forth, so it's a very, very different world.

SAL DAHER:      If you can do without VC money, great. If you can do without angel money, great, although angel money is a lot easier to deal with than VC money. If you take VC money, however, make sure it's the right VC. You have to study very well what kind of stuff the VC does and what kind of VC they are. How invested are they in the company? Are they going to be wanting you to exit early so they can cash in on 5X, but you want to go and take the company public. You have to a confluence of interests in there.

It's always important to understand who your investor is, but particularly in the case of dealing with the VCs, because they end up with so much control.

“…do not underestimate the value of a functioning board.”

SAL DAHER:      And one other thing that I want to say before I open it up to questions in general is do not underestimate the value of a functioning board. Even in the angel stage. You want to have one or two people. You don't have to have six people on your board. You want to have one or two people who really understand your business, who have a stake in your business, who have written you a check, and who will really go above and beyond for your company and who's a shoulder for you to cry on.

SAL DAHER:      Remember, it's not someone that's going to be keeping you from doing what you want to do, not somebody's going to curb your company and so forth in any way. These are people that are in your corner, have a lot of experience, and it'll keep you from tripping on silly things. Entrepreneurs are investing, creating new worlds. But it helps to have someone say look, your shoelaces are untied. You're going to trip. Simple stuff that you can take care of very easily if you have someone with that kind of experience. And then it allows you to spend time building the core of your business, which is a really important thing.

SAL DAHER:      Anyway, let's open it up for questions, if anybody has any questions. Please state your name and then ask your question.

Sean’s Question on Picking VCs

Sean:    My name is Sean, and I'm just hoping you can talk a little bit about if a term sheet is more important than the VC that you chose or is the VC’s track record more important than possibly their term sheets?

SAL DAHER:      The VC and the track record of the VC?

Sean:    Yes, the VC and the track record.

SAL DAHER:      The VC and the track record of the VC is much more important than if you're getting pre-money valuation of 20 million or 23 million or whatever. In the long run, if you have shared vision for the company, it's far more important.

Sean:    Thank you. I appreciate that.

SAL DAHER:      Anybody else? That's a really important question about what's more important, a term sheet or the VC. You really have to do your homework on ... you have to do your homework on the term sheet. It has to be ... there's a danger of your term sheet being priced in such a way that it's so favorable to you that in future rounds, you might have to have a down round. And that stinks. Nobody wants to be participating in down rounds. It's really a bad thing, so you have to think ahead and make sure that it's sensible.

Nathan’s Question About When to Raise Money

Nathan: I'm Nathan.

SAL DAHER:      Hi, Nathan.

Nathan: Thanks for coming in and talking with us. It struck me as though a lot of your advice was to conservatively look at fundraising and only do it when it's right, but I was wondering if you had advice from the other perspective for companies that are holding their equity or founders holding their equity so closely that it's hurting their chance to grow quickly.

SAL DAHER:      Well, if you have a business that needs $10 million of capital in order for it to become a billion dollar business, you're crazy not to bring that in. But realistically, most businesses are not like that. A company I've invested in recently is a company that has a cell separation technology. It's One Cell in a Billion, if you want to look it up. A company like that is a company that could become a very large company because it's a platform.

SAL DAHER:      Those guys, it could be that they could raise $20 million and still make sense for them to raise that kind of money. But you don't want to have a company that at most would sell for $30 million, going out and raising 15 million. Nobody's ever going to make any money on that. And believe me, some people will put money into that. It's crazy. Any other thoughts?

Nathan: Well, I guess what I'm thinking of, I've been talking to, there's one company in mind that's two years old. They've been growing rapidly. 60 employees now. They've got 70,000 plus customers, subscription-based service, going awesome. But they've taken no funding. They've bootstrapped everything, and they're just like nope, we're going to keep growing slowly-

SAL DAHER:      What would the money do for them? What would the money do for them?

Nathan: They're supply is restricted right now. They have more demand than they have supply, so they can build their supply faster.

SAL DAHER:      So basically working capital?

Nathan: Yeah.

SAL DAHER:      Well, if you happen to have a business that is profitable and you have a problem with supply, banks will lend you money. If it's a working capital problem, they'll give you working capital loans. Traditional banks like that, loans that are ... particularly if they're seasonal. If you borrow for four months out of the year and the rest of the year you're out, and so when a lot of business is seasonal, banks love that. And that's what they're built to finance. But if you don't have an established business, you don't have cashflow to show to the bank, then you need to go to a VC, but you have to explain. Okay, I don't have cashflow in this fairly large business, but I have very clear cashflow in this really small business and I need to scale. That's what you go to VCs for.

Nathan: Thanks. Appreciate it.

SAL DAHER:      Please state your name.

Matt:    Hi, I'm Matt. Thanks for coming and talking to us.

SAL DAHER:      Great, Matt.

Matt’s Question About Better Ways to Match Founding Teams with Investors

Matt:    When you're sitting around with other angel investors and you're talking about the process of finding good founders, what parts of that process come up as things that you'd like to improve or ways that the process could be better to connect those founders with the right angels?

SAL DAHER:      I don't give that a lot of thought because I'm mostly swamped with lots and lots of opportunities. Now this brings to mind one of the great resources of Boston that I should mention here. And that is Boston has some really, really great accelerators. One of the great resources here in Boston is that, for example, you have MassChallenge is an accelerator that doesn't take any equity from you. And if you manage to get in ... there are thousands of people applying and a handful get in ... but if you manage to get in, they don't make you give up any equity and they give you a lot of help. That's one way that we help winnow out the ... someone has come out of MassChallenge and done really well in MassChallenge, that's something that angels will look at.

SAL DAHER:      Or another thing, if you're an education startup, education's hard. I have an interview with Gene Hammond coming up. Gene Hammond is one of the people who set up LearnLaunch which is the accelerator for education companies. That's a great place to go. You're crazy if you don't try to get into LearnLaunch. And what that does is it also ... they sort of make sure that the companies are doing their homework. They provide a lot of help to them. Techstars is ... the demo day for Techstars was here at Northeastern, and it was also recorded on this show. It's going to be coming up some time in the future. And that is another great resource. These are places that angels go to to look for attractive companies to invest in. It's like a kid in a candy store.

Matt:    Thank you.

SAL DAHER:      Thanks. Good move, coming that way.

Elizabeth:         Yes, very strategic. Hi, I'm Elizabeth. Thank you for coming in.

SAL DAHER:      Elizabeth, thanks for coming up and asking a question.

Elizabeth’s Question About How Angels Put Together a Portfolio of Startup Investments

Elizabeth:         My question has to do with risk overall. When you're investing in very early stage companies, obviously there's a lot of risk, there's a lot of unknowns, some of which you talked about, and some of which we've been speaking a lot about during class. My question is as an angel investor and you are looking at trade-offs and trying to make selections, if you are that kid in the candy store and you have lots of different options, when you're thinking about how to put together your own investment portfolio in these early stage companies, how do you weigh the different options and put together a risk profile that seems to work for what your return perspectives are? There's a couple layers here.

SAL DAHER:      Well, stay because if you have ... if you want to follow up.

Elizabeth:         Sure, yeah.

SAL DAHER:      Okay, the way that we look at risk is very different from ... I'm a CFA charter holder, and Modern Portfolio Theory is a kind of thing that's drummed into you. And in Modern Portfolio Theory, they talk about diversification so that you are not carrying idiosyncratic risk, risk that is particular to the company; because most of that risk it's like Exxon, Valdez. Hits, you know it springs a leak, and it's always bad for a publicly listed company, all idiosyncratic, the company specific risk is down side.

SAL DAHER:      Well with startups there's a lot of idiosyncratic risk that's for the upside, you can have a surprise. Company cottons onto a market you did not expect it to find. So the risk for an investor is not so much losing money in the companies, because that's a given. 60% of the companies we invest in are going to be losers, some way or another and it might not lose 100% of the capital, but they will not return the full capital, something around 60%, or maybe even 67%.

SAL DAHER:      So, what is it that we're looking for? We're actually looking to make sure we don't miss out on that two or three percent of the portfolio that might give you 100X return. So that's why you don't want to invest in just three, four, five start-ups, you want to invest 40 or 50, that's my preference; maybe 60, and then you make the particular investment small, I only write follow on checks if I have really clear evidence that the company is doing really, really well, and they just, like the previous question, they need the money to make that 10 times the size of the business they have.

SAL DAHER:      So, this is how we deal with risk; so diversification, which is well established in modern portfolio theory; but also seeking not just to get rid of risk, but also to capture that really idiosyncratic risk that's going to pay your portfolio. I'll give you a really cogent example, Paul Graham of Y Combinator, which is an accelerator in Silicon Valley. There's this one statistic, I think it was around 2013-14, that they published this, they had 565 companies go through their program, and those, together, they raised about 2 billion dollars, and those 2 billion dollars became, by 2013, something like, this was from 2005 to 2013, something like 14 billion dollars, so 7X. Okay? Wow, 7X.

SAL DAHER:      Well guess what, out of those 565 companies, really basically 11 companies accounted for two-thirds of that growth in value from 2 billion to 14 billion. The rest of the companies were non-entities. So, if they had missed out on those 11 out of 565 companies, that would have been a really mediocre portfolio. So this is why what angel investors, what everybody's looking for, make sure that you don't miss out on the companies; and you know what? A priori, I cannot figure out who's going to be that huge winner, or who's just going to be an okay company; but I can figure out who's a non-starter, and that's what I do.

Elizabeth:         And a follow on question that's a little bit different, but related, so when you are evaluating all the different options I'm sure that there are others like you who are also pursuing a lot of the same companies, what is your process? And are their certain tactics, or ways, that you find you can get to companies first, or really try to otherwise out muscle your competition?

SAL DAHER:      No, it's actually not like that.

Elizabeth:         Okay.

SAL DAHER:      It's funny that you ask, this is a very important question, it's really great that you asked that because angels are intensely cooperative. Take a guess, how much do you think a typical angel might invest in a round? Let's say in a seed round. Take a guess, how much would an angel invest?

Elizabeth:         I don't know. Guys help me out?

SAL DAHER:      Who wants to take a guess? Individually. [crosstalk 00:29:53]. 100,000? [crosstalk 00:29:58]. Okay, so anybody else?

Speaker 1:        100,000.

SAL DAHER:      20,000. Closer to 20,000. Okay? Somewhere between 15 and 50,000, the biggest check I've ever written is $50,000. I've written checks as small as $5,000. So it's in that range.

Elizabeth:         Okay.

SAL DAHER:      When you're writing those kinds of checks, you want lots of other people to be in the game. Okay? Because remember you don't want to own this company, you want to own a little bite of this company. This is pepper for the pot. This is not meat. Okay? So it's a little bit of pepper for a large pot, and so pepper goes a long way as you well know. So angels are very collaborative, guess what? You put the money in, the money's the least of it. It's all the help you want, you want lots of people helping your company.

SAL DAHER:      So this is why angel investors are not competitive at all, because as I say there's lots and lots of room.

Elizabeth:         Does it ever get too crowded in particular deals?

SAL DAHER:      A recent deal got very crowded because the company didn't want to offend the investors, the company improved a lot. It was to begin with, the round ... Basically they were raising a half a million dollars and that was filled within a week; and they didn't expect that, and then they raised it to 750, and then that filled within two weeks, and they ended up having to explain to their lawyer why they ended up having, I think, 820,000 when they're supposed to take only 750, and there's some excuses you can make ... So, that can happen, but that's because the investors are getting a really tremendous value in this company, that had in that period, really made a lot of progress.

SAL DAHER:      The most likely thing is that that money and the company goes nowhere, and they're back for more, and you have to decide if you want to let them sink or you want to give them some more money. And other thoughts Elizabeth?

Elizabeth:         No, I think that's good, thank you very much.

SAL DAHER:      Well I appreciate your questions.

Elizabeth:         Yeah, thank you.

SAL DAHER:      Anybody else? Please come up.

A Question About Investment Theses

Speaker 1:        Hi, thank you for having us today. So, we did some reading for this class, and we learned about how a lot of VCs have investment theses where they say we're going to work in certain sectors, we're going to come in more of the higher upside, higher risk, or lower upside, lower risk; and I was wondering as an angel investor, do you guys go through a similar process where you kind of target your investments?

SAL DAHER:      Yes, in a certain way we do. VCs have to have theses, because they have to be able to explain, have a rational explanation to their investors, why something is working, why something is not working, the investors are saying we want machine learning companies, so you have to be doing machine learning companies; it's kind of they're driven by that.

SAL DAHER:      Whereas angel investors can invest based on whether they like the team, and one of the most successful Angel Investors I know, a guy named Michael Mark, is the first guy I interviewed on the podcast, this guy knows a pile about investing in startups, and he's invested in over 200 companies, and guess how many ... I asked him how many of those companies went according to plan? The business plan, to realize the business plan. He says, "None." And then he said, "One."

SAL DAHER:      The reality is VCs are investing in businesses, angel investors are investing in people. So forget about the theme, it's do you have a really, extremely capable team? That's what we bet on, it can be in biotech, it can be in somebody doing marketing technology, or whatever. So it's a little different, it's when people start saying you have to have theme, and so forth, well you might miss out on some really huge opportunities, they might miss out on the 11 out of 565 companies, because of this quote, unquote theme. Okay?

SAL DAHER:      If you find a team that you're really impressed with, go with your instincts and remember you're only putting a little bit of money, you're not putting all your capital, it's 1/50th, or 1/40th of what you're investing. Any other thoughts?

Speaker 1:        No, that's good thank you.

SAL DAHER:      Very good. Well, I thank everybody. I thank Steve Femino for this invitation, and I thank Northeastern for this really outstanding event, I'm very happy to have been here.

Please Leave a Review on iTunes, It Helps Us Get Found

SAL DAHER:      If you liked this podcast, you will find an annotated transcript of this episode at angelinvestboston.com. Please take a moment to leave a review of the podcast on iTunes, it really helps us get found.

Two Explanations

SAL DAHER:      A couple of explanations that are in order. Mr. Davis, any family member of Mr. Davis listening to this podcast should know that I really appreciate the opportunity that allowed me to get into AP Calculus, it changed my life. Forgive my imitation of Mr. Davis, I guess we never leave high school.

SAL DAHER:      And to PhD's, don't take what I said in this talk the wrong way. I love PhD's, some of my best founders are PhDs Çağrı [Char-ree], Armon, Federico, and Laura come to mind. My point is that PhDs need to learn to sell, and to get really good at it in order to get their start up off the ground. The four stellar founders I just named are all brilliant scholars, yet they mastered the humble art of selling to great effect.

SAL DAHER:      You know, selling and marketing has a really terrible name these days, we think car salesman, we think of spin, and all that stuff; but I think to put it in the proper perspective, we should look at Phil Knights biography “Shoe Dog”, it's a great book. He's the guy who founded Nike, and the guy he talks about the discovery at one point that Athena was a goddess of wisdom, but was also the goddess or persuasion. The arts of persuasion, and that really that's a noble thing to persuade other people, to have other people join you in your belief and in your actions. So, PhDs don't look down on selling, it's a noble profession. Athena, was the patron of it.

SAL DAHER:      This is Angel Invest Boston, I'm Sal Daher.

SAL DAHER:      I'm glad you were able to join us; our engineer is Raul Rosa. Our theme was composed by John McKusick. Our graphic design is by Katharine Woodward-Maynard. Our host is coached by Grace Daher.