The Angel Angle

Jon Jacobson: 2008-2009 AoA William H. Gates, Sr. Fellow in Innovation and Entrepreneurship

2009-07-07T12:08:00.000-07:00

My position as the William H. Gates, Sr. Fellow in Innovation and Entrepreneurship is structured as a 1-year endowed fellowship through a partnership between the Alliance of Angels and the University of Washington. The fellowship is undoubtedly one of the premier experiential learning opportunities in the country for an MBA student. The position offers unequalled exposure to Seattle’s entrepreneurial community as well as access to the organization’s accomplished members as mentors, ultimately creating a truly exceptional professional development opportunity. I feel as though I put the entire breadth of my business education to work with each company I coached and screened, and looking ahead to a career in the technology sector no other position could have offered me better preparation.

I would like to think that in my 13 months here I have been able to offer up to the entrepreneurial community at least as much as this opportunity has given to me. I conducted clinics for about 100 aspiring entrepreneurs on pitching business opportunities to investors, met with over 100 companies to help with their business plans and presentations, and coached roughly 30 companies through the AoA funding process. Given the value of this fellowship to me, though, I hesitate to claim that the scales are even close to balanced. However, I can promise you that I did my best and that Seattle’s angel investors and entrepreneurs will be in excellent hands with next year’s fellow.

I would like to offer my sincere thanks to the following people who have added so much to my time at AoA: My colleagues – Vandan Parikh, Rebecca Lovell and Greg Huey; The AoA staff – Susannah Malarkey, Katy Tollefson, Amy Bell Rousso and Kristin Osborne; and the AoA membership. My greatest thanks goes out to the entrepreneurs I have worked with this year who taught me more than anyone else. Good luck to you all and I’ll see you around town soon.

AoA Seed Fund 1st Investment: LiquidPlanner

2009-06-24T15:10:00.001-07:00

The Alliance of Angels has made its first Seed Fund investment, directing $235,000 to LiquidPlanner, developer of leading-edge online project management software. The investment by the Fund is in addition to a combined $385,000 that AoA members have invested in LiquidPlanner in the last two months, part of a total $1 million in new financing recently announced by the company.

AoA member Geoff Entress, an investor and member of the company’s board of directors said “My original decision to invest in LiquidPlanner was driven by two factors: the impressive management team led by Charles and Jason, and a truly innovative product that takes a completely new approach to project management software. I’m sure this combination of innovative offering and quality leadership, plus the great customer traction the company has been able to achieve in such a short time, is the reason so many AoA members and the Seed Fund were enthusiastic about this deal.”

The AoA Seed Fund considers financing deals in which a minimum of two AoA members, including an identified lead investor, invest an aggregate of at least $100,000. Alliance of Angels announced the Fund’s official launch in May. To date, it has raised $4.4 million to invest alongside individual angels in companies coming through the AoA program that meet the criteria for Fund investment.

Welcome Greg Huey!

2009-05-21T13:39:00.000-07:00

Alliance of Angels is thrilled to welcome new Program Director Greg Huey, whose first day was May 5th.

A former principal at Frazier Technology Ventures, Greg brings more than 10 years of corporate development and investment experience to his new position managing the operations of AoA, one of the nation's most active angel groups based on 2007 and 2008 deal activity.

Greg says that he is "very excited to join the AoA team and build upon the great work that everyone has been doing here. I am particularly eager to work with the Seattle entrepreneurial community again as well as leverage my private equity and venture capital background to serve as an asset to the organization and its members."

Greg can be reached at greg(at)allianceofangels(dot)com or (206) 389-7321.

Congratulations SNAPin - Alliance of Angels Company of the Year

2009-05-02T17:15:00.000-07:00

Congratulations to SNAPin - who was honored with the 2009 Alliance of Angels Company of the Year award at the State of Technology Luncheon on Friday May 1st. Brian Roundtree, SNAPin's Founder & CTO, and Bob Lewis, SNAPin's CEO were at the big event to accept the award and took a moment to thank those who helped them succeed - and they even remembered to thank their wives!

SNAPin Software "provides mobile operators with handset self service software to deliver a branded, relevant experience directly to their subscriber's handset". Founded in July of 2003, SNAPin had its first customer trial in June 2005, first customer in June 2007, and first global customer (T-Mobile) in June 2007. SNAPin was acquired by Nuance in October 2008.

SNAPin was one of 5 AoA companies to have exits in 2008: Cleverset (ATG), Insitu (Boeing), Shelfari (Amazon.com), SNAPin Software (Nuance Communications), and The Coffee Equipment Company (Starbucks). All 5 acquiring companies retained operations in Washington.

According to the Angel Capital Association, of its members, Alliance of Angels is the most active angel group. In 2008, Alliance of Angels invested $6.4 million in 36 companies, the second-highest yearly total in AoA’s history.

2009 Office Market Outlook for Entrepreneurs

2009-02-27T14:40:00.001-08:00

Pat Pendergast, of Washington Partners, recently took the time to share his 2009 office market outlook with us. In short, Pat expects big changes and substantial opportunities both in Seattle and Bellevue. While real estate is likely to hit bottom in 2009, the economic shocks we have been hearing about will continue to have their effect on the sublease market throughout the year. In Seattle, almost two million square feet of new developments are expected to reach completion during 2009, most of which has yet to be pre-leased at this time. To make matters worse, corporate downsizing at companies like WaMu, Safeco, and Starbucks is expected to contribute an additional two million square feet of space by 2011.

The result in 2009: High vacancy rates fueled by an oversupply of new and existing office space coupled with corporate downsizing efforts of firms located in Seattle. Pat is predicting office vacancy rates near 17% in Seattle (graph depicts trend from 2000-2008, and 2009 forecast):

While smaller in scale, the situation in Bellevue is expected to be similar with vacancy rates approaching 14% (graph depicts trend from 2000-2008, and 2009 forecast):

Depending on whether you see the glass as being half-full or half-empty, this situation may present a unique opportunity.

Either way, Pat has a few recommendations for entrepreneurs:
1. Position your lease for 2010:
- Consider a short term lease
- 2010 may offer a better outlook for future business and the economy

2. Take advantage of the Sublease Market:
- Offers a flexible lease term
- Lowest rates

3. Or for Subleasing Your Space:
- Be pro-active
- Be flexible on term, rate, and rental square footage

Thanks to our sponsors at Washington Partners for sharing their insights with us!

Calling All Northwest Angels: Join AoA for the 2009 Angel Capital Association Regional Meeting!

2009-02-07T21:53:00.000-08:00

The national organization of angel investor groups, the Angel Capital Association, will convene its northwest regional meeting in Seattle on February 24th. Accredited investors from the region are invited to join host Alliance of Angels to discuss trends in angel investing and a special workshop featuring tips for lead investors.

The morning session will feature a presentation by Sarah Dickey from the ACA, who will share the latest angel group statistics and trends. Participants will also hear the latest news on regional investment programs, including updates from Bruce MacCormack, chair of Bellingham Angel Group and David Verrill, founder of Boston Hub Angels and chair of the ACA Syndication Committee. The morning will conclude with a panel discussion, “Angel Investing in a Downturn,” in which experienced angels, including Mike Crill, managing partner at Atlas Accelerator, and angel fund manager Basil Peters of the Vancouver and Bellingham angel groups, will offer their perspectives on the impact of current economic climate on startup companies and investors.

The afternoon will be devoted to a lead investor clinic presented by Alliance of Angels’ most active and experienced deal leads, including AoA program chair Dan Rosen and Geoff Entress, managing member of Rolling Bay Ventures. Participants in this interactive, case-based workshop will gain insights into syndicating a consortium of investors, conducting due diligence; negotiating term sheets; and investment stewardship.

Members of ACA enjoy the full day of programs on February 24th and are also invited to attend an exclusive networking reception the evening of February 23rd for $125. Half-day registration for ACA members’ choice of the February 24th morning or afternoon session only is $75. Members of Alliance of Angels are also eligible for a special rate.

Accredited investors who are not members of ACA may attend the full day of programs on February 24th for $175, or choose to attend either the morning or afternoon session for $100.

Don’t miss the chance to connect with fellow angels and stay on top of best practices in early stage investing. Register today by calling Katy Tollefson at 206.389.7259.

Surviving the Downturn: Advice from Seattle-Area Firms

2008-11-25T16:39:00.000-08:00

New on Xconomy! Read about the November 20th Alliance of Angels entrepreneur roundtable in "Surviving the Downturn: Advice from Seattle-Area Firms Atlas Accelerator, Geospiza, and Mercent." View the article here.

Thank you to our panelists! Eric Best of Mercent, Mike Crill of Atlas Accelerator, and Rob Arnold of Geospiza; and thanks to our moderator David Caffey of Xconomy.

Congratulations to Insitu!

2008-07-30T09:48:00.000-07:00

In one of the most significant exits in the Alliance of Angels history, and, as John Cook quotes, perhaps the first and last M&A in Bingen, Washington....on July 22, Boeing announced its acquisition of Insitu. The Oregonian cited a price tag of $400M.

From following tuna in the Pacific to tracking insurgents in Fallujah, applications for Insitu's unmanned aircraft have evolved significantly over the company's 16-year history. Founded in Bingen, Washington in 1992 by Dr. Tad McGeer, the company is now led by CEO Steve Sliwa and a stellar management team. Bingen's population in 2006 was estimated at 699, and Insitu's employment has now reached 360 (note some operations are located in neighboring White Salmon, population 2300). It's rumored that Bingen now boasts the highest concentration of PhDs in Washington state. From any angle, Insitu has made an incredible impact on the region and the industry.

The timeline on the company's website tracks Insitu's impressive progress, with highlights including the flagship ScanEagle's 10,000 flight hours in support of Australian Army operations in Iraq and Afghanistan, and Sliwa's "CEO of the Year" award by Washington CEO magazine. Having entered into a strategic partnership with Boeing, and significantly grown its employee, customer and revenue base, Insitu was named the Alliance of Angels Company of the Year in May 2005 .

At that time, AoA Chair Dan Rosen described:

"Insitu exemplifies the great startup -- standing out by its vision, persistence, record of constant achievement in meeting its customers' needs, and understanding of the markets for its products. This has been a great investment for the angel investors." See the Technology Alliance press release for details.

Alliance of Angels executive committee member Doug Bevis was an early investor in Insitu, and states:

"CEO Steve Sliwa is unquestionably both the best Strategic CEO and the best Operating CEO I've encountered in over eight years of angel investing. And all this while thriving in the "Land of Giants" in Defense contracting, both domestic and international. Concurrently he has
developed a remarkably strong, diverse and complete management team, with a heavy focus on business processes and best practices. It has been a delight to watch Insitu grow, especially while knowing that American lives are being saved in Iraq and elsewhere as a direct result of Insitu's entrepreneurial energies."

On behalf of the Alliance of Angels, we're thrilled to have been a part of Insitu's history, and wish the team and the town continued success in the future.

Congratulations to The Coffee Equipment Company

2008-05-09T11:32:00.000-07:00

The Coffee Equipment Company, founded in Seattle in 2004, married sophisticated product engineering with that quintessential daily ritual: the cup of coffee. Having achieved a nationwide market for its innovative Clover brewing system – and an attractive exit for investors – the Alliance of Angels’ 2008 Company of the Year is flying high.

The award, which was presented by Technology Alliance board member and entrepreneur Jeremy Jaech during the State of Technology Luncheon, recognizes a company’s entrepreneurial spirit, progress toward achieving business plan goals, and positive impact on the economy.

“This is an incredible honor, and quite a surprise, actually,” said company co-founder Zander Nosler in accepting the award. “Doubly so because we finally are considered a technology company…I’ve been saying that from day one.”

After thanking his family for its emotional and financial support, Zander credited AoA investors and the Seattle angel community with helping the company progress to where it is today.

“The AoA has a ten-year history of investing in successful companies,” said AoA chair Dan Rosen, president and CEO of Dan Rosen & Associates. “We are delighted to honor The Coffee Equipment Company with the AoA Company of the Year Award for their passion, innovation, tenacity and vision.”

The company’s Clover was the first commercial-grade coffee brewing system that offers independent control over the variables of water temperature, grind, coffee-to-water ratio and brew time. The system enables baristas to prepare single cups of brewed coffee fresh to order, while the company’s software-based service, CloverNet, provides Clover owners with the ability to track brewing and sales activity and control their machines online.

“The elegant engineering of the Clover led to a successful acquisition by another angel-funded success story: Starbucks,” noted Rosen. “Congratulations to The Coffee Equipment Company.”

“As an investor in The Coffee Equipment Company since the very early days, I’m thrilled we have the opportunity to recognize Zander, Randy and their team for the Clover and its success,” said Geoff Entress, member of the AoA executive committee.

The Coffee Equipment Company was one of three finalists considered for the award, selected from among the technology-focused companies that presented to the AoA membership within the last four years which have demonstrated active growth and traction with investors. Ten such companies were nominated by AoA members, and the pool was narrowed to three finalists by our selection board; those invested in any of the companies recused themselves from voting.

The other finalists were Buddy TV and CleverSet, both also based in Seattle. Buddy TV is the creator of a dynamic online community for television fans that combines interactive features with original content on more than 500 shows. CleverSet, which was recently acquired by ATG, develops e-commerce software tools that enable its more than 90 commercial customers to generate automated, personalized recommendations for visitors to their web sites.

Update: Read more at John Cook's blog; this post generated so many (tangential) comments that it was the "talk of the blog" for weeks after the event.

Fund Raising in a Recession

2008-03-07T09:16:00.000-08:00

While it seems the Pacific Northwest may be shielded from the worst effect, each day it appear clearer that the country is headed toward recession (if not already fully enmeshed in one). Consumer spending, the engine of the most recent economic boom is drying up, with the problems in the capital markets trickling down to the lowest levels.

We thought it would an interesting time to address the question of how this will affect angel and venture capital investing. Typically, angel money dries up first during a serious recession as angels have no need to spend those dollars on investments. Looking at the dollar amounted invested by the Alliance of Angels over the last 10 years, it closely mirrors an graph of the US economy with about a one year lag. Thus far we have yet to see any real drop off in investments but it is something we will keep our eye on.

Different theories abide on Venture Capital investments during a recessionary period. One one hand, ad revenue dropping will hurt start-ups depending on that strategy and require VC's to keep more money reserved for follow on investments. On the other hand, VC's with a fund already raised will need to find opportunities and valuations on good prospects should fall.

Any entrepreneurs out there- how are you finding the current fund-raising process?

"Conservative" Financial Projections?

2008-03-03T16:34:00.000-08:00

As program managers here at the Alliance of Angels, we see 20+ pitches per month. As you might guess, out of those 20+ pitches, we rarely see even one that doesn’t have “conservative” projections. :-) However, we’ve found that investors aren’t as interested in conservative projections as they are in transparency. We find that “aggressively reasonable” projections coupled with full disclosure of the assumptions behind the projections gives investors what they are looking for. This way, investors can see the scenario the entrepreneurs are shooting for while having the information they need to develop their own scenarios.

Other keys for building good, transparent, believable projections include:

Build from the ground up - avoid building projections that are simply based on taking a percentage of the market.
Display the projections in an easy to read bar chart.
Include the key driver(s) (# of customers? # of sales partners signed?) in the bar chart
Make sure your market analysis, go to market strategy, and projections are all 100% in sync.

Investors love to see a good looking hockey stick at the end of a compelling pitch – just back it up with a full set of assumptions and they’ll have the information they need to decide for themselves if the projections make sense. For a sample financial projections slide and other information about building a great pitch, check out our sample deck or enroll in one of our popular pitch clinics.

Record-breaking Investments in 2007: The AoA Play-by-Play

2008-02-27T15:07:00.000-08:00

Here at the AoA we think transparency is a good thing. Plus we're data junkies. Below please see a few facts and figures from our record-breaking deals in 2007. If there's anything you'd like to know and don't see, we can pretty much slice and dice our stats any way that may be of interest, so don't hesitate to email us . Also feel free to post a comment (if you didn't get enough from the thread following John Cook's blog); this month the topic of angel investing has ranged from spectator sport to bench-clearing brawl.

As with any sport, we have our own ground rules for reporting:

We only report investments made in companies that were screened, coached and selected to present to the Alliance of Angels membership. Red flag: some groups report all investments reported by their members, regardless of whether or not the angel organization was involved.
We clearly distinguish "direct investment" (our own members' investment in the companies described above) from "indirect investment" (additional investment our members facilitated through their network). Yellow flag: some groups will consolidate both categories into a single group of "facilitated" investment.

Just the stats, ma'am:

174: companies interviewed, coached, screened (90 minute meetings)
32: new investment opportunities that were selected from the above, and presented to our membership
15: investments in new companies (just about 50% of the new opportunities reviewed by our membership).
9: 3 minute updates made by companies who had previously presented and were funded by AoA returned to give brief presentations when seeking another round of funding.
8: of these 9 received follow-on funding
21: additional AoA portfolio companies from prior years received follow-on investment from our members.
44: grand total of AoA investments tracked in 2007.

Show me the money:

$3.9 million tracked in direct funding from our membership, in AoA companies
$3.3 million in additional sources facilitated by AoA ("indirect" funding)

87% of the new companies who received investment were high-tech

These deals received 85% of the total direct dollars (the other 13% of deals, 15% of dollars were consumer product and retail).

93% of companies receiving follow-on investment were high-tech, and received 92% of this category of funding (correspondingly, 7% of the deals were consumer/retail and received 8% of the dollars)

For more fun with stats, and some color commentary, check out our press release.

Debt vs. Equity-Battle Royale

2008-02-01T10:43:00.000-08:00

At our first members-only fireside chat of 2008 we enjoyed a lively discussion about valuation trends and the merits of debt vs equity with top notch participants David Clarke (partner Perkins Coie), Peter Parsons (partner Davis, Wright, Tremaine), Geoff Entress (Madrona), Robert Headly (Ignition), and Dan Rosen (Chair of Alliance of Angels). With the panelists addressing the issues from the point of view of both investors and entrepreneurs it was a night to remember. Some insights gleaned from the discussion

Valuation

"More of an art than a science"-Geoff, who went on to remark that you could always try to use a DCF but more than likely it will end up getting thrown away.
Peter-Angels need to be careful not to be too generous in an A round because they will get crammed down by VC's in the next round.

Term Sheets

Robert-VC's may get nervous if a company a large number of individual investors (e.g. >30).
Geoff-In an angel deal find terms consistent with what VC's will look for later on to minimize attorney fees.
If you are going to pursue more than just friends and family money, convert an LLC to a C-corp early on to save yourself a headache.
Option pool-be analytical!! Think about necessary hires and what they will expect (eg. CEO 7-10%) and craft size of option pool to conform to needs for that round.

Convertible Debt vs Equity

Have a clear end point (next round of funding) in mind with convertible debt-6 months is normal outer limit for the next funding to occur. David suggested setting a cap on valuation if there are questions about the timing of the next round.
Between the attorney's and VC's on the panel the market discount rate for convertible debt appears to be 25-30% with some cases of the rate escalating month to to month after a certain point.
In a debt deal, make sure to note what will happen if a sale occurs before the next round of financing-set a valuation or an agreed upon return for debt investors.

Expense Budget for an A round

David gave an estimate of company counsel costing $50K and investor counsel between $25-35K for a normal series A venture round, with an angel round costing perhaps 2/3 of that. Although Peter, in a friendly dig at the competing firm, noted that perhaps Perkins is on the high side and his experience showed it to be a bit lower.

Update 5-22

Since we are still seeing quite a number of debt deals coming through our process I thought it would be interesting to link to a new article contending that convertible debt is a bad deal for angel investors. The arguments put forth in the article are the same we have been making here at the Alliance for some time, regarding the instances where convertible debt is an appropriate instrument. It does make the interesting addition that debt can be a good deal if there is a cap (agreeable to the investors) on the pre-money because in the event of a negative exit, debt holders will at least have first right to any assets...

Alliance of Angels Portfolio Roundup: Merry Funding and Happy Series A

2007-12-24T10:15:00.000-08:00

Several AoA Portfolio companies have closed out 2007 by closing out their funding rounds…read on for a snapshot. Congratulations to all!

Fyreball: Bellevue, WA. According to CEO Pete Parsons, “Fyreball is a rich and playful alternative to email for sending stuff to your friends. It's being developed by a team of game industry veterans, internet addicts and Spartan warriors. We think Fyreball will be a great way to track, send and receive cool content on the web.” We agree! We’ve tried it and it is contagiously fun. We could tell you more but we’d have to kill you. Or sign up yourself.

Pete comments: "The Fyreball team is honored to be working with the Alliance of Angels. We look forward to the support, counsel and feedback of this outstanding group as we work to make Fyreball great."
Additional press for Fyreball: San Jose Mercury News, John Cook's blog (twice)

Green Couch Conspiracy- Seattle, WA. These guys are as local as you get- Garfield High grads with street cred that includes bootstrapping their first start-up (Serials Solutions) to a successful acquisition. Co-founder and CEO Steve McCracken describes: “CultureMob.com is a new site offering personalized local events discovery: music, movies, theater, sports, and more. Our philosophy is to release early and iterate often. This a fraction of what we'll be releasing over the upcoming months.” Check it out here.

Steve comments: "Thanks again for all the support that AoA provided during our recent fund-raising round. We were able to subscribe the entire round in approximately 60 days "deck to check." AoA played an important role in that, both as a partner for helping us refine our pitch (this was our first time seeking outside funding), and introducing us to prospective investors. I've encouraged several entrepreneurs to contact you."
Additional link: A mention on John Cook’s blog.

Elemental Technologies- Portland, OR. CEO Sam Blackman got the band back together from Pixelworks to create a GPU-based video processing software solution…the holy grail of better, cheaper, faster software for professional video applications. With seed funding from Pixelworks, Elemental closed out this $1.05M round with groups including the Oregon Angel Fund, Bend Venture conference, and AoA. Learn more here.

Additional press on Elemental Technologies: The Oregonian, Northwest Innovation, Oregon Live

Is there room in BioTech for Angels?

2007-12-21T14:50:00.000-08:00

Recently at the Alliance of Angels, we have been confronted with the issue on whether biotech deals can work for angel investors. Traditionally, individual investors have regarded many of these types of deals (and rightfully so) as extraordinarily capital intensive and unfriendly for angels, as there is often no clear exit in the near term. Three letters alone, FDA, are enough to send most angels running for the doors.

But, is there a model out there in which angels can participate in the enormous upside potential without being entirely diluted by the tidal wave of follow-on financing. Getting all the way through phase 3 of FDA trials can cost a company hundreds of millions of dollars, but will generally assure a lucrative acquisition. However, if a company can get to mid-stage clinical testing, can they justify a high enough valuation and secure an exit at that point???

Dan Rosen, chair of the Alliance of Angels feels that dilution is not necessarily the only concern. “In a deal where you are raising $50M the possibility of having to raise unexpected rounds increases, as does the likelihood of a down round. For an early investor holding a small equity stake, can you hold your share during a down round?” This is a concern to all early-stage investors in these companies, but particularly to angels.

One interesting model with which we have recently become familiar comes out of our own backyard. The Ratner Biomedical Group, led by Buddy Ratner at the University of Washington, works extensively in the areas of molecular bioengineering and nanotechnology and spins off successful ideas as independent companies (two of whom we have seen at the A of A, Healionics and Calcionics). In this type of model a company might come in seeking to raise a small initial round, perhaps around $1M to work through pre-clinical development milestones. Later rounds are planned to get the company through mid-stage clinical trials, but smaller numbers for the Bio Tech world- with figures that might be in the arena of $35M in future financing.

The argument for these type of investments is that although $35M has a significant dilutive effect for an early investor, however we have seen those type of follow-on numbers in other industries and the upside in Biotech is tremendous. Who wouldn’t want to be holding .01% of a billion dollar company? Bio Tech (even minus Med Devices) reportedly made up 10% of Angel investments in 2006-so someone is playing. If nothing else it can be a great addition to the riskier side of an individual’s portfolio.

AoA in the Community: November Activities

2007-11-03T11:50:00.000-07:00

Having reached over 500 entrepreneurs with variations on the theme of our "10-Minute Pitch" clinic, we thought we'd list some of our pro bono speaking events this month. Feel free to contact us if you are a non-profit or academic institution looking to provide tools to your membership on how to effectively engage the investment community.

November 7, Science and Engineering Business Association, Entrepreneurship Week
“Perfect Pitch” workshop: 2-4 PM, Foege N130A.
In this hands-on workshop, the Alliance of Angels offered engineering students tips on how to structure a business plan and proposal, as well as how to use the language and concepts of business and investment to build a management team. We'll certainly keep an eye out for these entprepreneurial PhD's at the University of Washington's Business Plan Competition.

November 7, Venture Capital Investment Competition Class
Guest lecture at University of Washington, 6:30-7:30 PM
This course is led by Susan Sigl of Seapoint Ventures, and designed to prepare students for the Venture Capital Investment Competition. This now international competition has an 11-year history, and University of Washington teams have taken first place twice in the last three years. Helping students gear up to take back the championship, the Alliance of Angels offered their "Think Like an Investor" workshop to the class, comprised of both MBAs and engineering grad students. Students should be forewarned that should they succeed in winning the $10,000 purse, they'll also be stuck with the bar tab at the competition in lovely Chapel Hill.

November 10, 2007. American Society of Mechanical Engineers' Invention to Venture Workshop.
Seattle Sheraton Hotel, 9 AM- 5 PM
Hosted by the American Society of Mechanical Engineers and sponsored in part by the Technology Alliance, this all-day workshop was designed for the science, engineering, and technology communities, as a one-day "entrepreneurship boot camp" that teaches technology entrepreneurship basics. The AoA tailored its pitch clinic to a high-impact “Perfect Pitch" presentation, offered to to engineers, student teams, investors, and members of the ASME and NCIIA (National Collegiate Inventors & Innovators Alliance).

November 30, University of Puget Sound School of Business and Leadership
Guest lecture, 9AM-10AM, McIntyre Hall, Room 108
In our third visit to Professor Lynette Claire's classroom, we tailored our workshop to a group of undergraduate business students seeking to fine-tune taglines for their start-ups. The "Elevator Pitch" presentation has now been offered to some 60 UPS aspiring entrepreneurs.

"How do You Find your Wife?" and other such compelling questions and answers on team-building....

2007-10-26T17:42:00.000-07:00

At our second Alliance of Angels Alumni event, panelists Robert Bergquist (CEO of Widemile) , Jeremy Jaech (CEO of Trumba) and Glenn Kelman (CEO of Redfin) shared some gems on team-building with a standing-room only crowd. John Cook of the Seattle P-I both moderated and blogged on the event, and much of the panel's wisdom was amply covered there. Here, we’ve indexed some additional insights from panelists and moderator alike.

ABR

Always be Recruiting: the acronym of the day, coined by Bob Bergquist.

Chemistry

Asked “how do you find the right team member to add to the founding team?,” Jaech responded “how do you find your wife?” It’s not just about hiring the resume.

Compensation

Kelman suggested an employee response : "3% raise? 3% my a**! I need to move out of my parents’ house!"
Bergquist: With pay, we can’t match the big guys, but there are intangible benefits to being part of a startup.
Kelman: It’s a red flag is a prospective employee asks for a big severance package. Don’t even negotiate, just don’t hire.
Bergquist cautioned that everyone has a different concept of fair, so surface those expectations, and match them.

Competition

On out-recruiting the competition in the Bay Area, Kelman suggested: It’s tough when Stanford students come into Seattle on a rainy weekend. Facebook is basically hiring their entire class. However, Microsoft just backs up a bus in Silicon Valley and trucks ‘em up here.
On recruiting talent away from the competition, Jaech noted: We’ve seen great programming talent out of Microsoft, but being a monopoly they don’t necessarily know how to sell.

Costanza

When Glenn described his refusal to leave the building after being fired from Plumtree, Cook suggested he was the George Costanza of the start-up world (1992 Pez Dispenser episode, where George rejected the breakup).

Executives

Jaech: With your executive team, you need trust. I don’t mean love and affection, you just can’t be checking up on people all the time.

Firing

Kelman recalled commentary from a start-up COO mentor of his “I couldn’t fire the f-ers fast enough!" Glenn further reflected how the CEO of Alaskan Airlines had advised him to hire slow, fire fast.

Founders

Jaech: Build your business around the team you have; don’t wait to hire those critical skill sets.
Cook has interviewed more than entrepreneur who claimed to be a member of the founding team when they came on board 5 months after the company’s inception. He’s on to you so, don’t even try it.

Referrals

Regarding employee referrals, don’t you want to expand the gene pool? Bergquist noted that in Seattle, it’s two degrees of separation, however…….

References

...all panelists suggested the tightly-knit Seattle community is no excuse not to do thorough reference checks. Jaech cautioned employers to listen for coded language in reference checks. "Don’t just ask their last boss- they might be trying to get rid of them!"

Recruiting

When asked about the success of joint recruiting events, Kelman suggested the co-host has to be a somewhat attractive company to work for, just less attractive than Redfin.
How long does the CEO stay involved in interviewing new hires? Bergquist predicted: "I’ll be interviewing for a long time to come."

The Serious Business of Having Fun

2007-10-05T16:03:00.000-07:00

Did you know that October 5, 2007 was declared "Video Game Industry Day in Seattle?" To honor the occasion, along with 120 entrepreneurs, politicians, and service providers, I trekked down to Qwest Field for Enterprise Seattle's Interactive media Lunch. As my luck and lack of direction would have it, on my way there, I got lost wandering through the simultaneous, neighboring event: the World Cyber Games. Complete with black-and-silver decked cheerleaders and 1600 PC's for interactive play, Qwest's event venue was crawling with global gamers, floor-to-ceiling screens, and virtual-reality booths. So what is it about Seattle that attracted this kind of event? How is it that Western Washington (primarily the Puget Sound) support 15,000 jobs in gaming? Why did Sperling name Seattle the top gaming city in 2006?

Some of the panelists' thoughts, below:

Jeff Pobst (CEO, Hidden Path Entertainment) argued that UWs superior educational program, he training prowess of DigiPen, and companies such as Microsoft, Real Networks, and Nintendo have made Seattle one of the top places in the country to recruit talent in art, audio, video and game programming. He suggested, however, that we view Gaming not as part of the Software industry, but the Entertainment industry-- games have to be fun to be successful(turns out this is not a requirement for functional software).
Seattle enjoys a burgeoning "creative class" and urban attractions, and though rainy, at least it's got better traffic and cleaner air than LA, quipped Flowplay CEO Derrick Morton. As for entrepreneurs in the gaming space, Morton further suggested "Seattleites are bored out of their brains working for big companies!"

Additional take-aways:What are the success factors in gaming? What's driving growth?

Samantha Ryan, Senior Vice President, Warner Bros. Interactive Entertainment: It's not about competition, it's about community.
Morton: For FlowPlay, the name of the game is collaboration.
Shane Kim, Corporate Vice President, Microsoft Game Studios: X-Box combines competition and community. And let's remember we've got our first generation of dad's who grew up gaming....I'm not going to let my kid beat me!
John Mechey, CEO PopCap Games: Hasn't moved into community gaming, but it's hard to argue when a gamer asks "Why am I playing a game with a unicorn? I feel stupid but I've been doing it for 12 hours."

Trend watch:

"Serious gaming." Though casual gaming has been the largest growth area thus far, keep an eye out for this sector. Whether it's safety testing for Boeing or medical simulations, the Pacific Northwest could well become a hub in these emerging areas.

WA-The “State” of Entrepreneurship

2007-10-03T15:18:00.000-07:00

At the Sleeping Lady Lodge in the old Bavarian town of Leavenworth, the Tech Institute recently conducted their semi-annual retreat, focusing on the state of K-12 education and entrepreneurship here in WA State. A mixture of state legislators, educators, and general movers and shakers in the state came together over cocktails, excellent food, and some more cocktails to work out some of the more difficult questions confronting the state.

The Alliance of Angels participated by putting on an interactive seminar in angel investing getting the audience to evaluate and decide whether to invest in several different early stage companies. One of the highlights of the event was a panel discussion about Entrepreneurial Company Leadership featuring some great up and coming and established CEO’s from local companies. Moderated by Peter Wilson, Engineering Director at Google, the panel featured Jeremy Jaech (Founder of Aldus and Visio and now with Trumba), Rob Arnold (President of Geospiza, Inc), Christina Lomasney (President and CEO of Modumetal, Inc), and Steve Sliwa (CEO of Insitu, Inc).

The Panelists addressed a number of questions about the “competitive advantage” of the Northwest as a place to start and grow a company vs locating in the Bay Area. Several chief concerns in this process were raising funding, finding good workers, the cost of starting and running a business, and the quality of life for employees (focusing on housing prices).

On the first note, while the Seattle venture community has grown by leaps and bounds and is now third in the country after the Valley and Boston in dollars invested, the panel felt that it was still more difficult to get that first VC to bite. While Jaech’s didn’t have much trouble getting funding for Visio (he attributed it to great timing, although after Aldus he obviously didn’t have to go knocking down many doors) he did get all of his funding from the Bay Area and two other panelists mentioned that getting that first investment from the Bay Area helped speed up the process of getting commitments from local VC firms.

On the second point, several presenters made the case that proximity to the UW has been hugely beneficial both in terms of shared resources and research. While Lomasney did mention some real frustrations about getting ideas out of tech transfer, the process has been streamlined in recent years with changes to the ethics laws and more technologies are making their way out as noted recently by John Cook.

Contrasting the cost of starting and running a business in the Northwest vs the Bay Area, Seattle maintains an advantage. While none of the panelists went into great depth about the business costs associated with starting out in WA, Glenn Kelman recently posted a great piece on Guy Kawaski’s blog disclosing his actual financials for the first two years at Redfin vs his original projections. He also addresses what the costs would have been had he started in the Bay Area.

Finally, even with the recent jump in housing prices, the Seattle area is still downright affordable compared to the Bay Area and there is no great danger of Capital Hill passing Nob Hill in terms of prices or snobbery anytime soon.

80 entrepreneurs and 80 degrees

2007-08-28T16:19:00.000-07:00

How do you get 80 entrepreneurs to spend two hours together in an 80 degree conference room? Free advice and free beer.
Despite the weather and a pesky motorcade, we had a great turnout for an end-of-summer kick-off of our Entrepreneur Roundtable series. With over 2000 companies applying to the AoA process over the last decade, we felt there was tremendous knowledge in this group that could and should be shared within it. No service providers, no vendors, no solicitors-- just early-stage entrepreneurs the AoA had interviewed. We basically stepped out of the way, let the entrepreneurs get to know each other over beer and pretzels, and put together a panel moderated by Madrona Venture Group's Geoff Entress, featuring DRY Soda's Sharelle Klaus and Buddy TV's Andy Liu. And though more DRY Soda was consumed than beer, we had a lively bunch that wasn't shy about asking questions, just a few of which are noted below:

How did you support the business before getting angel funding?

Andy: founder investment from prior exit. Sharelle: claiming to be "cheap" (read: capital efficient), she obtained a home equity loan, used credit cards, and received a small SBA loan (didn't require collateral, just lots of paperwork)
Takeaway: founders with "skin in the game" inspire investor confidence, and "cheap," in a word, is good (apologies to Gordon Gekko).

What metrics or milestones were critical in getting you funding? (asked Lynn Brewer, Integrity Institute)

Andy: waited until the company was cash flow positive to approach angels, and also obtained a critical mass of unique visitors to the site
Sharelle: needed to show sell-through in at least one key distribution channel

Thoughts on convertible notes? (Steve McCracken, Green Couch Conspiracy)

Geoff: generally tries to avoid--not because of the downside risk, it's the lack of upside (see our previous post on the topic)

Pros/Cons of funding from angels, strategic partners, VCs

Andy: with angels the funding tends to be completed more quickly, VC's tend to be focused on ROI, and strategic partners bring additional value to the business, so at the end of the day, if given the opportunity, choose whichever route will grow your business the most quickly and effectively.
Note: Sharelle was asked about valuation in her angel round, and if she would have increased it if she could do it over again. She noted that while some may have perceived the deals as investor-friendly, she was able to close both her A and B rounds quickly (the first in 3 weeks), so it's hard to argue with that outcome.

How often do your portfolio companies really communicate with you? (Joel Gendelman, NTuitive)

Geoff: official quarterly reports are sufficient, a monthly touchpoint is even better, and the assumption (right or wrong) is that no news is bad news...so stay in touch!

If you've previously interviewed with AoA and the above was enough to whet your appetite, email us to be added to the invite list and join the conversation. We've planned quarterly meetings and welcome suggestions on both topics and panelists.

Top Ten List

2007-08-13T16:28:00.000-07:00

At our most recent Ten Minute Pitch Clinic, we had a packed house and a particularly lively group of entrepreneurs who asked some very timely questions, one of which inspired the below Top Ten List. In Dave Letterman style, we'll do a reverse countdown of what we recommend entrepreneurs ask of any angel organization from whom they seek funding:

10. What are your fees to entrepreneurs? (your time is money, but money is money too...make sure the fee structure is transparent, as there are both for-profit and not-for-profit forums in town...the range of fees is significant, from under $100 to well over $2000).
9. No, seriously, what are your fees? (this is the part where you ask about application fees, presentation fees, cut of proceeds, or any additional obligations or hidden fees throughout the process). For an overview of the Seattle-area angel group's, check out Susan Schreter's article on the topic in the P-I.
8. How long does it take to close the deal? (due diligence is a critical part of the process and shouldn't be short-changed, but expectations should be set for how much time will be required, and over what period of time)
7. How much money did your forum invest last year? (not how much investment did your network "facilitate," not "how much did your members invest in start-ups in general", but "what was the dollar figure of investment made only by your members in deals that you screened")
6. In what stage of company does your forum invest?(seed, early stage, post product, post revenue, growth phase)
5. What is your profile of investments by industry? (high-tech, consumer, retail, real estate)
4. Of the companies that presented, how many received funding from your members? (don't be shy about asking for the average and range of investment either).
3. If I present to your group, how many investors will be in the room? (this is an opportunity to ask not just about attendance but about their membership base....accredited investors? active and experienced angels?)
2. What's your deal flow? (how many companies do you meet with every month? how many companies presented to your organization last year? since your organization's inception?)

And as much as results matter, so does the experience.....so:

1. Can I contact any companies who have recently participated in your process?

For some best practice recommendations, check out this link on the Angel Capital Association web site. But don't just read about it-- ask! What they answer-- and whether they answer-- will speak volumes.

Canadian investing, eh?

2007-08-10T14:17:00.000-07:00

Think you might want to foray into Canadian investment? You’re not alone.

According to the CVCA (Canada’s Venture Capital & Private Equity Association ) cross-border investment is increasingly trendy. Non-Canadian investors represent 33% of venture investment in Canadian firms, and foreign investment in Canada is up 67% (Q32006 over Q32005).

At our last AoA Membership Luncheon, Devin Stockfish of K&L Gates gave our group some quick tips on investing in Canadian companies (timely, as one of our presenters was in fact Vancouver, BC-based). While this serial entrepreneur CEO had good traction and a compelling technology (and, as he pointed out, Canadians are just so darn nice), Devin provided some additional reasons we might want to consider cross-border investment.

The “shred” program (SR&ED, Scientific Research and Experimental Development), providing investment tax credits to provide incentives for conducting research in Canada

IRAP (Industrial Research Assistance Program),provides business and technical services to growth-stage Canadian companies

However, he suggested investors consider the following nuances:

Canadian tax issues

Differing treatment of dividends, interest and capital gains
116 clearance certificates , which become important with sale of shares
US LLC treatment: treated as a corporation vs. a partnership

US tax issues

Passive foreign investment company (PFIC) and Controlled Foreign Corporations (CFC):note special instructions from the IRS on taxation of profits

The take away was not to shy away cross-border investing, but to deal with these issues at the time of investment vs. at the liquidity event. The proper deal structure (and legal help) can prevent headaches. Other than that, when you visit the management team in Canada, remember your passport, and that it’s only an urban legend that Canadian beer is stronger.

Congratulations to BuddyTV

2007-08-03T08:26:00.000-07:00

One of many entrepreneurs we've interviewed and stayed in touch with over the past year emailed us with the following question:
"Is AoA funding Internet companies? I have been talking to some well known entrepreneurs that tell me Seattle is not the place to be and San Francisco/San Jose is where I need to go."
We'd like to offer both a point and counterpoint in response.

Point: In 2007, we have been up to our eyeballs in "eyeballs" deals.....of 120 screening and coaching sessions we've had this year to date, 23 have been web plays, primarily social networking and social media. If we had a dollar for every early-stage web entrepreneur who referenced the You Tube acquisition, a plan to use viral networking, and ad-supported revenues, well, we'd be about $20 richer this year. As to the suggestion above, of these 23 companies, only 4 were ultimately selected to present to our membership for funding this year. The space is highly competitive, and only the most compelling of these businesses is likely to succeed. However......

Counterpoint: We were thrilled to read in the Seattle PI that BuddyTV, co-founded by David Niu and Andy Liu, received $2.8M in funding from Gemstar-TV Guide International. Andy and the BuddyTV team were one of the exceptional internet companies that participated in our process, presented to the membership, and received funding. He comments: "We are very excited about this round as it validates what we've always believed is happening both online and on Television - strong demand for entertainment to be delivered closer to fans. Because of the strategic nature of the financing, we believe both the capital and relationship with Gemstar-TVGuide will accelerate the Company's growth significantly over the next year. We'd be remiss not to mention that Alliance of Angel member Geoff Entress has been a huge supporter of BuddyTV from the beginning and continues to be a valuable member of the team." BuddyTV leverages several advantages that position the company for success: the right combination of market drivers, a team with street cred in the space (Niu and Liu truly understand SEO and viral networking, and successfully led NetConversions to acquisition), and some incredibly strategic partnerships. Congrats to BuddyTV, and continued success. In the meantime, whether you're the next YouTube, MySpace (or Andy Liu), yes, we do interview and fund internet companies.

The Naked Truth: 7/24 Event Connecting Entrepreneurs to Journalists

2007-07-26T14:17:00.000-07:00

Surrounded by entrepreneurs, venture capitalists, and journalists, awash with beers and barbeque, my boss Susannah Malarkey and I attended "The Naked Truth" panel and party Tuesday night. Though we saw and got to chat with no fewer than 15 companies we’ve interviewed in recent months (and CEO of the AoA Company of the Year, event host Glenn Kelman), apparently a few of you may have missed this free, Madrona Ventures- and Redfin- hosted event. Attendance was capped at 200 and “sold out"ridiculously fast.

I kept myself to one cocktail during the panel discussion and took copious notes, some of which we’ll share here:

How do you get noticed on TechCrunch, Michael Arrington’s blog?
He says you need good product. “Even dysfunctional founders can do ok in the press,” he claimed (that may be true, but to get funding from AoA, a team that can execute is key!)

What kinds of entrepreneurial stories tend to interest the press?
John Cook (Seattle PI) prefers to focus on people, product, and funding, but needs a hook. Oftentimes this will be a financing event, which is “transformative in the company’s history.”

Tricia Duryee (Seattle Times) and Rebecca Buckman (Wall Street Journal) like to comment on trends (Tricia notes: even if you don’t hear back from the Times on a press release, individual examples help inform trend data, so keep her posted).

Who should talk to the press?
According to Fred Vogelstein (Wired Magazine): definitely the CEO (vs. a PR firm). “You guys are the best salesmen for your ideas,” he described. He also cautioned against engaging a PR firm if your motive is to save time. Proper management of a PR firm (and the efficient use of one) is a real commitment.

How does the press feel about off-the-record?

Answers ranged from “there’s no such thing,” (Becky) to “tell me everything then tell me what I can print.” (Michael). The take-away is that entrepreneurs should find out the journalist's policy before commenting.

At the end of the day, if the panel agreed on one topic, it was to avoid spin. Be succinct in your value proposition, avoid flowery marketing language, and tell the truth. Turns out that advice works in investor pitches too.

2007 Deal Trends

2007-07-25T09:00:00.000-07:00

As the Alliance of Angels enters its 10th anniversary year, we’ve been struck by the opportunity to pass on the insights we glean from daily discussions with entrepreneurs and investors. Thirteen months and 191 interviews into my tenure here, I’m lucky enough to be sitting on a wealth of data that we can mine for answers to the questions CEOs ask us every day. The graph charts our monthly 90-minute coaching sessions with entrepreneurs. We’re averaging about 17 of these interviews per month, and after a busy July, have met with 120 early-stage companies this year.

Some interesting trends have arisen, and when a CEO called me on Tuesday to ask about our “policy” on convertible notes, it inspired some investigation. For those unfamiliar with this type of structure for angel financing, here’s an excerpt from
Brad Feld’s clear but thorough description:

"a promissory note that converts into equity on the terms of a qualified financing. The note will either convert at a discount, will have warrant coverage, or both, to give angel investors some additional ownership in exchange for taking the early risk.”

In the second half of 2006, we saw a significant uptick in this type of financing, and 50% of the companies that presented to our membership were convertible notes. However, in the first half of 2007, only 26% of the deals presented to the members were structured this way. Is the observation affecting the observed? Is the word on the street that AoA "doesn't do" convertible notes? Though we are not in the business of giving financing advice, we are in the business of presenting the best deals to our membership and getting the deals done. From a Program Director's perspective, part of the coaching we provide applicants is to share aggregate data on the companies that successfully make it through our four-step process and get funded. When it comes to deal terms, the feedback from our screening committee and membership has been clear: convertible notes can be attractive to our angels if and only if the timing and the terms are right.
Historically, our angels would get involved in a convertible debt round when it was a true bridge, i.e., funding at a critical juncture that would enable a company to hit milestones which would in attractively position it to institutional investors. This was predicated on an imminent round of venture or institutional funding, which, given the time it can take to close this kind of deal, would suggest the company was already in discussion with this class of investors. In terms of a time-frame, this might suggest a priced Series A round three (and possibly up to six) months out.
Last year, we started seeing debt rounds that wouldn't convert for 9,12, and in one case, even 18 months. While our membership is by no means monolithic, a prevailing perception was that this structure wouldn't properly reward the highest risk class of investors: the angels. Imagine the progress that a successful company could make in 18 months, achieving its development, traffic, staffing, or other significant business plan goals. If the initial funding round had been priced, those who participated could enjoy an impressive step-up in valuation, with a pre-money on the Series A significantly higher than when the angels got involved. Instead, in a convertible debt round such as this, early investors are instantly diluted when it eventually converts to equity.
As to our policy? We don't have a policy per se, just a preference towards deals that are structured to reward both the entrepreneur and the angel. A convertible round doesn't have to be a deal-killer, but timing is everything. Much has been written on this topic, but for some validation from the east coast, here's a link to a Redeye VC post by Josh Kopelman, Managing Director of First Round Capital.