June 25, 2020

Angel investing during pandemic - where should founders go first during COVID-19 to get funding? By Grant Van Cleve

Angel investing during pandemic - where should founders go first during COVID-19 to get funding? By Grant Van Cleve

In this episode of Fundraising Radio, Grant Van Cleve an ex-President at Tech Coast Angels at Orange County and a current member of Board of Governors of Tech Coast Angels as well as an angel investor and a Managing Partner at Hangar 75 explains the current landscape of investment field from the investor's perspective. He also explains where should founders head to get funded.

In this episode of Fundraising Radio, Grant Van Cleve an ex-President at Tech Coast Angels at Orange County and a current member of Board of Governors of Tech Coast Angels as well as an angel investor and a Managing Partner at Hangar 75 explains the current landscape of investment field from the investor's perspective. He also explains where should founders head to get funded.

Hangar 75: https://www.hangar75.com/

Tech Coast Angels: https://www.techcoastangels.com/

Angel Capital Association: https://www.angelcapitalassociation.org/


Transcript

I am an American who lived twenty years abroad in Europe,

and came back here in twenty ten background of venture and real estate and incubating nonprofits anyway,

very active as an angel investor in seventy seven different companies.

And on the board, or an advisor of probably a quarter of those. So I, I take this seriously. It's not a hobby between golf. It's something that I want to get great at really empower wonderful companies and.

And hopefully do it at a skilled enough level to get the rates of return that make it a useful way to deploy capital and to spend time so far. So good on those fronts. That's that's crazy here. Congrats.

On the on the good rates. So far. So, speaking of race, by the way, before I move onto, speaking of I first wanted to ask you, how How's it going right now in terms of investing?

So a lot of investors are going game back on their feet and starting to deploy cash. Really? Actively into companies, what do you think is going on in the agile world? How are they behaving.

Good question, it's I would say that we, as investors are a little bit schizophrenic on this, there's obviously nervousness people's, you know, portfolios might be down.

And you think of angel as something you do with some extra money and there's a little bit less extra money. So, you'd be much more cautious at the same time.

There's just some amazing stories of innovation that happens in downturns and troubled eras and just that scrappy quality entrepreneur that makes their way through this.

So, you kind of want to be ready to deploy money on the other end of it at the same time and there's probably some discounts and evaluation and things like that that make it a little bit more attractive.

So, we're sort of playing hard to get at the same time, is keeping a listening here to the ground, wanting to make sure we do get access to the right deals with the right time. Speaking of listening to the ground. How do you sorts of your deals?

So, how do you find most of the deals that you invested? Is it through and your groups? Is it through partnering angel groups with, or where else to find them.

Well, as he mentioned earlier, I am a very active member of a particular angel group called angels, join that six years ago, and then became the president and then the chairman of the board of governors, and it's a big group.

It's kind of big fish, small pond in Southern California. We have four hundred and fifty angels, and we've really deployed into some great companies over the years.

So,

it's a great place to meet good investors as well as to get sources of deal flow the same time as I've gotten active in that I'm often seeing deals before they get to those angel levels and have a network of people who are passing

on deals.
Sometimes too many deals.

And I also have a higher risk tolerance than a lot of investors do. Plenty of people wouldn't want to wait until it gets more traction that invest maybe at a higher evaluation.

But a, a lower risk situation, risk profile while I'm thinking, well, if this thing's gonna grow anyway I'm gonna be able to discern it fast. So I wanna get it more a larger percentage of the company by jumping in earlier.

So, I know people to know that. If you run into a good idea, that doesn't quite have the sex appeal.

I have some other deals, it might be having a little bit of trouble with it. It's initial traction, but they really have a great idea and a good founder then, you know, they'll come and seek me out because I'm interested people like that.

That's really great to hear a lot of people with higher tolerance. So, let's now talk about tech and specifically what is the board of governors who what does it do?

Well,

so there are five different chapters within tech,

ghost angels so it's not a national network,

like,

say,

a,

maybe not as broad as that,

but we're a little tighter than that,

but still each of the five chapters represent geographies and those geographies want to be involved in the,

the local entrepreneurial ecosystem.

So the San Diego crowd of investors wants to hang out with the San Diego founder. So they're gonna get better access to the particular companies in that area. And they're gonna have a better chance of

being able to become good coaches.

For those founders, so five different groups that have slightly different focus at the same time, as we'd like to invest in each other's deals. We also just like being with one another. So we try to create some connections some things that tether us together.

So, one of those is a governor mechanism where those chapters meet together and have an appointed board, that helps give direction. But the primary energy of each of those groups is the local chapter.

So, the Orange County chapter, we're part of here, you know, we're pretty tight knit group, same thing with Santa Barbara or L. A. or the inland empire. So, it's just we're loosely knit group of people, you know, if.

Not all your listeners are not aware angel investors are writing checks from their own pocket, but they're not a an investment committee deploying money that somebody else gave them that they raise. They're actually individuals.

So those relationships are pretty important in angel groups that they.

Have camaraderie to share deals to trust each other and diligence to kind of put their money where their mouth is by backing one another's deals as well. So, governance isn't the same thing really?

As a managing partners, or an investment committee, at a venture capital group that wield a lot of power on the other hand.

You know, angels as a group, invest enough and make a difference enough in those early stage, high risk things that, you know, doing what we do. Well, as important. So, governance plays a role. That's true. No one. I'm pretty sure.

No, one doubts that what angels do is really, really important, but my next question was actually about finding those initial groups. So, of course, there are huge angel groups like tech coast, angels, New York angels. Correct?

Too, as you mentioned, but there are across the US. I think there are like fifty seven tangible groups. So, what's your recommendation and finding those? Is there a tool other than association of.

I forgot what stands for association of fats, right? You remember that okay ACA is the angel capital association and that is a website to go to.

And that represents a I mean, it's surprising how many numbers of angel groups there are around the nation, and around the world. So you mentioned a few big ones as you go deeper people might have another handful or a dozen names.

But there's actually hundreds of such groups so there's a good directory. There.

You just say whether you're an investor looking to join something, or if you're a company looking for investment, there are a geographical sorter and it's just listed by state and then different groups within that.

So, if you're in the, you know, state of Kansas, and you don't think that there's much happening, entrepreneur really well turns out there is and great groups to get involved with their.

And at least in our case, we put, I think it's eighty five percent of our investment into deals within Southern California.

So, and that, as I mentioned earlier about coaching about, you know, playing a role in those

companies at some level, we want to do that close to home.

So, as opposed to other groups that might have a national or international footprint angels will tend to be local. So, that kind of a directory is a great place to to go to learn more.

Absolutely. That's true. I was again, it's ACA.

Angel Capital Association, I got it I remember that was stuff, but let's talk more about dynamic and what's going on right now in the field of fundraising for startups so where should founders go right now?

Like, literally, this date this week to raise finance, should they try grants first before going onto angels? Should they try individual angels before go into annual groups? Or should they just go straight to big agile groups? Like Deco angels?

I'm not sure I'll have a good answer to that. Maybe I can take it from another direction.

If you're an existing entrepreneur and have investment, you will significantly be more likely to get money from your existing investors.

So, even if you have to lower your evaluation, incentivize them to get some money in, and that's really going to be your best best bet investors will want to and think through their existing things before they'll expand into new things.

And, yeah, I was read a quote recently about, from Warren Buffett saying that when the tide goes out, that's when you see who was swimming, naked things are tough.

So, if you've got an idea, and of course, you're believing in it with all your heart, and you're trying your best at it but maybe it really isn't getting the necessary traction. And, you know, it could be a time to.

You know, just to have an honest conversation about what it's really at, but on the other hand, it's a great chance to pivot. It's a great chance to find out. There's changes in the market.

That are happening and find out how your product maybe really relates more to this particular market.

There's been a great boost in E, commerce sales, which is good news for startups who is more people are selling directly in those sort of routes to customer markets, rather than needing to do expensive brick and mortar things.

So there are parts of this that could could could be good for us,

but it's a little tough if you really have an idea that you're Jenner getting off the ground from nowhere and the market is so unstable,

you know,

it is not an easy time to raise funds,

but that can also be a reason to put in some more sweat equity developing the products,

keeping active studying of what's happening in these changes in the market and adapting your product to it.

So that when you come out the other end, you've got something robust, and you can be the only ones left standing, or the first one to enter into a transitional thing and there were money will follow that. So right.

But if you're just saying, I've got this thing, and I love it. I think you should back it. It's gonna be a tough time for a couple of months. Then it was.

Previously, definitely definitely. That's a good point in speaking of money, following good ideas and new sustainable ideas.

Let's talk about the beach that how can a founder prove that his, or her idea is they sustainable one what do you think or the major points that they should include in the pitch deck to prove that.

Well,

there's there's good resources out there things you can study and in general about keeping the pitch deck size down shorter than you think,

making it attractive,

making it a discernable to,

to anybody other tips about,

you know,

take a look.

There's a lot of data you want to throw in there and actually you're better off putting those in an appendix as sort of,

or a second deck, supplementary deck, just think of,

in terms of absorption of content by somebody who's reading it and reading it quickly or hearing it seeing it from the front and you wanted to make sure they catch the main idea which I guess then I would add to that.

You should think very strongly about the beginning and the end, especially at the beginning the majority of angel investors decide whether or not, they're gonna make an investment.

In a given company, within the first, three minutes of a presentation now it doesn't mean it only takes three minutes to convince them. It might take a full twelve minute presentation.

It might take two weeks of due diligence afterwards, but they get in a mindset where they say I like this and I want to find out if it's true. I really hope it's true, because it would be great thing to be part of it or the world really would be a better place. They'll catch that.

And then they'll be in a frame of mind saying, I'm just checking to see if there's any red flags or they're on the other end, where they're like Ha, I don't get it. Or I doubted that can't be true.

Or, you know, that guys, you know, it's a pipe dream it's not rooted in reality. There'll be some kind of frame of mind where they get in a negative frame of mind about it and they're just not interested.

You really can then give them all the facts. And figures in the world, give them, you know, pages and pages of data and they'll still be like yeah, but it doesn't work for me that sense of it. It works for me, is gonna happen fast.

So, make sure you've got a catchy and clear beginning to it. That doesn't vary. The lead tells them exactly what it's after and a quick summary of why you're the ones to do it and then say, and I'm gonna prove that to you.

And then you can use it whatever time you've got left to flesh out the detail, but they should, they should understand what it is you do, and make sure be excited about it being true. From the very beginning.

A couple of tips those are all good tips so thanks for that. And for moving on to mistakes that founders make, especially now the times have changed. There are no more face to face meetings basically, at all.

So,

what do you see the standard mistakes that founders make during those zoom calls during the actual presentations where they speak and show show their slides where the major mistakes either

mistakes I,
I think the mistakes would be the similar mistakes to face to face meetings.

Those the problem with the zoom calls and things is that it amplifies the same basic mistake. So, take, for example, listening. I just think that's the.

Like, number one thing in general, in your interactions with an investor, they want to know that. You're coachable that you're humble that you're paying attention to, you know, things they might be offering tips that it's not that they have egos.

You have to listen to them, but they want to know whether you're gonna listen to the market, whether you're gonna listen to your clients, whether you're gonna listen to your teammates.

So, I'm catching clearly, you know, not being ready to jump into your answer, but making sure you're listening.

Well,

to what their question really is,

what their concern really is,

I'm waiting to hear for sure they're done with their comment or their question then repeating it back and affirming what it is they asked and then saying,

you know,

now,

if I've got if I understood that correctly,

and you're concerned about this or that then yeah.

Here's what you need to know about our product. And then you explain that in a way. Those are just those are general conversational tools. Those are general things that are affirming to somebody.

You're trying to have an empathetic conversation with those are ways to persuade people, but they're really they're tougher when you don't have those visual cues when you can't tell for sure when they're done when there's a lag in in the thing.

So just sort of double down on those basic communication things, knowing that the media makes them even more challenging.

Right, right that's actually great advice for what the other person says is a good tactic of speech.

So you should you should definitely practice that and before moving onto the question about the documents and which documents are more important, which are less important. I would love to discuss hangar seventy five with you. What is that?

So, hangar seventy five is taking entrepreneurship from a slightly different angle.

And what I'm going to explain to you is gonna be different than my normal ammo of how I would be investing, or how I even think entrepreneurship happens.

And by that, I mean, that most entrepreneurship, most of the dramatic innovative things happen in the world happened from somebody who has a a great idea and they're able to fall on the sword to do all that.

It takes to bring an idea to life to meet the challenges that are associated with entrepreneurship and, you know,

there's obstacles in the market ops tools and team and family life and finances all of these things that should stop innovation from happening in most parts of the world and most parts of history,

and they don't happen.

So in our era and in American particular, maybe even California more. So than some other places entrepreneurship happens because we have a climate where it's okay to try and where we believe in.

Great courageous people to do transform it. So that's entrepreneurship in general and that's what I love. That's what I back. That's most of those seventy seven companies. I put my time into it. My money into it.

But all that said, there's another way to look at entrepreneurship, which is that sometimes there are good ideas that are out there that can make a difference in the marketplace. But execution is important.

And there are many times when there are entrepreneurs who have cool ideas.

But they don't really know how to get from point a, to point B, we as angels can be a part of helping other advisors, other teammates and things, but it's not easy to build all those pieces together. Well, sometimes you can actually have an idea that good.

And just needs quality input in order to get it off the ground. So hangar seventy five is a little bit more focused on that we're not taking an entrepreneur and grooming his idea or we're not helping him or her build that company.

We're saying we'll build that company and maybe you'll get to be a part of it. It could be an idea. We have ourselves it could be an idea that somebody comes to us could be an idea that we build a team around eventually.

But in general, we're saying we've got a, we think we've got a pretty good skill set to get things from. Point a,

to point B,

second part of it is we also realize that there's a lot of acquisition opportunities that get missed because people are more interested in a longer term shoot for the unicorn,

or in a using a baseball terminology,
or swinging for the fence trying to get a home run,
but there was a movie a few years back called money ball.

Some might have seen about story about the Oakland days, and sort of a more statistical approach to baseball to getting singles getting bases on B*** doing whatever it takes to get people to move around the bases and get runs.

And those points are more important than the drama of something like a home run.

So, taking them back the other way, we're saying that there's ideas that should get built to a certain level and then should get sold should find another home let a corporate buyer buy it and help develop it within the context of their own client base.

Help somebody bring it onboard to get to a private equity company who could put more money and more talent into it. But a lot of times, if somebody's, if it's their, their baby, their thing, they want to put on their tombstone.

They're really just swinging for the fences and that home run. They're saying, I've gotta turn this into a unicorn. This is what I'm going to be known for when we're saying no, it's okay.

Let's build some things that are good ideas products that can get find a home relatively quickly and investors like that.

They might tell you, they want to get a ten X or a twenty X or thirty X return but if they could consistently get five X returns.

For their money on a regular basis would have good exits. They get excited about that. I mean, it's not the only thing they're excited about, but there's a room within an angel portfolio for more secure returns.

So what we're trying to do at hanger, seventy five. That's really interesting. I'll definitely leave a link to hangars seventy five in the description of this episode. So if you think you have a good idea, you should talk to them. Probably it's gonna it's gonna be something cool.

So, we're moving on to the question about the documents. There was an episode on fundraising radio where a lawyer explained five documents.

There are essential, basically for an investor to make an investment in a startup and right now, put them up here.

So it's first certificate of incorporation, second, bylaws, third, confidentiality and intellectual property assignments. Fourth is restricted stock purchase agreement. And thief is the corporate resolution to grant.

Which one do you think or I mean, which ones do you think are really important? And which ones are can be kinda ignored. That's an interesting question.

The specific answer is that none of them can be ignored ultimately, for five of those things you mentioned, need to get taken care of. I view it a little bit more in the context of whether or not.

How would I say this from an investor's perspective, especially in an early stage when most of the investments that I would be doing would be happening. We wanna make sure that you a couple of things. One is you're not doing anything illegal. Okay.

So is does it have some valid basis so if you created some company around it, if we're gonna investing you are we investing in something tangible. So that's that's sort of a minimal approach to it.

We also are interested to know whether you think that way we have, of course,
are more excited,
you know,

we're not by backing somebody just because they can do their legal and financial dotting the i's and crossing their t's there's lots of organized people out there doing innovative things,

so that's not the main thing.

But we also need to know whether that innovator is reasonable enough to know what needs to get done. So, that would mean if they at least we're studying it. We're getting people alongside them. That we're helping. Think about that.

But outside of that, those initial documents that you're creating are probably going to need to be changed along the way.

So I don't think you get any extra brownie points by having spent twenty thousand dollars on some great legal documents. And we're like, that wasn't what we're gonna need for our round anyway. Let's, you know, we're gonna need to change those or a future series.

A VC fund, we'll definitely need to work on some governance documents, but so I wouldn't put a ton of time or money into it.

There's great basic documents that go Cooley that are sort of online thing for legal group. There's other ones you can download. So, you can adapt those.

Or even just using the basic law and legal zoom places, there's ways to get a decent set of documents. So you do need to get those things.

But it should be spending more time on developing the business plan itself and developing some kind of financial forecast. And even on that, same front of financial forecast, we also know that. Whatever numbers you're putting in. There probably aren't that.

Well, baked they aren't that tested in the market. We're not hiring you because you're a great accountant and we're not investing in you your great accountant. But we're saying, are you actually thinking about it? Are you aware of unit economics? Are you aware of customer acquisition costs?

Do you have an idea of what overhead would be necessary to build out a company to support your idea if your thing gets going? But, but we're not going to go through a fine tooth comb on. Exactly. All those overhead costs whether you put them in. Exactly. Correctly.

We're just again more concerned about that exercise and that you have an awareness that those things are important.

Right. That's that's actually a great answer. That's perfect. And I see too often probably how startup

founders are getting too much focused on the documents.

I've seen some spending, like, five, seven thousand dollars, and I'm like, come on you're not, you're not paying for an, just just move on, you know, to some basic stuff and move on.

So, yeah, we're definitely on the same day share with you grant and on this page, we're moving onto the last question of today's app, which is a call to action. So, what's the one thing that you would like the listener to do? As soon as the app? Is always over.

Well, first call to action, I mean.

I guess, I, you know, I wanna make sure that we're not missing this opportunity from Chrome virus where people are working from home, or there's a little bit slower pace a little bit, you know, fewer evening activities you can go to for mixers.

And if we just use that to to watch to binge, watch Netflix episodes or, you know, catch up on our tan or beef up our biceps or something, we're gonna miss the opportunity to actually do some deeper reflection.

It can be deeper reflection about your company about when I,

when I mentioned earlier about what market forces are changing,

doing some kind of deep research,

just,

you know,

thinking through where things are headed and daring to adopt,

you know,

that just sense of a change of pace gives an opportunity to to think things through at a deeper level and I guess I take that same thing from a,

for your personal side.

I mentioned a little bit earlier sometimes we're just so caught up and we have to, you know, build this thing. This way, or, you know, it could be, you know, take stock of how things are going and other relationships in your life.

How was your family keeping up with your entrepreneurial pursuits?

You know, what, what do you really want life to be, like, in ten years? And sometimes we just get going week to week, month to month, year after year on the same track and some of that's necessary to just stay focused.

And do that deep work that leads to transform it of things but sometimes we also need to take advantage of kind of a sabbatical rest.

Those rhythms were always in there of, you know, fields that are left fallow for a little bit in order to regain their nutritional potential.

So they can do well,
for the following years it's kind of built into those biblical story is I've taken a year a day out of seven

in the week off a day,

a year,

seven,

a slower pace in order for those fields to be fallow or to get training or whatever.

So, this is one of those opportunities that landed on us, whether we want it or not.

And I would say, take advantage of that to, to do some deep thinking some deep prayerful reflection on meaning of things and come out of that.

Whatever that is even if it is this mean tightening the belt for a little bit economically to get through it it can mean coming out the other side. That you're in a better, richer situation. That sort of gold can be refined by fire.

Let's just see this as a tougher time, but through which, if we don't handle it. Well.

We can have a better future right? That's actually a pretty philosophical, but still good call to action I think. Yeah. Just taking a look at what you're doing in terms of your company building in terms of where trends are going.

It's really important and speaking of trends my call to action would be follow some, you know, daily email updates.

Like, I'm personally reading to it's CrunchBase daily updates and Angeles, daily updates. Great. You know, it takes me, like, five minutes a day and I know where things are going. I'm not missing anything huge out. So do that's full.

Grant's advice, follow mine for. Sure. And at this point, we'll wrap it up. Thanks a lot grand for coming up and for sure. Your experience, I think it was really useful episode. So thanks a lot for that. I appreciate it doing a great job. Thank you.

All right. Take care. Everybody.