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2008.05.06

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Will

Todd,
This is an awesome post! Thanks for this. We have managed to get your first type of Angel to invest, now if we can get the rest we will be squared away. :-)

Ben

A great post. Thank you for this.

I do take issue with one of your last thoughts though: "If you never sell the company, I never realize a gain."

I'm always confused why so many people focus on the exit as the only path to return. A profitable company can be privately held and reward investors through dividends. Sure, this means more discipline in execution and monetization since you don't expect that billion-dollar buy-out, but dividends are an acceptable investment return mechanism for many investors.

Larry Meyer

Todd,
Great post! I am diving into the world of " I need investors". It appears to be a nerve racking endeavor, not for the weak. If you have further info in regards to "realistic equity" to investors that would be great. As a new owner to a virtual company, I have know idea what to expect.
L~

Todd Vernon

@Ben: thanks for the comments. You are correct that the outcome of the company can be a dividend to investors. I would say however that these kinds of businesses tend to be in the lifestyle category which is a different beast. You will get your money out in the form of an annuity but thats generally not a venture capital type profile. your comments are totally valid, just make sure that your Angels know this is your likely strategy or you can have misalignment between you and your investors.

Don Jones

Todd - nice post on the different types of angels.

For a take on the process of working with angel groups, here's another resource:

http://www.venturedeal.com/Reports/AngelGroupFinancingGuide.pdf

Cheers

Aaron Fyke

Hi Ben, I'd like to echo Todd's comments above. An annuity stream of dividends can be a great payout for angels, but this pretty much precludes the business from being attractive to VCs. Because of the "closed fund" format of most VC funds (ie, the funds must be returned to the LPs within a set time period - usually 10 years), a long annuity stream can only be realized for the VC if they are able to sell it. As this is often impossible, a business with no exit path is a very different type of business than one that follows the traditional angel-VC-exit route.

Aaron Fyke
Starfish Ventures

Chris

Todd,

Great post. Any chance of you writing a post regarding the next round of raising capital? It would be really helpful.

Regards,

Chris

Todd Vernon

@Chris Since our Angel round of financing we have raised an additional 3.3M in Venture Funding. I may write something on that in the near future.

John

We are well into our second angel round and boy have you hit it on the head. I am now a professional cat herder. We could use a big dog instead!

Ryan Bowse

Great Post!

Anthony Kuhn

This is a great primer on angel investing with inside view information worth of a link today in my own post at the Innovators-Network blog. Thanks for sharing your hard-won knowledge, Todd and best wishes for continued success with Lijit.

Dan Caruso

Todd,

Thanks for this post. I will refer to this in my site and refer people to it often (as people often ping me for advice on angel investors)

Dan Caruso

Chris Sheehan

Todd,

As the co-manager of one of the largest angel groups in the country, I enjoyed reading about your thoughts and experiences in raising money from angel investors. Keep up the good work!

Chris

Mark

Todd,

Thanks for sharing.

Why angels and not seed-stage VCs? Was it equity? Terms?

Knox Massey

- Make sure all the angels are accredited.

Good luck!

Todd Vernon

@Knox We had one seed stage VC in our angel round and one individual that was a proxy for a VC that later came into our first venture round. I think seed investments from VC's are great, but my experience is they are hard to come by for first time entrepreneurs. After you have a success under your belt, much easier.

Burke Franklin

Outstanding explanation -- from a person who has been there and done that. May I have your permission to include your article on our website to supplement the education of our customers for BizPlanBuilder (www.jian.com), our very successful business planning software? Many are starting businesses and seek financing. Link, image, attribute back to you... of your choice of course. Thank you very much.

Evan Bartlett

Very insightful profile of angel investors. Its a different perspective from the standard x-entrepreneur vs. corporate angel that I hear so frequently, and I think your explanation does a better job of describing the variation in angel investors.

Another post that goes well with this is http://www.informationarbitrage.com/2008/04/super-angel-net.html?cid=111811854 and there's a discussion about Super Angels essentially being able to compete much more effectively against VCs in the seed space.

VC seed funding is definitely hard to find, and with effectively organized angels (maybe led by Arc Angels), you've got a better chance of finding money.

Evan

Todd Vernon

@Burke Franklin: Sure just point back to this post..

Ray Weilage

I have been on both sides of the table. I started buying property where I did all the work - found the property, developed the bank line of credit, developed the property and sold it. The investor received 50% for putting up his net worth as a guarantor and 10% cash up front. Later I started to purchase small banks. This took a lot of work and investors who had $100,000 to $200,000 to invest. Again, I did all the work for which I received 20% of the Bank Holding Company stock. The investors put up 100% of the book value of the Bank. Anything over book value was borrowed. The Investors received 80% of the stock.
The Article was excellent!

Mike Michalowicz

The biggest realization is that funding derived from VCs or Angels is simply an investment. Just like when the "common man" buying stock on the NYSE, the concern is the return. No one gives two hoots about the number of hours the President has to work, or what his grand ideas are - all we, as stock investors, care about is that the stock goes up and we make money.

We are all cut from the same cloth, VC or Angel or any one else - we invest to make money, not friends.

Oliver Sweatman

Thanks for the post. My experience with more experienced angels is that they often prefer to invest in convertible debt knowing that it is generally cheaper and faster for a start-up to paper & close, keeps them closer to the IP and affords them a little more leverage (perceived?) going into a subsequent dilutive financings. Such paper though, esp. it has too many bells and whistles, can muddy up follow-on equity rounds. My preference as an entrepreneur is to issue small rounds of common equity a reasonable valuations to Angel investors, but they won't always take it.

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