Saturday, August 16, 2014

Angel On Vacation?

It is a common perception is that venture capital firms close down for business during much of the summer. Start-ups should align their fundraising activities with the annual calendar, and not waste their efforts when it is unlikely that a full partnership group is able convene. As an active angel investor, this also rings true for new deals, even if there are no partnership decisions required. Starting in early July, first time meetings with entrepreneurs are postponed until after the summer. Knowing that many other investors also take the time off, the chances of not being able to take part in key deals seems small.

Existing investments are living, breathing organisms where the activities are not controlled by the boards and the advisers. In most of the cases this does not constitute an issue. During the most recent summer vacation period, six of my portfolio companies did nothing which would have required my attention or intervention. For another two companies, planned and ongoing  activities simply spilled over into the summer: In one case, a new CEO was brought on board. In another, the critical introduction to a future business partner was initiated and resulted in a first productive meeting.

However, two portfolio companies provided unexpected, and in one case material, surprises.  In one case, the startup was publicly hit with presumed claim about the company’s intellectual property (IP) and its development practices. Making sure that the IP is rock solid should be one of the foundations for investing, and attacks on these grounds are always cause for concern. While such claims are often not resolved immediately, they need to be put down as quickly as possible and before the next funding round to allow the company to focus on the business. In this case, the founders responded promptly to what appears to be a fraudulent claim.

The CEO of the other start-up company sent out an urgent and surprising email to the company investors. He announced the need for an immediate cash infusion within two days, or else the company would have to shut down and the assets would have to be sold. He also informed that two of the board members had stepped down in the prior two days. All of this after things seemed to have been going well. In hindsight, some warning signs had been obvious, but it was hard to believe that such a perfect storm could arise within a few days. 11 days later and thanks to the hard work of many of the stakeholders, the impending demise has been avoided, the company has been restructured, and new capital has been infused. 

In the past weeks, I took time off from pursuing new investments. For the existing portfolio companies however, the involvement never stops - it may just pause.