Sunday, October 22, 2006

Is Angel investing good?

Great discussion with Kimbal Musk and Brad Feld, hosted by Podcaster, blogger and investor, David Cohen. Damned interesting stuff. Kimbal, apparently, told David that he no longer believed in angel investment at a tech meetup in Boulder and David decided he wanted to go deeper, and to podcast it. So the three of them met at one of Boulders best restaurants (which happens to be owned by Kimbal) and chatted about it over coffee. Check out David's blog here, and listen to the podcast on ClickCaster here. Or click on the title of this blog entry.

What follows is a recap of the podcast in my own words with some color commentary. If you're going to listen to the podcast, you can skip the rest of this (and I'd encourage you to listen.. it's short, about 22 min, and loaded with great info).

If you’re more of a reader than a listener, then read on…

Kimbal thinks a $500K investment is the same as a $50k investment (you get a prototype, but not alot more). Even with $500K, you don't take enough risk out (due to the cost of entry into your chosen market) to matter to VCs. He thinks some of them can do well with angel money.. they're 'hit's' driven (a pilot in effect). But he thinks as a rule your not going to get users or full technology infrastructure with a ‘real’ angel investment (defined at $500K).

I've got to disagree with him here. Without angel money, ClickCaster, when we launched in Jan, had about 7,000 unique visitors, did about 140GB of data transfer (podcasts being downloaded) and served about a quarter million pages in Jan., our first full month. In Sept., when we closed our angel round, we had several hundred thousand unique visitors, did just under 3 terabytes of data transfer and served a little under 7 million pages. Nothing spectacular, but pretty good considering we didn't spend a dime on building audience and we have yet to get slash-dotted, Dug or Techcrunched. Concerning infrastructure: with about $40K worth of recently purchased vanilla server hardware and no cost LAMR (Linux, Apache, MySQL and RoR ) software, we could handle several million users per month without breaking a sweat. And to add more, we just throw in more servers and bandwidth. That's, generally, pretty good infrastructure. Certainly enough to build a healthy business on.

Brad thinks the $450K extra, for a company that knows how to run cheap ($20K, $30K to $40K a month burn) is a real sweat spot. It allows you to really hone your idea. Especially if you have a business that you can get to revenue quickly. And you can really increase in valuation by doing this. Kimbal does agree with this, if you can get far with that $500K (some real products, some customers) and that's good and removes risk, but he still thinks that market momentum and a strong team require real money (i.e.VC level cash).

Interesting side note: Kimbal thinks that you give up more of the company than we believe needs to happen. In his model you've already given up over 70-80% of the company (or more) before you get to VC's. Personally, I don't think you need to do that. If you bootstrap to the point of having real products and services that get some traction in the market before taking angel money.

We also were pretty lucky in that we have an incredible group of angels. And our board, made up or our angels, is deeply engaged.

The consensus seemed to be that there are two types of angel investment. The first is where the investors put in some money and then walk away; passive angel investment in effect, and as Brad calls it "for profit philanthropy". The other is a deeply involved set of angels where, as Brad says, "they take an active and emotional role in the business". I'd call that engaged angel investing. In our case, Brad was our lead investor, is our chairman and he brought along several of his friends who trust his judgment and know he's more deeply involved than a passive investor would be.

Interestingly, about 2/3rds of the way through the discussion, Kimbal and Brad seemed to come to agreement that the right type of angel investment (the second of the two types above) is, after all, a good thing all around.

Ahh.. so we get to the heart of it: Do it right (right idea, right group, get deeply involved), and angel investing IS something to believe in. Engaged angel investing. So, as with everything else, it's about quality. Kimbal doesn't believe in passive angel investment. Brads view is: just put them into the right category. Passive (the for profit philanthropy)... what Kimbal considers bad angel investment is what it is, and take it for what it is. One thing it isn't: a place to make money. Sort of 'social sport', as David calls it.

Just separate the two and when you invest know which is which.

Just for reference on how they filter angel investments, Kimbal says: Value of the idea and then, the people. Brad says value of the idea (plus, needs to be in a domain he's interested in), then the people, then the geography (if it's not local, it needs to be someone he's worked with in the past).

Interestingly, they pretty thoroughly trash one of my own beliefs which is, 'All I need is one angel round and I'll never need to raise more money". Brad called this, in his usual delicate and succinct way: 'bullshit". His view is you're going to have to either sell your company when the next step is reached (to become something more substantial then they are), or you're going to need to go for institutional investment. Very rarely does a company get to eight figures of revenue without going the institutional investment route (or, at the very least, gets the existing angel network to double down on the first round of investment).

Call me a dreamer (or an idiot), but we're pretty tenacious and I'm keeping my eye on that 'one angel round is all we need' ball. Call it a fantasy, but I believe it can be done. Just because it's nearly impossible to do, doesn't mean you can't do it. I've seen a lot of companies do the impossible and there's no reason we can't be one of them.

I'm not a fool though; we'll develop a plan for future institutional investment, among other things. You've got to have a plan B (and if possible, a C and a D).

Like the Cheshire cats says: If you don't know what path to take, any path will do. Better to have at least an idea of what path you'd like to take (and in what order) before the decisions are made for you.

To David, Kimbal and Brad: Great job. I wish I'd heard this before I'd gone looking for angel money (and, at the same time, I'm really glad I didn't). And THAT, makes it a excellent podcast. I’ve just hit the high points (for me) here. If you’re interested in hearing how real angel investors think, you owe it to yourself to check out this podcast.

Full Disclosure: Brad and David are angel investors in my company, ClickCaster. Kimbal, sadly for me, is not.

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