2017 Angel Investing Outlook for Southeast Region

The number of startups in Carolinas is increasing because of tech talent that is present in the region, and a number of startup accelerators and incubators that are helping new entrepreneurs grow their business. On the other hand, the funding for these startups remains a challenge in Carolinas and Tennessee because most angel and venture capital groups are located in Silicon Valley and they  prefer to fund local companies. Because of that, Bull City Venture Partners founder, Jason Caplain has organized another conference inviting angel and venture capital investors that do support startups in the Southeast region to discuss their investment strategy.

Angel Investing Panel

Angel Investors panelist at the stage, from left to right: Matt Dunbar of VentureSouth, Anthony Pompliano of Full Tilt Capital and John Osborne of Charleston Venture Partners talk angel investments strategies with David Jones of Bull City Venture Partners.

Focus and angel investor strategies

  1. Matt Dumbar of http://venturesouth.vc represents a network of angel groups located in  South Carolina, Charlotte, Asheville area.  Even though the group is trying to get more money into South Carolina, the group invest in startups located in South East region. It is important to emphasize that Dumbar’s group has been named one of the most influential angel groups in 2016, a tremendous accomplishment for an angel group that is outside Silicon Valley. Venture South includes 10 different angel groups with around 220 individual investors. Angel groups meet monthly to discuss deal flow, perform due diligence, and to pool capital to invest via side car. $20M has been invested so far. The typical check size ranges from $200-250K and now $500k is not uncommon. The group is usually the first investor, focused on enterprise software, life science and industrial manufacturing; they will fund will pre-revenue  startups with demonstrated traction.
  2. Anthony “Pomp” Pompliano of Full Tilt Capital is industry and location agnostic prolific angel investor; he closed  35 deals in only 6months, with an average check size of $350k. Pomp primarily looks for a great management team, big market opportunity, and how can he personally help the company grow within 90 days of the investment. He puts himself in startup shoes and thinks what he would do if this is his business and offer suggestions. The deal flow for Pomp is significantly larger than of any other investor as he personally sees  50-60 pitches per week! He likes to be the first investor in a company, because he believes that the biggest ROI is made when getting into company early, before others. Pomp believes that venture capital is broken, inefficient industry taking a long time to invest is a company, so he’s moving really fast.  Other investors spend a lot of time on due diligence, but Pomp looks at people, if this management team is capable of building a company. This way he weeds out  lot of startups fairly quickly.
  3. John Osborne of Charleston Venture Partners invested in five deals averaging  $250k last year. This angel investor group has around 50 members. Because they operate outside Silicon Valley ecosystem, they seek companies that can grow organically when they are valued at $2-5M. Hence, they extensively evaluate product-market fit and business model financial viability. Like most angels, they invest into sectors they are familiar with, such us medical devices, diagnostics B2B enterprise software because the a number of group members are medical doctors and software architects.

Example: last deal and the process

David Jones asked panelists to give him an example of the last deal they have completed and the process that took place.

For John, the last deal was with a company came out of an accelerator. One angel investor member  was already heavily involved with this platform based software startup, so he brought them to the group for seed round. Because of the close relationship between startup team and an angel, the group has closed the deal in 36 hours. Pomp, on his way to NYC, watched a pitch for a mobile app used for immersive story telling, geared toward educational entertainment. That company raised $250k round from angels, and now were raising more. Even though Pomp  couldn’t understand the demo initially, he asked for clarification and then  wrote $250k check on the spot. At that time the company had 9k users and now they have 100k users! I am not sure if this example has any educational value to other founders other than if Pomp likes you, he may write you check quickly. Matt has recently invested in a startup lead by his school buddy. The Chapel Hill startup targets pharmaceutical companies doing phase IV trials, offering a model for the entire population for the same demographics, proved it with hepatitis condition people.

It’s not surprising that entrepreneurs that have already established personal connection with angel investors have much easier time time closing on the seed round.

How angel Investors bring value to Startups?

Most investors emphasize the value-add they bring to their portfolio companies, but not everyone actually delivers on the promise.  For example, Matt has recently helped a portfolio company negotiate a licensing agreement. He usually places an experienced, well connected professional, an angel to be on Board of Directors. John usually plays a match maker, he’s trying to figure out  when someone is on the job hunt to start recruiting these individuals to work for his portfolio companies. Also, one angel investor from his group, Oracle sales executive, participated in B2B sales calls on behalf of the portfolio company in order to  close the sales expertise gap the startup has.

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Trend Is Your Friend — Popular Industries for 2017

There is very little doubt that investors follow the trend. When I led renewable fuels startup in 2012, I couldn’t raise more money despite of superior technology because clean-tech fell out of favor with investors that year. Entrepreneurs that develop companies in market sectors that are currently hot with investors will have much easier time closing the round. So, which sectors are currently hot with angel investors?

As usual, Pomp gives contrarian, generic answer. He does not have any specific industry or sector that he favors, he likes to stay away from trends; will not invest in chat-bots, but he likes genetic nutrition, for example. He thinks that Silicon Valley investors will be the greatest destroyers of wealth in history. This statement is also very interesting given the fact that he has an active lawsuit against Snapchat where he claims that the company inflated key growth metrics as it was recruiting him from Facebook. His new job with Snapchat lasted only three weeks following the confrontation with senior management.

Matt and his large group of 200 angels bring different professional experiences to the table, but they are mostly comfortable with startups in  B2B software, life-science, and industrial manufacturer sectors. Mostly, they look for capital efficient business models because they cannot rely on VC follow-on round in South Carolina. Angels cannot wait 10 years for ROI either, need to exit much earlier, so their portfolio companies need to grow organically as much as possible to break even quickly. John sees South East region as interesting. He advises startup founders to look for investors that really understand what you do, not just how much money they can they give you. Cash is just a tool that will help you buy resources that you need.

Steps Startups Need to Do To Close a Seed Round Quickly

Getting investors’ attention is half the battle. The other half is entering due diligence process and finishing it as quickly as possible and close the seed round. Most entrepreneurs are still not prepared to go through due diligence process quickly and effectively, so angels on the panel offer their advice on steps startup founders can do to speed up the process.

Pomp believes that entrepreneurs  get needlessly overwhelmed with fundraising process, when they need to convince only 3-4 angels in a group of 200 to write them a check. Founders feel like investors have all the power, but that’s not true. Founders need to vet investors too! In the big scheme of things $200k is not that much money,  because startup founders are spending their time, and time is the biggest investment anyone can make. You are the one in power, because investor have to hunt for good startups. Pomp makes it sound that you can get $250k easily, but it’s not true, said moderator. Seriously, how do you do it? Pomp urges startup founders to minimize investment risk for an angel. Traction is always a good answer; for example, video games founders need to advance the game from one level to the next and show progress.

“80% of startup founders will eventually get a job” 

— Anthony Pompliano 

Matt advises entrepreneurs to build credibility at every step of the process, to demonstrate that they have done their homework, have a warm introduction, deliver materials that look awesome, and are knowledgeable about angel investing the process to avoid any surprises. He also doesn’t like convertible debt deals. John: agrees with all Matt’s points. However, even without warm introduction, startup founders can get investor’s attention with persistance. He will take a phone call from people that kept emailing him about business growth accomplishments every 2-3 months for at least 6 months, but will not talk to people that have sent him only one email and went silent. Angel gets interested when they see progress. Yesterday John heard a pitch from someone that was raising, unsuccessful,  since August  (today is January); that time should have been better spent increasing sales.  Pomp: the more data points you can provide about your business, the better. Show your sales, number of users, show your goals, milestones, and contingency plans if/when some milestones fail.

Seed Round Closed — What is the Next Step?

Once a startup raises $250k Seed Round, and needs more funding to grow, where do you go?  Pomp doesn’t do larger deals because he is only getting early for the largest ROI, but he does encourage entrepreneurs to  leverage equity crowdfunding platforms such as angel.co. Because venture capital is scarce in South East region, John wants founders to have a plan how to grow the business without needing venture capital backing, and to learn how to be profitable quickly. He insists that entrepreneurs show him a plan toward profitability. For Matt the biggest challenge is lack of experience as most angles in his group have never invested in startups. Hence, the big part of his work is education for both angels and startups. But, he has a long game, making everyone comfortable with this asset class.

2017 Angel Investing Outlook for Southeast Region Summary

Startups raising Seed and their first Series A round outside Silicon Valley or New England face geographical disadvantage that make the process more difficult, so the fundraising process has to be modified to overcome regional challenge.

  1. Plan for fundraising at least six months, ideally 12 months before you actually need money. Because of that, your own skin in the game is paramount.
  2. Bootstrap and grow organically as much as possible for as long as possible. If you raise Seed round from local angels, plan for no venture capital follow-on round.
  3. Vet angel investors, find a group of investors that will bring value to the table, not micromanage your every move. Money is commodity; your time is the only thing that I cannot renew, increase of bring back.
  4. Building trust with angels is they key factor to getting funding. The most successful startups regularly send quarterly updates to potential investors and their own investors.
  5. Be familiar with the process, be transparent about your KPI, goals, milestones, plan when milestone is not met.

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