How To Become A Super Angel, Part One: Seven Steps To Lift Off

Historically, angel investors have been retired high net worth executives and entrepreneurs. But as of late, super angels and micro VCs have emerged as a new type of new angel investor.

The archetype of the super angel is Ron Conway who got his start in 1995. Since then, others such as Jeff Clavier, Aydin Senkut, and Chris Sacca have emerged, some of which have leveraged their early successes into building partnerships akin to the venture capital firms of the early days.

Even without a formal definition of a super angel, one can identify remarkable similarities by inspecting the early days of these investors. Without further ado, here then are seven steps to achieve super angel lift-off:

1. Have an immigrant mind set. This can encompass anyone from outside of Silicon Valley. Jeff Clavier grew up in France, Aydin Senkut hails from Turkey, Manu Kumar came to the U.S. at the age of 17. Chris Sacca grew up in Buffalo, New York, and carefully cultivates the image of a small town kid. What matters is the mind set.

2. Build your skills in adjacent roles. No one is born a super angel. The more prominent super angels had operating experience at a start-up. Launching your own company or being a member of a founding team is the best place to start; business development and product management roles can come pretty close. But realize that training wheels have to come off at some point.
   
   
3. Quit your day job. Spending more hours on due diligence and interacting with portfolio companies at least a couple of times per month correlates with greater returns. With a large size investment portfolio, there isn’t enough time to be a super angel while holding a day job.The price is high: You must be ready to spend years without receiving a paycheck. And the next step makes the financial picture even worse.
   
   
4. Spend your own money. Most super angels spent the first three years investing their own money in 10-20 startups. Chris Sacca’s story is the exception: He had just enough cash to invest in Photobucket, and had to immediately move on to steps #5 and #6.  

5. Hustle. Hustle. And then, hustle. Ron Conway is the consummate networker, and was able to invest in Google by getting both Sequoia and Kleiner Perkins to sign up for the Series A . Chris Sacca bootstrapped himself into Twitter by charging $25,000 to his credit card. Aydin Senkut got into Helsinki based Rovio - not exactly a drive-by Silicon Valley location. Reminder: This step is closely connected to step #1.
   
   
6. Get lucky. Jeff Clavier had a massive return after 18 months when AOL acquired Truveo, and had many other early exits in his first portfolio. Chris Sacca’s investment in Photobucket more than returned its money in less than a year. Three angels - Jeff Clavier, Aydin Senkut and Dave McClure  - have claimed Mint’s sale to Intuit as a significant early exit. Note: End customer related internet start-ups rule when it comes to quick exits.
   
   
7. Raise first outside money from High Net Worth acquaintances. Investment portfolios take time to generate returns even when there are some early successes, and eventually angel investors run out of money. The initial check sizes tend to be small, and hence this hobby is not likely to pay for the daily expenses. But early successful exits allow super angels to raise money from high worth individuals in their networks. In Chris Sacca’s words: He was able to raise money from people he had traveled with and who he had relationships with.

Stay tuned for Part Two: How To Spend It.

Veeva Las Vegas - How A 7 Million Dollar Wager Became A 5 Billion Dollar Jackpot

Enterprise software company Veeva Systems had been a relative unknown in broader venture capital circles since it was founded with $7 million of angel and venture capital in 2007. Six year later, Veeva has reached a peak market capitalization of close to $5 billion and has turned into a massive jackpot for its early investors. Here are some observations on the strategies the team and its investors used to bust the bank.

1. Keep cost of customer acquisition low by focusing on a concentrated industry

Focusing on one industry allowed Veeva to quickly reach a tipping point and generate $129.5 million in revenues in year five of its existence. At the time of the IPO in August 2013, they served approximately 170 life sciences customers, including 33 of the top 50 pharma companies. Since the pharma industry is highly concentrated, it has been estimated that it only takes 80 customers to dominate the market. In fact, in 2013, Veeva’s top 10 customers accounted for 54% of total revenues.

2. Lower the execution risk by signing up industry experts

There was nothing generic about the Veeva board of directors: Two angel investors provided more than 35 years of deep software life sciences expertise gained at Siebel, Oracle and Pharmasystems. They also brought in the future president of the company, and their inside knowledge helped significantly increase the deal win rate and shorten the sales cycle. The CEO and the lead investor both gained deep Software-as-a Service experience at the platform businesses of Peoplesoft and Salesforce.com.

3.  Focus on the application by leveraging existing technology platforms

Veeva decided to build its sales automation software on Salesforce’s force.com platform. Leveraging Salesforce’s investment allowed Veeva to replace upfront platform development efforts with operating expenses linked to revenues. However, the non-compete agreement prevents Veeva from selling sales automation to other industry verticals: Veeva is only allowed to use the Salesforce platform to sell sales automation solutions to drug makers in the pharmaceutical and biotechnology industries. Veeva had to develop their proprietary Veeva Vault and Veeva Network to expand their offering beyond sales automation.

4. Play in an industry with high barriers to entry for horizontal software providers

The life science industry’s highly regulated environment requires industry specific functionality for areas such as sales and marketing, new drug submissions,and quality management, which in turn limits the attractiveness and raises the barriers to entry for horizontal software providers. As a competitive analysis has shown, the sales automation market for life sciences was dominated by products and services from Siebel and Cegedim. Veeva essentially replaced Siebel with a product that offered a more features and a mobile app at a lower price.

Using these four levers, Veeva was able to achieve profitability after year three. Gross profit margins were 58% of revenues in 2012, and net income reached 14%.

Can other start-ups replicate this strategy? Veeva's success in life science sales automation was likely a one of a kind event. While there may not be any opportunities left in sales automation, there may be other lines of business in global, complex and heavily regulated industries where on premise legacy software is ready to be replaced by on demand applications built on a general technology platform.

The Best Deals Are Yet To Come: Coupons Are Disappearing But Coupon Companies Are Thriving

Two recent blockbuster IPOs are evidence that the once sleepy coupon industry has transformed into a hotbed of new activity: Groupon has pioneered mass couponing for local retailers and convinced consumers to pre-pay. RetailMeNot has aggregated a large online coupon offering, and has made it easy for online shoppers to save money. At the time of this writing other digital coupon companies such as Coupons.com and eBates and are making plans to go public. And yet, it is only early days in the consumers' transition from clipping printed coupons to receiving relevant offers. The industry is still stuck in an age where 95% of coupons are printed, and the majority of those printed coupons is distributed to consumers as Free Standing Inserts (FSI). Less than 1% of FSI coupons are being redeemed, and worse, there is no easy way for consumer product manufacturers to track when and by whom they were purchased and redeemed. And while couponing as a category is moving online, paperless coupons presented at the point-of-sale accounted for only 2.2% of all coupon redemptions in 2012. Clearly, this is a highly inefficient situation.

Starting with Coca-Cola, coupons have served multiple purposes: To help consumer product manufacturers and retailers acquire new customers, increase the number of purchases of the same item, and incentivize customers to return. Specifically, manufacturers want consumers to switch to their product, while retailers want to increase shopping basket size and increase the number of trips to the store. Going forward, the digitization of coupons promises to make this a more seamless experience for the consumer and demonstrate ROI for manufacturers, in part by directly connecting to loyalty cards and credit cards. This digitization will also broaden the base  of coupon users and deliver coupons that are relevant: Traditionally, couponers tend to be consumers with low opportunity costs of couponing relative to income. With direct targeting, coupon manufacturers will be able to offer coupons to other user groups. It will also affect the coupon mix and physical locales for redeeming coupons: As consumption patterns and retail spaces continue to change, the shift away from food and grocery coupons towards other categories will continue. Already, the share of food coupons has declined from 70% in 2008 to about 60% in 2012.

Couponing marketplaces are two sided markets which require significant investments to acquire large audiences. In these ‘winner take most’ situations the race to dominate local couponing has been won by Groupon.  Livingsocial, once a major Groupon competitor, is struggling to survive, and other local coupon competitors such as BuyWithMe have been acquired or have folded. The rewards of scaling fast are tremendous: Even at this early stage in the digital transformation, and despite short operating histories, companies like Groupon and RetailMeNot are commanding market capitalizations worth billions of dollars.

So while it may appear that the couponing space is consolidating already, there are three reasons why early stage  investors should pay close attention

• Couponing is still in its infancy: Relationships between consumers, manufacturers and retailers continue to migrate online, and existing players occupy only small segments of the couponing space.
• Value networks are continuing to change: RetailMeNot and Groupon have emerged out of nowhere to become public companies in less than five years, and the impact of players like Pinterest on the landscape is only beginning to be understood

• Plenty of exit opportunities exist: The viability of IPOs in the coupon space has been demonstrated, and public companies have proven to be active acquirers.

In couponing, RetailMeNot and Groupon are akin to the first wave of Web 1.0 portals. There are many opportunities of start-ups like Ibotta, Shopmium and Aisle50 to take the consumer experience to the next level and demonstrate ROI for consumer product manufacturers and retailers.

Disclosure: I was one of the first investors in BuyWithMe, an early Groupon competitor. I am an early investor in Aisle50, a leading provider of prepaid coupons for grocery stores and consumer products manufacturers.

Wearables Devices - The Future And The Past

Wearable Devices have generated interest from consumers and investors alike: Fitbit has shipped more than three million fitness trackers, the Pebble smartwatch has raised more than $10 million in the most successful crowd-funded project on Kickstarter to date, and Google has released Google Glass to beta developers with great fanfare in early 2013. Hundreds of millions of dollars of funding have been poured into Fitbit and Jawbone over the past five years. And major athletic brands like Nike and Under Armour have staked out initial positions in the race to quantify personal fitness. But is this an area where angel investors should tread?

The initial fitness appliances have been targeted towards walking and biking. Trackers to quantify additional activities such as weightlifting or swimming are in the works, and the race is underway to put sensors and hardware on every imaginable place of a person’s body. In what initially appears to be a race to scale the distribution of their hardware, the winners will be tightly integrating hardware and software to build a ubiquitous platform. The goal is to successfully repeat Apple’s journey from the iPod device to the iTunes platform.

Wearables of course are not a new category per se. Personal accessories like watches and glasses have been around for centuries, and watches were digitized in the seventies. What is new is that modern accessories collect much more data using miniaturized sensors and are tethered to smartphones to make this disparate information transparent. Fibit, Nike Fuelband, Jawbone, Lumoback and many others bear testament to this current wave. But with all the data gathered from accelerometers and other sensors, one wonders how much physical information is really needed until everything is quantified for every sport and every motion in every imaginable activity.

Back to Apple and the smartphone. The mobile phone emerged as a personal accessory in the 1980s and has become the central hub to collect and process all kinds of information. In fact, smartphones disrupted the market for wrist watches to such degree where the emergence of a new platform for wearable devices seems somewhat improbable, and displaying smartphone information on a wristband seems like a limited step at best.

However, more aspirational uses cases for wearable devices beyond the quantified self are emerging. Studies by educational researchers suggest that approximately 83% of human learning occurs visually, and the remaining 17% through the other senses. To date, Google Glass seems to be the device with the highest potential to change user behavior and the potential to become a stand alone platform. And yet, use cases for Google Glass still seem few and far between.

As Marc Andreessen has stated, hardware is hard. While there is a new crop of engineering graduates combining ME, EE and CS backgrounds, success in wearable devices requires expertise in manufacturing, design, inventory management and distribution, making success highly uncertain. And yet, there are three areas that could offer attractive opportunities for early stage investors:

• Wearables for enterprise applications. A successful Kickstarter campaign can launch a product in the consumer space, but capital intensive marketing, distribution, and inventory are required to participate in the battle for the consumer space, let alone to become the one winner. In contrast, B2B spaces can have multiple winners, and avoid much of the channel and marketing cost.
• Portable and detachable devices. These devices can be used in stationary or mobile modes, for example in laser distance measurements.

• New software platforms. KPCB’s investment in MyFitnessPal and UnderArmour’s acquisition of MapMyFitness are examples of investors and acquirers hoping to replicate Android’s success in the wearable device space while avoiding capital intensive hardware.

Andreessen Horowitz has decided to forego early stage investments in wearables and instead double down in the later stages. This should not deter angels from investing in this exciting space.

2013 - For This Angel Investor, A Good Ending After Some Initial Detours

In 2012, a disappointing Facebook IPO cast a shadow on tech IPOs and angel investments. Success in 2013 seemed to be an uncertain proposition, and in fact, the year got off to a slow start. But for the stock market, start-ups, and my own portfolio of angel investments the year turned out to be much better than initially expected.

Facebook shares surpassed their IPO price in late July 2013, and the IPO pipeline reopened in a big way. Twitter launched a successful IPO in November and saw its share price triple. Enterprise SaaS company Veeva Systems successfully IPO’d in October and returned more than 300x of the $7 million invested. The Dow Jones Industrial Average gained over 3,000 points and 26% to end just north of 16,500. 

Total money flowing into early stage investing even exceeded 2012, and 2013 saw the highest amount of seed deals since 2009. To wit: the Band of Angels made a larger number of investments in 2013 compared to 2012. Start-up valuations continued to decline, but overall angel and seed investing activity continued to be strong, perhaps supporting the claim that many valuable companies have indeed been started in the past years. The introduction of so-called Angellist Syndicates and Backers to crowdsource investments has made participation in start-up fund raising accessible to a much larger set of investors.  Companies such as Crunchbase, CBInsights and eShares are making significant headway in providing more transparency for early stage investors.

My own portfolio of early stage enterprise focused software companies started off with six start-ups. Given the high valuations of 2011/12 and somewhat uncertain outlook at the beginning of 2013, I expected to see difficulties raising follow-on rounds. But while valuations largely went sideways, the companies that needed to raise more money were able to do so. I also met with more than 50 start-ups, and made investments in three new teams

• Tylr Mobile turns the inbox into a platform for mobile work. CEO and co-founder Ryan Nichols is passionate about workplace productivity, has been an early team member of two successful start-ups. The company was part of the Alchemist accelerator,  and Ryan was with SAP before the last two start-ups.
  
• Paystik captures impulse payments in an easy and intuitive way and was founded by James Ioannidis and Mary Minno. The deal was sourced through the Band of Angels.
  
• A6 Corporation is mapping the Internet topology to build a superior advertising exchange. Founder and CEO Bill Urschel is a serial entrepreneur, and returned to the Band of Angels for financing.

At the beginning of 2014 the stock market is trading at historical highs and the IPO pipeline is stocked with high profile companies. Money is still pouring into angel and seed investments as evidenced by Angellist and the ever growing number of Superangels and MicroVCs. But the shadow Series A crunch still has to play out, and having to raise $5 million in the next round - whether it is called Series A or Series B - will be the time where the wheat separates from the chaff. For entrepreneurs not much has changed: Hit your milestones, and Always Be Raising!

The Series A Crunch Has Officially Been Postponed. Here Is Why Professional Angel Investors Should Take Note:

Adeo Ressi predicted the so-called series A crunch in late 2011: A dearth of available Series A money caused by the concentration of venture funds in the top venture investment firms and the inability of many smaller venture firms to raise new funds from their limited partners. In fact, at the June 2013 PreMoney conference Naval Ravikant from Angellist confirmed that there is a gap in the market to write a $250 thousand to $1 million check, and to lead a round for a company that is not ready yet for Series A.

But not as many young start-ups have shut down as might have been expected. Instead, many have been able to raise follow-on rounds from their initial seed investors. These investors are willing to double down and provide additional funding hoping that significant traction can be achieved in another 9 to 12 months. 

As opposed to traditional Series A territory these rounds often are not priced. Y Combinator (YC) in particular has changed how entrepreneurs have raised funds: In 2010 Paul Graham infamously tweeted that ‘the convertible note has won’, and start-ups beyond YC have raised $1 million or more of initial seed funding using a capped convertible note structure.

The vast majority of the follow-on investors seem to be perfectly happy to further invest using these note structures. Rather than demanding debt conversion into equity or a loan repayment, they are willing to extend the duration of the initial loan terms, and caps may be raised further. Actual price setting and governance are pushed out into the future. Implicitly, these additional raises are expected to last long enough to meet all milestones assuming execution is flawless.

Fast forward by a few years: Entrepreneurs will ask VCs for equity investments where multiple millions of dollars have already been spent and the corresponding valuation expectations from founders will be high. In fact, Aydin Senkut of Felicis Ventures spoke of a 'shadow series A crunch based on convertible notes'.

Professional angel investors can afford to just sit and watch if they so choose to. But the Series A crunch may present an enormous opportunity for experienced angel investors to exercise leverage, provided they are willing to take the lead. Professional angel investment groups in particular are in a unique position to exert leverage by pooling resources and applying their institutional and operational know how. With relatively little capital, professional angel investing groups have the opportunity to top up a follow-on seed round, convert debt into into a priced round, and take a board seat.

Ron Weissman implored angel investors to look in the mirror when it comes to angel investing in the seed round. But the postponement of the Series A crunch raises an additional question: Angel investors now have to ask themselves whether they are ready to fill the void created by the convertible note shadow Series A crunch and lead start-ups to the next stage.

The best way to end up with $1m as an Angel?

At the 500 Startups’ PreMoney Conference in June 2013, Superangels and Series A investors discussed trends and disruptive models for modernizing venture capital. 

Accelerators such as Y Combinator are providing start-ups with operational expertise by connecting current classes with their alumni, creating significant impact despite relatively little capital invested.

VCs are under pressure from their LPs to reinvest their management fees and add value to their portfolio companies, and ever shorter technology cycles reduce the half life of the VC’s own operational experience. First Round Capital has taken the YC model and has launched a closed network for all employees in their portfolio companies. Andreessen Horowitz has hired more than 50 people to help their ventures scale.

Investment sizes and participants in the early funding stages continue to undergo significant shifts. The Series A investment sizes of the top VC funds have increased and entrepreneurs are being forced into larger rounds. As Paul Graham succinctly stated, ‘Series A has become the de facto Series B’, and Marc Andreessen added ‘the seed funds are becoming the new VCs’.

Angels have piled into an unprecedented number of opportunities in the past years, resulting in a significant overhang of funded start-ups. Aydin Senkut from Felicis Ventures identified ‘the shadow series A crunch based on convertible notes’ as one of the unresolved and untalked about issues for the coming years.

So what is the best way to end up with $1m as an angel? As for the here and now, Elad Gil answered his own question with ‘start with $2m’ and concluded ‘it’s a bubble when the good looking people start showing up at tech parties.’

Postscript: Jeff Lawson of Twilio gave the most inspiring talk called 'we are software people'.