What would be Reasonable Convertible Debt Deals for Angels

March 6 2014 No Commented


I have written blogs on why I don’t invest in seed/startup stage deals using convertible debt instruments.  See:

Angels: Convertible Debt Is Seldom the Right Security for Startup Investments


When is Convertible Debt the Right Instrument for Angel Investments?

I was recently asked to quantify under what terms and conditions I might be willing to do a convertible debt deal.  Frankly, the answer is simple:

  1. When the round size is small and the company is super early (pre-seed stage?).  Say, the entrepreneurs needs $150K for robust customer validation (after a successful beta test).  The company may be a bit early for angels, but for some reason we like this one.  Convertible debt can be cheaper to close than a round of preferred stock, so perhaps there is no need to spend more than the minimum to close this funding round.
  2. The conversion valuation is fixed at a low price.  The median valuation for seed/startup stage deals in the US is currently about $2.5 million – see Halo Reports.  For a pre-seed deal with limited customer validation, a pre-money valuation of $1 to $1.5 million might be more appropriate.  So, let’s say the conversion price is $1 million.
  3. The time to conversion is no more than 12 months and at the option of the investor, although there might be some investor advantages to a longer time to conversion.


As you can read in the two blogs above, I am not interested in funding deals with convertible debt with conversion caps above $3 million or triggered solely at a discount to a subsequent round with no cap, because the pricing neither recognizes nor rewards the considerable risk involved in the first money into a deal.

“If you’ve got a business — you didn’t build that. Somebody else made that happen.”

August 17 2012 No Commented

Title is quote from Barack Obama, speaking in Roanoke, Va., July 13, 2012

Are you kidding me?  What a silly, uninformed statement to make!  Wouldn’t you think that one of the jobs of the President of the US is to encourage those whose companies create most of the jobs in our country?

1.  He assumes correctly that most successful entrepreneurs have had an outstanding mentor or teacher that had a big impact on their lives.  But…so did every successful big company manager, labor union leader and politician.  Successful people recognize the value of mentors!

2.  Then, he assumes that the government deserves a share of success – for building roads, operating a post office and defending our freedom.  Good jobs for governments – establishing a climate in which entrepreneurs (and all other citizens) can succeed…and fail.  But, entrepreneurs have been thriving, and creating jobs, in America for more than a century, long before our federal government even acknowledged that entrepreneurs had a significant impact on job creation.

Let’s enlighten our President:

Risk:  Entrepreneurs risk their financial futures by starting companies.  Can the same be said for government employees?  Of course not!  Entrepreneurs have no government safety net and don’t want one.  Government does not pick them up and dust them off and give them an encouraging word when they fail.  Government doesn’t even know they have failed until they suddenly don’t file a tax return for the year after they go out of business.

Alone:  Much of what first-time entrepreneurs do is learned on-the-job.  Engineer entrepreneurs must learn selling.  Financial entrepreneurs must learn product management.  Very few first-time entrepreneurs have experience at running all aspects of a business.  And, they have no one to turn to for help.  Successful entrepreneurs find advisor and mentors, but learning when and how to use advisors take time – time that is perceived as necessary to run the business.  And, of course entrepreneurs hire employees.  They must select the best possible team to get the job done.  Once on board, the entrepreneur must manage those employees to effectively grow the company.  Growth in revenues and profits enables the company to hire more employees (job creation).  No one is there (especially no one in government) to “make it happen,” Mr. President.

The US is suffering from the lowest rate of job creation since the great depression.  And, it is an established fact that new companies create most of the new jobs in this country.  It is time for the leaders of our country to recognize who creates jobs in America and take supportive action.  Encourage entrepreneurs!  Don’t impede company formation!  At a very minimum, just get out of the way and let entrepreneurs “do their thing”!

Visiting Angels and Entrepreneurs in Northern Europe

June 19 2012 No Commented

My wife, Ann, and I visited Ireland, Russia, Estonia and Finland, from mid-March to mid-April (2012), sharing experiences in angel investing through lectures, discussions and workshops.  We met passionate entrepreneurs with exciting startup companies and engaged angels investors in all four countries.


Upon arriving in Dublin, we were met by our hostess, Diane Roberts, for a leisurely drive to Belfast.  It was a lovely day in the North of Ireland.  The following day, I delivered a four-hour workshop on capital sources for entrepreneurs and pitching angels for fifteen entrepreneurs in the Propel program.  Later that afternoon, we visited the phenomenal new Titanic Experience – a don’t miss!   We finished our first full day sharing dinner with Halo – the Northern Ireland Business Angel Network (Alan Watts).  I enjoyed a short interview on BBC radio the following morning.  Immediately thereafter, a dozen Halo members participated in a workshop I led on portfolio strategy and post-investment relationships with portfolio companies at the impressive Northern Irish Science Park.  We then took a picturesque train ride back down the coast to Dublin.

On Wednesday, April 18th, I presented a keynote talk on US Startup Valuation Trends  for the 1st Irish Angel Meetup.   Two hundred angels, entrepreneurs and others in the startup community attended this inaugural event organized by Diane Roberts of Xcell Partners and held at StartupBaseCamp accelerator in Dublin.  In the afternoon, I led a Master Class focused on Angel Working in Groups for thirty prospective members of the new Colman Investors after which we heard pitches from two entrepreneurs.   On Thursday, I spoke to entrepreneur groups at both the National Digital Research Center and the DIT Hothouse on subjects of fundable companies, trends in funding, business plans and pitching investors.

In addition to enjoying some delightful pubs and restaurants, the highlights of our Dublin sightseeing were visiting Newgrange, touring the Old Jameson Distillery and the live musical comedy “Legally Blonde.”

In Northern Ireland and Ireland, I spent 19 hours in front of audiences, delivering eight lectures and workshops to 162 entrepreneurs and 190 angel investors.


We attended the twelfth annual Congress of the European Business Angel Network held April 23-24, 2012 at the Digital October technology entrepreneurship center.  325 delegates participated in an interesting program highlighted by a gala awards dinner boat cruise on the Moscow River, with Frank Peters as master of ceremonies.  Philippe Gluntz, President of France Angels was honoured as the 2012 EBAN Angel of the Year, while the Finnish Business Angel Network (FiBAN) was recognized as Business Angel Network of 2012.  Views of the Moscow Cathedral, the Kremlin and Red Square from the cruise were marvelous.


Tallinn is the capital of Estonia, located just across the Bay of Finland from Helsinki.  We arrived from Moscow on April 25 and I spoke on Raising Money to Go Global the following day at StartSmart held at Technopolis Ülemiste, an incubator and innovation center.  One hundred fifty entrepreneurs and others attended this monthly conference that alternates monthly between Tallinn and Helsinki.   On the 28th and 29th I lectured and mentored more than a dozen entrepreneurs, part of the University of Tartu’s DDVE program, led by Mart Kikas.

On May 2nd and 3rd, I led workshops for Estonian investors on syndication, due diligence, valuation and the post-investment relationships with entrepreneurs for about 30 angel investors.  Over dinner on the 3rd, I assisted these Estonian angels in a screening session with three entrepreneurs pitching interesting startups.  These efforts were organized by Merit Imala and the Arengufond Estonian Development Fund team.

In Estonia, I was in front of audiences for 21 hours, delivering 7 workshops and lectures and mentoring 12 entrepreneurs.  Audiences totaled over 380 entrepreneurs, investors and others.

We found Tallinn to be a delightful place to visit and the best preserved medieval city in Northern Europe.  Great museums, a large section of the 13th century city wall, wonderful cobbled streets and delightful restaurants, all within a short walk of modern hotels.  We also discovered that Estonians love to sing.  Their Tallinn Song Festival Grounds provides a stage for 15,000 singers to entertain over audiences of over 100,000.


We arrived in Helsinki after a two-hour ferry ride across the Bay of Finland from Tallinn.  On the morning of Monday, May 7, I led a workshop on angels working together in groups for an audience of about 70 angels and entrepreneurs organized by the award-winning Finnish Business Angel Network (FiBAN).  That same afternoon, FiBAN organized a two-hour workshop on Due Diligence in the offices of PricewaterhouseCoopers.    The following morning, I delivered a workshop on Valuation and then spoke on Startup Boards in the US to the 200 delegates attending the Boardman conference (Boardman is Finland’s leading corporate governance organization) in Finlandia Hall.  That afternoon, I spoke on pitching investors to 40 entrepreneurs and then coached seven entrepreneurs on their presentations, organized at Finvera.  The evening was capped off with a reception attended by 125 leaders of Helsinki’s entrepreneurial and investor community at the historic Nordea Bank facilities.

After a day of touring Helsinki, I then delivered a workshop on exits Thursday morning, followed by a pitch session at which four entrepreneurs presented to 30 angels (plus visitors) in the Startup Sauna, an accelerator located at Aalto University.  After the formal presentations, I had the opportunity to meet many of the fine teams there at a casual BBQ.

The highlight of Friday, May 11 was participating in a panel discussion on encouraging entrepreneurship in Finland with Prime Minister Jyrki Katainen the new parliament facilities before an audience of about 150.

Our FiBAN hosts, led by Claes Mikko Nilsen, Feodor Aminoff and Jan D. Oker-Blom treated us like royalty during our visit.  Overall, I spent 20 hours in front of audiences totaling nearly 800, delivering six workshops, mentoring a dozen or more entrepreneurs and as the subject of five press interviews.

Ann and I enjoyed glorious Spring weather in Helsinki.  We enjoyed a delightful harbor cruise, walking the Esplanade Park from the wonderful Hotel Kamp, the views from Palace Restaurant and the Torni Tower and many other sites in the city.  Ann visited Aniola villa, the home of famous Finnish composer, Aino Sibelius about 30 minutes outside of Helsinki.  Then, on Friday, May 9 our FiBAN hosts treated us to a wonderful piano concert of Sibelius compositions at the new Helsinki Music Centre.

St. Petersburg

We ended our European stay with a train ride visit to beautiful and historic St. Petersburg, the northern-most city in the world with population exceeding one million.  From our small hotel near Nevsky Prospect, we were able to visit most of the sites in or near the central city, including Peter and Paul Fortress, the Church of Our Savior on the Spilt Blood and St. Isaac’s Cathedral.  We enjoyed a boat ride on the Neva River and several canals and walking/auto tours with angel investors Dmitry Rumyantsev and Michael Podgaiets.


We were in Europe for a month, visiting four countries.  In total, I delivered 21 lectures and workshops, conducted 10 press interviews, participated in four panel discussions, mentored over two dozen entrepreneurs and teams and spend 60 hours in from of audiences totaling about 1600 angels, entrepreneurs and others in the entrepreneurial community.

The Road to Crowdfunding Hell

June 19 2012 No Commented

It is remarkable to me the lack of rational analysis about equity crowdfunding.  Sure, crowdfunding “sounds like” an easy source of capital for startup entrepreneurs, leading to happy entrepreneurs, delighted investors and job creation galore.  Few pundits seem to have the depth of knowledge and foresight to look far enough down the equity crowdfunding road to offer convincing predictions of the issues and problems that may arise.

Fortunately, Daniel Isenberg has provided just that in his HBR Blog, The Road to Crowdfunding Hell.  Don’t miss it!

The Berkus Method: Valuing an Early Stage Investment

March 27 2012 No Commented

Dave Berkus has just published the most recent version of his method for establishing a pre-money valuation for early stage companies.  See his blog at The Berkus Method: Valuing an Early Stage Investment

Southwest Angel Summit – April 1-2, 2012

March 12 2012 No Commented

If you angels can fit April 1st and 2nd into your busy schedules, here is a dynamite meeting annually held in Tucson and hosted by the Desert Angels:  http://southwestangelsummit.org/.  I have attended in the past and would be there this year, if I could.


Follow-on Funding: A Dilemma for Angel Investors

February 12 2012 No Commented

In 2007, Professor Rob Wiltbank reported in Returns to Angel Investors in Groups that angel investors made follow-on investment in about 30% of their invested companies. It was surprising for me to learn that follow-on investments correlated with lower returns, that is, angels that made follow-on angel investments saw returns of 1.4X their investment, while those that did not make follow-on investments enjoyed 3.6X returns.  The time to exit for both groups was similar.

Frankly, the conclusion that angels who make follow-on investments can expect lower returns is distressing to me.  At a time when venture capital, on average, has moved to later stage investing, angels need to plan on making multiple investments to help startups survive to positive cash flow and eventually to exit.  Fifteen years ago, angels typically invested $250K to $500K in startup companies while the average venture capital investment was $2-3 million.  As we saw in Average Round Size in Angel Deals, the average angel investment is now about a bit over $300K but venture capital is now investing $7-8 million per deal.  While it may not have been true in the past, angels now need to provide startups with enough runway to get to positive cash flow, to venture financings or to an early exit through several rounds of angel capital.

How does a “one and done” investment strategy by angels provide higher returns?  I think there are several contributing factors, such as:

  • There are a few angel funded deals that take off so quickly that the startup entrepreneur can easily raise $5 million or more in venture capital in the next round.  These deals are likely to provide early investors with very high returns.
  • On the other hand, too many of us angels” throw good money after bad,” that is, we don’t pull the plug early enough.  We become convinced that our funded startup is just about to turn the corner…when they really aren’t.  So, we fund the company a second or perhaps even a third time before we acknowledge that the company simply cannot be successful.  These follow-on investments have a significant negative impact on portfolio returns for angels.  And, candidly, this is an important area of improvements for angel investors.
  • Some angels invest in only one early round of funding, strategizing that the early rounds provide the highest returns.  Investing in later rounds only reduces the total return from any single portfolio company.
  • Furthermore, some angels choose to invest in more companies rather than multiple rounds in the same company.  With a fixed amount of capital reserved for the angel asset class, these investors look for improved returns through a diversified portfolio.

Acknowledging the results of the Wiltbank study, the reality of angel investing today is that we can expect to provide multiple rounds of investment for new ventures.  Without multiple angel rounds, startup entrepreneurs simply cannot hit the milestones necessary for either an early exit and venture funding.  But, we angels need to be more diligent before providing second and third round funding to startups with little chance of success.  More objective due diligence on portfolio companies prior to second or third rounds of angel investment has become a best practice for higher angel returns.

Average Round Size in Angel Deals

February 3 2012 No Commented

The Center for Venture Research at the University of New Hampshire has been publishing statistics on angel investing for decades.  Over the past several years, the numbers of US companies funded by angel investors has increased from about 50,000 per year to over 60,000 annually.  Based on CVR reports, Mark Boslet of senior editor with Venture Capital Journal has shown that, in the past eight years, the average angel round has decreased from nearly $500,000 to under $350,000.  See my recent post on Gust.com which describes some possible explanations for this unexpected trend.

Protecting IP in Crowdfunded Deals

January 25 2012 No Commented

Angels and venture capitalists will not sign non-disclosure (confidentiality) agreements just to listen to an entrepreneur’s funding presentation, or even to read the entrepreneur’s business plan.  Serial entrepreneurs understand this and write their plans without describing the “secret sauce.”  Investors will eventually want to validate the intellectual property (IP) prior to investing but not just to hear about the opportunity.  After hearing an interesting presentation, these professional investors will engage with the entrepreneur in a process called “due diligence,” an exhaustive review of the business plan.  During this phase of the investment process, representatives of the investor group may agree to a non-disclosure agreement as part of their validation of the IP.

Crowdfunding is an opportunity for new small businesses (lifestyle companies) to raise capital from many different sources using qualified websites to facilitate the deal.  For “mom and pop” businesses, this may make lots of sense.  Unfortunately from what I read, crowdfunders expect to invest in the next potential IPO in which IP may play a huge role in the success of the company.  Validating the IP may become a roadblock to crowdsources participating as equity investors in high-growth companies.

IP takes many forms, but let’s just consider patents for now.  The validation of a patent (perhaps not as yet issued) requires demonstrating that the innovation is unique by an exhaustive study of the prior art (early patents and publications).  Validation also requires consideration of “freedom to operate,” that is, clarity that the product can be made and distributed without violating the IP rights of others.  Verifying that a new company has a unique product or service that cannot legally be duplicated quickly by reverse engineering by competitors is a legitimate concern of investors.

So, how will crowdfunding sources validate the technology for investment in interesting startups?  There seem to be a few options:

  • Crowdfunding sources will simply not require new companies to provide any validation of competitive advantage facilitated by IP.  OK…but that certainly seems to increase the risk of failure for investors in this very high risk asset class.
  • The entrepreneur will ask hundreds, if not thousands of crowd investors to sign non-disclosure agreements to allow investors to validate the IP.  Gee….think about the nightmare if an inappropriate disclosure is made.  Tracking down the individual who made the unauthorized disclosure would seem to be a daunting task.  In fact, just maintaining the non-disclosure documentation for hundreds of investors would be a logistical headache.  Are 1000 non-disclosure agreements better than none?
  • An independent facilitator will validate the technology and provide a non-confidential report to interested crowdsources.  Those with extensive experience in pursuing IP legal opinions understand that this is a time-consuming and expensive process ($10,000 to $50,000, or more).  Since crowdsources will be making small investments, the new company seeking funding will have to pay for these opinions.   Considering the legal liability, will these IP specialists complete these studies on a contingency (assuming their fees will come from the proceeds of the crowdfunding)?   I wonder.

It is the opinion of this writer that IP validation is simply one more strike against crowdfunding as a source of capital for high-potential, high-growth startup companies.

A Bubble for Seed Stage Valuation

January 19 2012 one Commented

When entrepreneurs raise equity capital for startup companies, the investors’ percentage of ownership is determined by the negotiated valuation for the company at the time of investment.  For example, if the negotiated pre-money valuation is $1.5 million and the investors provide $500,000 in equity investment, the investors are purchasing 25% of the company [$0.5 million ÷ ($1.5 million + $0.5 million)].  And, as you might expect, when the company grows and meets important milestones (granted patent, first revenues, etc.), the valuation of the company increases.  If investors fund the company at a later stage, after the company has met important milestones, the investors’ $0.5 million in capital will purchase less of the company.  Not surprisingly, entrepreneurs are generally encouraged to postpone fundraising until critical milestones have been met, so entrepreneurs can sell less of their company to raise a given amount of capital.

But, as Mark Suster points out, the valuation of startup ventures also varies with demand.  When asked if we are now in another demand bubble, Mark responds “Duh…of course….!”  So, not only does valuation increase as companies mature, the valuation of new enterprises vary with a demand cycle.  Demand was extremely high during the Internet bubble (ending in 2001) and very low in 2007-09.  And, in 2012, prices have risen dramatically again.  Will this bubble end soon?  Suster suggests we will see the valuation bubble burst within the next 24 months.

So, valuation varies with demand and with the maturity of the company. 

But entrepreneurs must also realize that there is very little valuation consistency across the geographic and business vertical spectrum of this country.  Some geographic markets are hot (high demand for startup deals in NYC) while others are not (pricing in Montana is much lower).  Some business sectors are hot (Internet) while others are cooling (medical devices).   Entrepreneurs must research startup valuations in both the local market and their business vertical before negotiating for funding.  Also look at several valuation methodologies prior to seeking capital.

What is the message regarding startup valuation?  Entrepreneurs:  Know your marketplace.  Do not expect the same valuation for a gaming startup in Atlanta as for a biotech startup in Boston.    

Here are some important points for entrepreneurs to remember when raising seed/startup capital:

  • Raise money far in advance of need.  It always takes longer to raise money than one expects.
  • Don’t try to predict the fundraising cycle.  You will probably be wrong anyway.
  • Hit as many milestones as possible before raising money, to maintain as much ownership in your company as possible.
  • On the other hand, if investors come knocking at a reasonable valuation and you will eventually need to raise funds – take the money!  A bird in the hand…you know the rest.
  • And, if you are oversubscribed (investors offering more money than you had intended to raise) – take the money!  You never know when a hiccup will result in your new enterprise needing more money than expected.