80 entrepreneurs and 80 degrees

How do you get 80 entrepreneurs to spend two hours together in an 80 degree conference room? Free advice and free beer.
Despite the weather and a pesky motorcade, we had a great turnout for an end-of-summer kick-off of our Entrepreneur Roundtable series. With over 2000 companies applying to the AoA process over the last decade, we felt there was tremendous knowledge in this group that could and should be shared within it. No service providers, no vendors, no solicitors-- just early-stage entrepreneurs the AoA had interviewed. We basically stepped out of the way, let the entrepreneurs get to know each other over beer and pretzels, and put together a panel moderated by Madrona Venture Group's Geoff Entress, featuring DRY Soda's Sharelle Klaus and Buddy TV's Andy Liu. And though more DRY Soda was consumed than beer, we had a lively bunch that wasn't shy about asking questions, just a few of which are noted below:

• How did you support the business before getting angel funding?
• Andy: founder investment from prior exit. Sharelle: claiming to be "cheap" (read: capital efficient), she obtained a home equity loan, used credit cards, and received a small SBA loan (didn't require collateral, just lots of paperwork)
• Takeaway: founders with "skin in the game" inspire investor confidence, and "cheap," in a word, is good (apologies to Gordon Gekko).
  
• What metrics or milestones were critical in getting you funding? (asked Lynn Brewer, Integrity Institute)
• Andy: waited until the company was cash flow positive to approach angels, and also obtained a critical mass of unique visitors to the site
• Sharelle: needed to show sell-through in at least one key distribution channel
  
• Thoughts on convertible notes? (Steve McCracken, Green Couch Conspiracy)
• Geoff: generally tries to avoid--not because of the downside risk, it's the lack of upside (see our previous post on the topic)
  
• Pros/Cons of funding from angels, strategic partners, VCs
• Andy: with angels the funding tends to be completed more quickly, VC's tend to be focused on ROI, and strategic partners bring additional value to the business, so at the end of the day, if given the opportunity, choose whichever route will grow your business the most quickly and effectively.
• Note: Sharelle was asked about valuation in her angel round, and if she would have increased it if she could do it over again. She noted that while some may have perceived the deals as investor-friendly, she was able to close both her A and B rounds quickly (the first in 3 weeks), so it's hard to argue with that outcome.
  
• How often do your portfolio companies really communicate with you? (Joel Gendelman, NTuitive)
• Geoff: official quarterly reports are sufficient, a monthly touchpoint is even better, and the assumption (right or wrong) is that no news is bad news...so stay in touch!

If you've previously interviewed with AoA and the above was enough to whet your appetite, email us to be added to the invite list and join the conversation. We've planned quarterly meetings and welcome suggestions on both topics and panelists.

Top Ten List

At our most recent Ten Minute Pitch Clinic, we had a packed house and a particularly lively group of entrepreneurs who asked some very timely questions, one of which inspired the below Top Ten List. In Dave Letterman style, we'll do a reverse countdown of what we recommend entrepreneurs ask of any angel organization from whom they seek funding:

10. What are your fees to entrepreneurs? (your time is money, but money is money too...make sure the fee structure is transparent, as there are both for-profit and not-for-profit forums in town...the range of fees is significant, from under $100 to well over $2000).
9. No, seriously, what are your fees? (this is the part where you ask about application fees, presentation fees, cut of proceeds, or any additional obligations or hidden fees throughout the process). For an overview of the Seattle-area angel group's, check out Susan Schreter's article on the topic in the P-I.
8. How long does it take to close the deal? (due diligence is a critical part of the process and shouldn't be short-changed, but expectations should be set for how much time will be required, and over what period of time)
7. How much money did your forum invest last year? (not how much investment did your network "facilitate," not "how much did your members invest in start-ups in general", but "what was the dollar figure of investment made only by your members in deals that you screened")
6. In what stage of company does your forum invest?(seed, early stage, post product, post revenue, growth phase)
5. What is your profile of investments by industry? (high-tech, consumer, retail, real estate)
4. Of the companies that presented, how many received funding from your members? (don't be shy about asking for the average and range of investment either).
3. If I present to your group, how many investors will be in the room? (this is an opportunity to ask not just about attendance but about their membership base....accredited investors? active and experienced angels?)
2. What's your deal flow? (how many companies do you meet with every month? how many companies presented to your organization last year? since your organization's inception?)

And as much as results matter, so does the experience.....so:

1. Can I contact any companies who have recently participated in your process?

For some best practice recommendations, check out this link on the Angel Capital Association web site. But don't just read about it-- ask! What they answer-- and whether they answer-- will speak volumes.

Canadian investing, eh?

Think you might want to foray into Canadian investment? You’re not alone.

According to the CVCA (Canada’s Venture Capital & Private Equity Association ) cross-border investment is increasingly trendy. Non-Canadian investors represent 33% of venture investment in Canadian firms, and foreign investment in Canada is up 67% (Q32006 over Q32005).

At our last AoA Membership Luncheon, Devin Stockfish of K&L Gates gave our group some quick tips on investing in Canadian companies (timely, as one of our presenters was in fact Vancouver, BC-based). While this serial entrepreneur CEO had good traction and a compelling technology (and, as he pointed out, Canadians are just so darn nice), Devin provided some additional reasons we might want to consider cross-border investment.

• The “shred” program (SR&ED, Scientific Research and Experimental Development), providing investment tax credits to provide incentives for conducting research in Canada

• IRAP (Industrial Research Assistance Program),provides business and technical services to growth-stage Canadian companies

However, he suggested investors consider the following nuances:

Canadian tax issues

• Differing treatment of dividends, interest and capital gains
• 116 clearance certificates , which become important with sale of shares
  
• US LLC treatment: treated as a corporation vs. a partnership

US tax issues

• Passive foreign investment company (PFIC) and Controlled Foreign Corporations (CFC):note special instructions from the IRS on taxation of profits

The take away was not to shy away cross-border investing, but to deal with these issues at the time of investment vs. at the liquidity event. The proper deal structure (and legal help) can prevent headaches. Other than that, when you visit the management team in Canada, remember your passport, and that it’s only an urban legend that Canadian beer is stronger.

Congratulations to BuddyTV

One of many entrepreneurs we've interviewed and stayed in touch with over the past year emailed us with the following question:
"Is AoA funding Internet companies? I have been talking to some well known entrepreneurs that tell me Seattle is not the place to be and San Francisco/San Jose is where I need to go."
We'd like to offer both a point and counterpoint in response.

Point: In 2007, we have been up to our eyeballs in "eyeballs" deals.....of 120 screening and coaching sessions we've had this year to date, 23 have been web plays, primarily social networking and social media. If we had a dollar for every early-stage web entrepreneur who referenced the You Tube acquisition, a plan to use viral networking, and ad-supported revenues, well, we'd be about $20 richer this year. As to the suggestion above, of these 23 companies, only 4 were ultimately selected to present to our membership for funding this year. The space is highly competitive, and only the most compelling of these businesses is likely to succeed. However......

Counterpoint: We were thrilled to read in the Seattle PI that BuddyTV, co-founded by David Niu and Andy Liu, received $2.8M in funding from Gemstar-TV Guide International. Andy and the BuddyTV team were one of the exceptional internet companies that participated in our process, presented to the membership, and received funding. He comments: "We are very excited about this round as it validates what we've always believed is happening both online and on Television - strong demand for entertainment to be delivered closer to fans. Because of the strategic nature of the financing, we believe both the capital and relationship with Gemstar-TVGuide will accelerate the Company's growth significantly over the next year. We'd be remiss not to mention that Alliance of Angel member Geoff Entress has been a huge supporter of BuddyTV from the beginning and continues to be a valuable member of the team." BuddyTV leverages several advantages that position the company for success: the right combination of market drivers, a team with street cred in the space (Niu and Liu truly understand SEO and viral networking, and successfully led NetConversions to acquisition), and some incredibly strategic partnerships. Congrats to BuddyTV, and continued success. In the meantime, whether you're the next YouTube, MySpace (or Andy Liu), yes, we do interview and fund internet companies.