Austin Angel Investors, Come Back to the Center!

A couple of weeks ago, a local writer penned a blogpost entitled “Where Art Thou, Austin Investors?”  The basic premise of Carla Thompson’s piece was that despite the entrepreneurial activity in Austin, few of these companies are getting funded.  She asked “why?” and offered a couple of solutions.  A lot of commentary was generated about the piece, and to the suggestions offered in the piece.

Despite this post and commentary, no one seems to be describing why the problem exists.

Our view is that the angel communities in Austin and elsewhere have moved away from their traditional spot in the funding spectrum, and have become uncompetitive.  Angels have traditionally occupied the space just beyond seed (friends and family) funding.  However, angels have moved away from this position and moved closer to the position occupied by professional venture capital investors.  This new position is making them uncompetitive, and is the first problem.

Over the years, angel investors have formed more structured groups, and have tried to become more professional about their process.  Most angel investors have significant business operations experience, and are considered high net worth individuals – based on an IRS definition.  As a result, angel investor groups require that startups follow a process, which means that they must author executive summaries that are generated from a service that delivers a consistent look of the summary information across all kinds of startups.  Once the summaries are reviewed by the individual members of the angel groups, various startup groups are invited to present to the angel groups.  If one angel investor likes the concept, they are asked to be the “lead” on this opportunity.  Being the “lead” on the investment opportunity also means that they must do the lion’s share of the due diligence work.  When the group of angel investors have several investment opportunities to consider, all other things being equal, they will choose the investment with the lower risk.  This is a logical response to an opportunity that inherently carries a significant amount of risk.

The focus on risk reduction means that angel investors demand that a startup already has revenue, has customers, and has market traction.  In other words, angel investors are demanding that startups are beyond the startup phase before they invest.  That is quite a conundrum.  How do you grow without capital?  Angel investors appear to have abdicated their traditional position as they have attempted to become more professional about the process, and improve their chances of investing in a successful startup.

The second problem is the amount invested per angel group appears to have decreased.  In other words, angel groups typically looked at startups that were looking to raise $500,000 – $1.5 million.  This range appears to have decreased to $200,000 – $500,000.  Moreover, the average amount invested per angel has decreased over the years.  In other words, if a startup is looking to raise $200,000, then they would hope to raise that amount from one or two angel investors.  Reductions in net worth resulting from problems in the stock market in recent years, appears to have forced angel investors to reduce the amount invested per startup.  Therefore, rather than invest $50,000 or $100,000 per startup, it appears that angel investors are writing checks for $20,000 per startup.  If you are not able to raise the capital needed from one angel group, you are introduced to other angel groups.  If one or two angels from one group invest in your company, you are told that other angels from other angel groups will give you a better reception.  What you don’t realize is that all angels are their own individuals, and make their own decisions.  Therefore, you may not be starting at square one, but it sure seems pretty close to square one.

As an entrepreneur, your funding exercise just got significantly longer and more difficult.  Not only do you need to be past the startup stage with existing revenue, customers and traction, you also need to convince up to 10 angel investors, across multiple angel groups, to write you a check for $20,000 – $25,000 so you can get to your $200,000 raise.

That’s a bigger problem, as it lengthens your funding exercise, and takes away from your time to focus on operations and winning new customers.

So, what is the solution?

Enter the “Super Angel.”  There appears to be a growing number of former technology company entrepreneurs that have experienced a life changing liquidity event (they made a lot of money when their company was sold), and have earnestly taken up the position of funding seed stage startups.  Note however, that they are not funding pure startups with no revenue and no customers.  They are still demanding that the startup has already developed a minimum viable product, and are actively operating a software product or service that is gaining customers.  They are also appear to be funding entrepreneurs who are themselves programmers that are intimately involved in writing and delivering a large portion of the initial code.    However, these Super Angels are also writing larger checks, and do so in a much shorter time frame than those people in the angel groups.

Where do you find these Super Angels?  Many are very well known, are active bloggers and participate in the dialog on Twitter.  The problem for Austin entrepreneurs is the same as before, how do you get these well-known Super Angels, who are located outside of Austin, to invest in an Austin based company?  More insidiously, if a Super Angel funds an Austin startup, are they demanding that the startup leave Austin, and locate closer to their home base?

It seems pretty clear that a few Austin angels need to take on the role of Super Angels.  Moving back into the post-seed funding position on the funding spectrum allows them to see more interesting startups, and allows them to get a larger amount of equity for a smaller amount of money.  Clearly, this means taking on more risk per startup investment, so how does that Super Angel try to reduce that risk?  Firstly, Super Angels can engage the services of individuals that can quickly do much of initial due diligence work.  Secondly, Super Angels can encourage the startup entrepreneur to gain some mentorship and education – especially if they are a first time founder/entrepreneur – from one of several groups in the Austin area.  The Austin Entrepreneur Network is one such group, has access to a ton of resources for local entrepreneurs, and has introduced an “Connections” program to match up the needs of entrepreneurs with experienced individuals.

Other groups known as “Accelerators” have formed in Austin recently that attempt to bridge the gap between education/mentoring and funding.  This approach has promise, but also has well known problems.

So what is the bottom line to the lack of angel funding in Austin?

Traditional angels have moved away from their long standing position on the funding spectrum and moved closer to professional VCs.  This has occurred to the detriment of local startups and entrepreneurs.  In effect, traditional angels have become uncompetitive, and have provided an opportunity for a group of individuals loosely called Super Angels to occupy their traditional position on the funding spectrum.  In many ways, this movement is akin to the movement of politicians who try to occupy the “center” in order to maximize votes.  Those politicians that move closer to the right or left on the political spectrum eventually become uncompetitive to those that can successfully position themselves at the center.  In our view, Angels that move back to the center become Super Angels.  They will gain the best deals and have the opportunity to gain the better returns as they jump ahead of the others who have become more risk averse.

There is a lot more to this story, so stay tuned and follow this blog, or follow us on Twitter at @angelpitchdoc, and check out our website: Outram Research.

About Richard Piotrowski, CFA

Richard Piotrowski, CFA, is a formerly a #1 ranked securities analyst, who has 20 years of experience building, dissecting, and fine tuning presentations, business models and valuation models of all kinds. The experience has been gained working in the investment community on both sides of "Wall Street", on "Bay Street" (Canada), as well as on "Main St." as Chief Financial Officer, Chief Operating Officer, as well as Evangelist and Marketing Director, where he focused on building messaging for solution sales opportunities based on value positioning, high ROI and fast payback. Richard joined Canada’s investment banking community in the early 1990s as an analyst following technology companies. He was recognized within two years by the Street, and was ranked "First" for Quality of Research in the survey of institutional investors conducted by an independent advisory firm – Brendon Woods. Richard was also the founding member of the internet technology research practice at two boutique investment banks.
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