2014 - A delayed reckoning, and more uncertainty ahead

2014 was supposed to be a good news/bad news type of year: More tech IPOs than in 2013, but a reckoning for startups facing the Series A crunch. Both pretty much played out as expected: The Dow Jones Industrial Index started at 16500 to close the year end at 17824, Alibaba went public in the biggest IPO ever in August, Whatsapp was acquired by Facebook for $22 billion, private unicorns like Uber, AirBnB and Box continued to raise hundreds of millions of dollars, and Zendesk, Lending Club, GrubHub, Hortonworks, HubSpot, New Relic were just a few of many notable tech IPOs. All companies that went public had been founded a decade ago or so, except for Hortonworks which was only spun out of Yahoo! in 2011.

Until 2013, round sizes increased, and second seed rounds emerged to stave of the Series A crunch. The largest seed rounds included VC participations and exceeded traditional Series A. While late stage fundings seemed to spiral out of control in 2014, it also appeared that valuations and overall activity on the seed funding side cooled off significantly. For the Band of Angels, the overall dollars invested stayed fairly constant, but the number of deals invested in dropped by half - consequently the amount invested per deal almost doubled.

Players in the seed funding game continued to evolve: Accelerators churned out start-ups at ever increasing rates, and the accelerators and their business model went international. The transaction volume on Angellist reached $104 million. The MicroVC market of super angels and freshman funds continued to expand and fill the gap towards Series A, although consolidation may be on the horizon already .

I spent more time on my existing investments versus seeking new deal flow. My own portfolio comprised nine enterprise focused software companies at the beginning of the year, where some had already raised second seeds and now needed to raise a substantial next round. Retailnext/Nearbuy (2010) raised $30m in July and Navera (2010) $8 million in October. I was reminded that getting to a minimum viable product is so easily said, and yet it is so difficult to achieve: Two of my investments (from 2010 and 2011, respectively) were able to get acquihired, and one (from 2013) closed its doors. The only real surprise was a McKayla Maroney moment when a seasoned CEO sent an email announcing that his company would have no cash left in two days. I do want to give a special shoutout to my Band of Angels colleagues Jack Carsten for taking the lead on restructuring of A6, Ken Arnold for looking for the crazy ones, and Carol Sands for teaching a world class course on being ‘The Effective Startup Board Member’ at Stanford.

Several spaces stood out as potential sources of new deal flow: Workflow and productivity tools, wearables, 3D printing, drones and associated systems, healthcare communications involving patients, nurses and doctors, social media marketing and advertising (still!), and HR applications. Three other broad trends: SaaS applications to every buying center, anything and everything as-a-service, and the continuing API-ification of software. Out of the 100+ companies I saw and the dozens I talked to, I ended up making three investments

• Truevault offers healthcare applications a secure API to store health data in a HIPAA compliant way. Jason Wang started the company in June 2013 and was part of the  Winter 2014 Y Combinator class.

• Secured3D’s encrypted 3D printing cloud allows centralized command and control of 3D intellectual property, 3D printers, and users. John Dogru is maniacal about product development, and his Estonia based development team is peerless.
  
• 3ten8 helps mobile operators better understand and optimize their wireless networks and subscribers experience. Miro Salem drinks from the deep fountain of professional experience and is driven by the mission to make the mobile network world a better place.

I authored a dozen blog posts, mentored at the Alchemist accelerator, and shared my experience at the annual Band member workshop ‘Good outcomes and bad outcomes and the lessons learned’. My resolutions for 2015 are much the same as last year: Work closely with the teams, leverage my colleagues in the Band of Angels. and continue to build my network.

My outlook for 2015: caveat emptor. The tech IPO pipeline is still full, but the overall climate continues to be somewhat uncertain. The huge number of seed funds means that there are a lot of companies testing different things, and that there are many copy cats.

Photo credits: dailymail.co.uk

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.