Angel Insights Blog

This post was written by John Huston, ACA Chairman Emeritus and Founder & Manager of Ohio TechAngels.

Like most ACA member groups, the Ohio TechAngel Funds (OTAF) conduct postmortems after our exits, regardless of whether they are positive or negative. From our positive exits, we’ve gleaned that even our best entrepreneurs have always fallen woefully short of their revenue projections. From the autopsies of our losing investments, we’ve realized that rarely had we missed major risks, but often grossly underweighted their likelihood, impact, or both. And, we had insufficiently discussed them with management to ensure all possible efforts were being taken to mitigate them.

Therefore OTAF added the premortem discipline to our due diligence process, making it a required step prior to recommending any investment. With the benefits greatly outweighing the time required, we are convinced there is a high return on this effort.

Project planning has exposed many executives to the premortem technique which is nicely explained by Gary A. Klein in his September 2007 Harvard Business Review piece entitled “Performing a Project Premortem”: http://hbr.org/2007/09/performing-a-project-premortem. In this article he states:

Dan Rosen is a Board member of the Angel Capital Association, the world’s largest organization of accredited investors, and is also chairman of the Alliance of Angels, a Seattle-based angel investment group.  To read the original post on VentureBeat, click here.

On July 10th, the Securities and Exchange Commission released rules allowing entrepreneurs to publicly advertise their investment opportunities, finalizing a portion of the JOBS Act of 2012. These included a final rule lifting the ban on general solicitation and provided guidance on how issuing entrepreneurs could “reasonably” verify their investors are accredited; a final rule disqualifying “bad actors” from investing in private offerings; and a proposed rule requiring entrepreneurs to submit multiple reports and information for solicited offerings. The Angel Capital Association (ACA) has taken a strong stance on these rules, stating that these rules could greatly reduce entrepreneur access to angel investment, as they require investors to provide their private wealth or income information to issuers or third parties, and also may require entrepreneurs to submit considerable information to the SEC with harsh penalties for missing filing dates.

Choose Taurman and Clayton White are members of ACA and co-founders of the South Coast Angel Fund, formed in 2010 to foster entrepreneurial endeavors throughout Louisiana and the Gulf Coast. The group recognizes the value of supporting the entrepreneurial community for the economic benefit of the entire region. Their initiatives include seminars, mentoring start-up companies and early stage capital. We recently spoke with Choose and Clayton about their outlook on angel investing and how that is being shaped for the next generation in New Orleans and the Gulf Coast.

ACA: Tell me a bit about your professional backgrounds leading up to South Coast Angel Fund.

Choose: I came to New Orleans after the army and attended Tulane University Graduate School of Business. During this time, I fell in love with venture capital but quickly realized that there weren’t going to be many VC deals in New Orleans, as they were mostly in Houston and Boston at the time. My wife and I started our own business in factory and plant automation, which we sold years later. After Katrina, Clayton and I, who had known each other for years, met up again, and we started a conversation about how we could work together.

Clayton: My background is in law. I also co-founded a business in 1985 and took it through two rounds of venture and fell in love with the process. After Katrina, Choose and I began to talk about how we could work together. We thought about starting an angel fund and were quickly introduced to the Irish Angels and Piedmont Angels. They opened their arms to us, and we had the opportunity to watch how they operated for two years. Out of that experience, we started the South Coast Angel Fund.

This post was written by David S. Rose. To read the original post, click here.

Social media can indeed be a good way to start the process of finding investors. The first thing to do is to use your immediate network to reach beyond it, and that’s where LinkedIn does a marvelous job. I just checked my statistics there, and it turns out that 14 million people can get a warm introduction to me through one or more people whom we both know. That’s a lot of people, and probably covers a good percentage of the active entrepreneurs currently seeking funding. What this means is that if you draw up a list of potential investors, the odds are very good that you will be able to find someone to introduce you them.

Specialized networks are also very useful. They include the aforementioned AngelList, which includes several thousand individual investors, and, as Quintin Adamis pointed out (thanks!) Gust, the company of which I’m the CEO. Gust is currently used by over 40,000 angel investors and venture capitalists to manage their investment review processes, through their participation in one of over 1,000 angel groups or venture funds.

David Verrill is Chairman of the Angel Capital Association and also leads the Hub Angels Investment Group in Boston.  He wrote an Op-Ed in the Wall Street Journal today on the SEC General Solicitation Rules.

Last week's SEC ruling on General Solicitation sounds an alarm to angel investors in the US on several grounds. But first, a quick summary of the ruling. Rule 506b keeps regulations as they are for those companies who only privately solicit funds from self-certified qualified investors. No harm there, and thanks to the SEC for maintaining the status quo for what has been historically the best way for startups to raise money from accredited angel investors.

The problem is with the new 506c rule, which puts the issuer (CEO of a startup, hedge fund manager, venture capitalist) on the hook to take “reasonable steps” above and beyond the self-certification questionnaire to verify accreditation of an investor if the issuer generally solicits that investor. The definition of what constitutes being generally solicited is extremely broad, including anything public, such as an event or appearing on a Web site. Herein lies rub #1. Much of the deal flow for my angel group comes from events and activities that could well be considered a "public" forum. Think about the accelerators (TechStars Demo Day), business plan contests (MIT $100k, MassChallenge events), or even the portals (Gust) that all have mechanisms of communicating with their various audiences that makes them likely subject to the 506c requirements. These critical members of the startup ecosystem are very important sources of quality deal flow for angels (and VCs). In order to avoid any question of whether or not 506 b or c would apply, an issuer might play it safe and file under 506c because the penalties are severe (like offering your investors their money back, or being banned from raising more capital for a year) if you file for 506b but are shown to have generally solicited. What would you do as a startup CEO?

This post was written by Marianne Hudson, Executive Director of the Angel Capital Association.

Our field of angel investing is burgeoning with articles, books, and Web sites that are important to us in our everyday work. Below are several recent resources that I thought would be of interest to Angel Insights readers, be they investors, entrepreneurs, or others in the startup support community.

Research, Statistics, and Infographics

Halo Report – Average Angel Investment Up 23%... (VentureBeat)

Growing Challenges for Women Entrepreneurs – Wanted: Catalysts for Women to Lead High Growth Firms (Lesa Mitchell, Kauffman Foundation, and Infographic)

Infographic: What the SEC Announcement Means for Startups and Entrepreneurs (Wil Schroter, Fundable)

This post was written by David S. Rose.  To read the original post, click here.

It’s true, but…

Starting a company is NOT at all easy, and unfortunately there simply is no way toreally learn about it other than by doing it. No book, school, mentoring, or even apprenticeship can substitute for hands-on experience. When you consider that doctors spend a minimum of two years in pre-med, four years in med school, one year in internship, and two years in residency before you would consider putting yourself in their hands, think about how investors feel putting hundreds of thousands, or millions, of dollars into the hands of a startup team with no experience. Isn’t creating a viable company at LEAST as difficult as treating a patient? [Hint: Yes!]

Even barbers have to have at least two years’ experience and pass a rigorous state licensing exam before they can work on their own…and as the old saying goes, “I’d prefer that you learned to shave on someone ELSE’S whiskers!”

Last week the Securities and Exchange Commission approved two rules and one proposed rule that will change how entrepreneurs raise angel capital and may make investment more difficult for angels and startups alike. We think fewer angels will invest as a result, unfortunately hurting the startups that create jobs throughout the U.S. 

The issues are complex, but here is a quick summary:

1. The SEC is lifting the ban on general solicitation for startups raising capital under Regulation D Rule 506(c) – as required in last year’s JOBS Act – and providing rules on how issuers take “reasonable steps to verify” that all investors are accredited.

Here’s the important thing for you to understand: for solicited deals, angels will no longer be able to self-certify their accredited status. Instead issuers will need to verify accredited status with “safe harbor” categories such as providing the issuer a copy of your W-2, tax filing, or brokerage statement or a third-party (attorney, accountant, or registered investment advisor) certifies that you are accredited. Investors who have previously invested in an issuer will be grandfathered in additional investments in that particular company. The published rule is here.

This post was co-written by John May and Wendee Wolfson, co-hosts of the 2013 International Exchange at the 2013 ACA Summit.

At this year’s International Exchange, we asked five of our most experienced angels from around the world to help us do some “myth-busting.“ Jordan Green, chair of the Australian Association of Angel Investors; Claire Munck, former Managing Director of EBAN and current Board Member of Belgium’s BE Angels; Fernando Prieto, Chairman of Chile’s Southern Angels; Luigi Amati from Meta Capital in Milan, Italy; and Ross Finlay, ACA Board Member and co-founder of First Angel Network Association of Canada, provided their perspectives on whether some of the most common assumptions in angel investing still hold true.

Assumption #1: Distance matters for mentor capital. While historically, angel investing has been very local, syndication across groups has become more common within countries and there is also a growing interest in cross-border investing between countries. Can it really work? Is it possible to make it profitable, or should angels stick to their own locations? Early stage investments still benefit from having a local mentor and deal lead who can be present to help and to monitor the company on a regular basis. If angels want to invest beyond their own geographies, they should develop their networks, get to know other angels, and learn about their investment experiences and guiding principles.

Brian Cohen is an ACA member and the Chairman of the New York Angels, the most active angel group in North America. He co-founded Technology Solutions, Inc. in 1983 with his wife, which he later sold to the McCann Erickson World Group, becoming Vice Chairman of their technology group. As a publisher, Brian helped found a number of computing publications, including Computer Systems News & InformationWeek. As an investor with the New York Angels, Brian has invested in dozens of early stage technology companies. Most recently, Brian co-authored the book, What Every Angel Investor Wants You to Know.

We recently spoke with Brian to hear more about his outlook on angel investing and the broader entrepreneurial community, and we wanted to share the discussion with our readers below.