Hacking Angel List

7 Tips For Raising Startup Capital

AngelList is an amazing thing.  No, let me rephrase that-- AngelList  is a freakin' phenomenon. 

Since launching just over a year ago, 2,250 investors have joined, over 400 startups have raised money, and according to co-founder Naval Ravikant, about 20 new inbound companies per day sign up.

Wow.  

In case you’ve been adrift at sea for the past 9 months and have no idea what I’m talking about, AngelList is a hugely-successful online service that matches early stage companies with angel investors.  It is similar in concept to a “stock market for startups” where privately held companies post information about their businesses and a filtered list of angels, HNW individuals, and VCs can follow the companies, take intros, and ultimately invest.

I’ve had two portfolio companies “list” on AngelList, and I’ve also started wading in as an investor member.  In addition, I have another two startups that are getting ready to raise funding rounds, and AngelList will likely play a very big role in our capital raise strategy.  As these startups get ready to make their debut, I thought I’d synthesize a few observations, tips, and suggestions for making the most of this powerful new funding vehicle. To wit:

1.  Land a lead investor before going live.  This is the best tip I can give, yet the hardest one to achieve.  Nonetheless, it’s critical for success, as AngelList is a momentum-driven platform where “hot” deals get hotter, but the unwashed masses (without any existing investors) often stall or are neglected.  This could eventually change, and I do believe Naval and gang are working hard to create a system where any quality startup-- even “raw” companies-- can raise money on the system.  But at present, AngelList is more useful as a tool to pour fuel on an already-burning fire, than it is to get the fire lit.  In other words, use it to round out a round vs. trying to source a new round.

Granted, getting the first domino to topple is usually the most difficult part of the game-- as a rough proxy, plan on spending 80% of your time and effort closing Investor #1, and the remaining 20% locking down the rest.  As needed, be ready to offer sweetheart terms to the first person to take the plunge.  In short, do whatever it takes to make sure the “Current Investors” field on the AngelList application form is not blank when you go live.

In addition, you get massive bonus points on AngelList if your lead is “someone who has done something”-- in other words, an investor who is not your dad or your dentist, but a recognizable personality or industry expert.  Here’s why: I believe that the long tail of investors on AngelList are paying close attention to what the “head" investors are doing; in other words, of the 2,250 angels, perhaps 10% are very actively taking intros, making comments, and otherwise generating buzz for certain startups, and the other 80-90% tag on when a startup starts to heat up.

Thus, there is tremendous marketing value in a name brand lead, and the more effort you put into finding one-- even if s/he is investing a relatively small amount-- the easier the rest of the process will be.  A good place to start is the first 3 or 4 pages of this list here, combined with LinkedIn's "How You're Connected To..." function.    

UPDATE / COUNTERPOINT Naval responds: "Thanks for this. I vehemently disagree with this first point, though :-) The majority of companies-- probably even 75%-- that we send out now and raise money have no lead and often no investors, e.g. .  It's just that companies that don't have something else obviously special about them need that to get past our bar.  The rest of this post is pure gold. The conveyor belt and watering hole analogies are spot on."    

2.  Focus (a lot more than you’d expect) on building “social proof.”  When you list your startup on AngelList, you populate fields such as Company Description, Traction, Management Team, and so on.   Many of these fields are similar to the information displayed on Google Finance or Yahoo Finance for a publicly traded company.  But one very clever field you’ll find only on AngelList is a category called “social proof.”  This is where you name drop key people, both inside and outside the company, who are involved-- Advisors, Referrers, Endorsers, and Current Investors.

This is a hugely important field, for two reasons.  First, unlike a publicly-traded stock, most startups do not have much (if any) revenue, profit, or other financial metrics for investors to analyze and compare; thus, angels are relying on “who you know” as a filter (and presumably, are assuming that someone among this bunch has done their due diligence).  Second, due to the sheer number of startups listing on AngelList, it is efficient for investors to filter for those that have attracted name brand folks.  Spend the time and legwork to connect with influencers who can signal that your startup is In With The In Crowd.

But don’t stop there-- prod your social proof folks into action.  Get them to generate buzz on the site and amongst their peers.  Have them promote you using the Follow and Share buttons, and have them Comment on your status (feed them soundbites to talk about, if necessary).  As with other social networks, these actions get pushed out to their followers, and they may be amplified if Naval or another AngelList uber-member “likes” that comment.  In short, get your social proof points talking.  

Let me give you a quick example using one of my advisory clients, a startup called Zerply.  Zerply worked it pretty hard and did almost everything right to generate positive social proof:

• Jonathan Nelson, founder of the networking group Hackers & Founders, originally referred us in --> instant street cred
• The team met Naval at an event, and he sent out a “cultivated email” to an initial group of hand selected investors --> very valuable initial buzz and endorsement
• Startup networker guys like Adam Rifkin and Brendan Baker became Endorsers and commented on Zerply’s profile --> more buzz, particularly among these users’ followers
• Zerply's CEO Christofer kept the company's profile updated with current screen shots and traction metrics --> demonstrating both business momentum and the team’s design prowess
• I and another advisor Nicolai added a few Comments such as an announcement of some NY Times coverage --> further reach within the AngelList news feed
• A few prominent angels including Dave McClure put in money, and were added to the profile --> additional credibility, momentum, followers, intros, etc. 

...And so on; momentum begets momentum.

3.  Stand up, stand out, and get noticed.  When I initially explain AngelList to founders who are considering it, I use the metaphor of a fast-moving conveyor belt loaded with startups rolling past a line of angels who are scanning them as they go by.  It’s a highly-efficient system, yet the trip down the belt goes pretty quick, and if your company doesn’t get noticed and plucked out of the masses by an interested investor (or three), you’re dumped into a bin at the end of the line and are quickly buried under the avalanche of new startups in the queue behind you.  It is then very difficult to claw your way back to the top of the pile.

This happened with one of my startups in the social marketing space-- we went out with no lead, and with a ho-hum profile.  Traction was good but not outstanding.  The product demo was still a work-in-progress, and we only had one other advisor (aka social proof point) involved.  As a result, that company was ignored on first pass, and it took an extraordinary level of hustle to generate enough interest to close the seed round.

Appearances and presentation count.  I suggest you learn from our mistakes.  To do so, make sure that:

• you show Screen Shots that are compelling, and your links point to stellar demos (that are not password protected)
• you have Traction Stats that are meaningful, and that tell an up-and-to-the-right story
• you frame said Traction Stats in a compelling manner, and you dress up your profile with eye-catching charts and graphs showing your momentum 
• you portray each co-founder in a favorable (and well-rounded) light, with bits from your bios that prove credibility and an ability to execute
• you have recruited Advisors, Endorsers, a recognizable Referrer, and ideally, a Lead Investor.  
• you have set your valuation and raise amount in the sweet spot of the majority of investors on the system (e.g., a $500k - $750k raise at a $2m -$6m valuation) 
• you get a quote from Robert Scoble or another accessible-yet-trusted entrepreneur as the icing on your profile cake.

Doing this work upfront-- before going live-- will make your profile “pop” and as a result, you’ll be hard to ignore.  Call it "peacocking for the investor mating dance."

4.  Pare your company down to its “Hollywood pitch” soundbite.  As mentioned, there are simply so many quality startups running through AngelList that it’s critical to have something unique in your pitch-- something that spurs investors to stop and take a closer look.  In short, you need a hook.  For many popular startups on AngelList, the format that works well is similar to the Hollywood pitch, where new movie concepts are sold to studios by references or mash-ups using the familiar-- e.g. it’s “Ghostbusters meets Waterworld.”

In the startup world, this becomes “We are Airbnb for puppies”.  This approach does seem to be quite effective, and the shorter the hook is, the more memorable it becomes and the less friction with which it spreads among investors.  Just be on the lookout for any investor soundbite fatigue (comparisons to Uber, Pandora, and Airbnb all come to mind).  Further, as HubSpot CEO Dharmesh Shah recently tweeted, “Saying you are [x] of [y] is shorthand for describing your startup; it’s not really a long-term strategy.”

As an alternative, consider using a super-short description of what you actually do, e.g. MogoTix is "Simple, social, secure mobile ticketing."  Another approach is to have a teaser that doesn't actually say that much, but is very intriguing; e.g. TracksBy is "The most viral way to launch music" or Pipedrive is "If Apple designed Salesforce."  Clever.

5.  Tweak your profile, tweak it again, then tweak it some more.  Startups can game the AngelList system somewhat by making frequent changes and updates to their profile information.  Essentially, when you update something, it shows up in the News Feed as “Acme Corp updated their profile” and you can get viewed again.  However, I’d suggest that startups not overplay this card, which would quickly become annoying to your followers and prospective investors.  Update your profile frequently, but only when you have actual, real news to report (e.g. you’ve just added another 10k users or inked a distribution deal with Oracle).

6.  Do (at least) one thing exceptionally well.  Naval covered this point beautifully in a recent talk he gave to the Founder’s Institute members called “Anatomy of the Fundable Startup."   Here’s the nut of his message:  “investors are trying to find the exceptional outcomes, so they are looking for something exceptional about the company. Instead of trying to do everything well (traction, team, product, social proof, pitch, etc), do one thing exceptional. As a startup you have to be exceptional in at least one regard,”  Of these five categories: (1) Traction, (2) Team, (3) Product, (4) Social Proof, (5) Pitch/ Presentation, which ones do you have?  What can you work on prior to debuting on AngelList?

7.  Use AngelList as a resource for self-directed hunting.  Despite your best efforts and despite following these tips to the letter, there’s still a good chance you might not get much attention on AngelList.  Indeed, quite a few interesting startups generate just a few follows or comments, but not that many intros.  Others are more or less ignored.  In short, investor interest is not distributed evenly on AngelList; rather, it tends to cluster around a couple dozen companies.

If interest in your startup is lackluster, then take the matter into your own hands, and go on an active hunting trip.  AngelList is quite possibly the single largest and best collection of angels, all gathered in one place-- like a watering hole on the African Savannah, “all the great animals” are here.  Thus, why not use this resource to research profiles of money folk, form a short list, craft a really poignant and targeted intro, and go after these angels directly instead of hoping they notice you?  Ideally you can use your personal network, attorneys, advisors or LinkedIn to find a warm intro; significantly less likely, but still possible, is to form a connection on Twitter or a cold email.  Regardless of the form factor, put them on your radar, and there’s a good chance you’ll find a way to get to them.  Don't just passively wait to be discovered.

Bonus Tip:  Create a catalyst to close the deal.  This tip applies broadly to raising capital vs. being purely AngelList-specific, but it’s worth mentioning.  Second only in difficulty to landing that first lead investor is wrangling the rest of the cats toward a signed term sheet.  Investors drag their feet.  As long as they're not at risk of getting bumped from a deal-- and assuming that the valuation is not skyrocketing--  it is in most prospective investors’ best interest to watch and wait as long as possible before actually handing over the check.

Thus, it helps to have something on the horizon that will encourage investors to get off the fence.  Setting an artificial deadline is rarely effective; you’re asking for their money-- they can ignore this.   Marginally better is a deadline with some actual basis in reality, like the fact that you’re about to head off to Israel for 3 weeks.  But my favorite is a deadline triggered by something that has the potential to a) suddenly generate a lot of investor interest; b) ramp up the startup’s valuation; or c) all of the above.

As an example, one of my startups is participating in Dave McClure’s 500Startups accelerator program.  At the end of the program a few months from now is Demo Day, which will bring startups and investors together for pitches and meet-n-greets.  We know there will be a ton of frenzied press and buzz leading up to this event, and we know our startup is well positioned vis-a-vis the other startups demo-ing.

Thus, we are using this event as a catalyst to help close a near-term convertible note.  Investor psychology is always driven by fear and greed; so at the same time we are overtly selling investors on the opportunity (greed), we are also subtly signaling the possibility of missing out on the deal when it heats up at Demo Day (fear).  It’s amazing how fast investors can move when motivated in this manner.

Sum
I hope this list provides a few good pointers for making the most of AngelList.  AngelList is a true a gem of a resource for startups seeking capital, and Naval and Nivi do a fantastic job of measuring, tracking, tweaking, and all around improving the site on a near real-time basis (seriously, it blows me away-- every time I check in there are new features).  Start playing around with it and get to know it.

Is your startup on AngelList?  Have you raised money?  If so, I look forward to hearing what has worked well for you (and what hasn't)-- please email me at nathan (at) venturearchetypes (com)  or you can follow me on Twitter @startupventures.

In Praise of "Dumb Money"

I am frequently contacted by startup founders seeking help raising an angel round of capital. I give an explanation of what angels are looking for, point out a few of the various formal angel groups, and describe the growing army of “super angel” investors like Ron Conway or Aydin Senkut that has emerged in recent years.

And then I gently shatter their hopes and dreams by telling them there is no way in hell any angel will fund them; I tell them they are not ready to raise outside capital from professional investors.

I do this because of a common disconnect, a misperception of angels as mythical creatures willing to shoulder all the financial risk in a startup. Granted, angels are opportunistically driven by a desire to get in early. But the reality is that they are still highly risk averse (especially since it’s their own money) and seemingly becoming more so (according to a recent NY Times article, total angel funding fell by 27 percent in the first half of 2009, and the average deal size shrank by 30%).

The point I try to drill home is that although angels play early in the game, they rarely invest in pure ideas or business plans. Instead, they tend to invest in entrepreneurs who have been able to get the ball rolling through their own hustle, creativity, and chutzpah. You may not have solved all the technical or market risks, but angels want to see that you are sufficiently resourceful to have built enough of “something” that they can see the shape it’s taking, and kick the tires a little.

So what do I suggest for those who are not ready for angels, and who don’t have enough personal savings to launch the business?

I tell them to seek dumb money.

This pejorative term comes from the fact that an investment in a pre-launch company is almost never rational when viewed by any traditional investment lens. Given the lottery-like odds that a pre-launch company will ever return money to its initial backers, dumb-money investments are more akin to a grant or donation than an “investment.”

But “dumb money” is often exactly what is needed at the idea stage of a business, and it usually means hitting up friends and family—people who know you well enough that they are willing to take a leap of faith on your ability to pull it off. In short, you are raising money from people who are willing to invest in you, as opposed to investing in the fundamentals of a deal.

I dislike this term, as it is both pejorative and a misnomer—anyone who can bankroll the $50k or $100k needed to get your startup off the ground has probably done quite well for themselves based on their own smarts and drive. They may not be savvy private equity investors, but they probably know a few things about business.

Further it neglects how important the friends-and-family funding economy is to a healthy startup ecosystem. Indeed, it is the invisible army of doctors, dentists, parents, grandparents, and great aunts who catalyze the dreams of wild-eyed entrepreneurs and who enable crazy ideas to come to fruition and change the world.

So this holiday season, let’s raise our glasses to the unheralded champions of entrepreneurship, the ones you don’t read about on TechCrunch but who in aggregate are more vitally important to the startup world than all the VCs combined.

And, as the liquid refreshments begin taking effect, and as you move in to seal the deal, let’s review a few tips to ensure the dumb money round does not become a disaster:

Understand The Risks: If you raise friends-and-family money and your startup fails—and odds are it will—you’ll still see your “investors” each Thanksgiving and at each wedding, baptism or bar mitzvah. Is this going to cause significant heartburn and family strife? Proactively visualize your father-in-law’s reaction to losing his money, and it’s effect on your relationship. Make sure you can stomach this before cashing his personal check.

Make Them Understand The Risks: Directly related to the above, you should temper your pitch by being painfully, explicitly candid about the risks of the venture. Talk through all the reasons the company might fail, and state that although you will do everything legally possible to make the business a success, the odds are that they will never see their money again. Is this something they are willing to accept? Perhaps more importantly, is this going to cause them financial hardship? If so, you’d do best to look elsewhere.

Structure It As A Loan: Selling a percent of your company at an early stage is exceedingly difficult, not only because you must issue shares, but because it generally implies you are setting a valuation. Further, a messy cap table—with many small investors who may or may not be “accredited”—can make it difficult to raise money later from professional angels or VCs. A better approach is to structure it either as a non-recourse loan, or as convertible debt (i.e., a loan that converts into equity once a valuation is negotiated later with VCs).

Paper It Up: Many friends-and-family rounds are done via lunch and handshake. In general, I think this is a mistake, and you are better served by drafting a written deal. It need not be overly complex, but it should state the amount being loaned or invested, repayment terms (if any), and an acknowledgement of the risks involved. The most valuable takeaway is that you’ll have something tangible that you can refer to later if things go awry or if perceptions diverge.

Go Like Hell: The best way to solve all of the issues above is to execute like hell and make the business a success. Granted, this should be a given, but building a startup is always a roller coaster ride with serious highs and lows, and many entrepreneurs want off when things get rocky. Taking other people’s money brings an additional level of obligation and pressure; it means you need to be more committed; it means you can’t easily walk away. In particular, this manifests itself in a sacrifice of personal life and freedom. But this is the deal with the devil you make when you take other people’s money. Further, for your investors, demonstrating that you gave it your all will lessen the pain of losing their money if the startup fails.

In sum, dumb money is what you need at the idea stage. But let’s come up with a better term for this critical bedrock of innovation. How about “concept capital”?