Tag: Angel Investing

Angel Investors – Standing Behind Startups

When Madrona Venture Group was founded in 1995, it did not start by raising a venture capital fund right away. In the early days, Madrona invested with funds solely from the four founders: Tom Alberg, Paul Goodrich, Gerald Grinstein and William Ruckelshaus. It was a “super” angel group, so to speak. One of those early angel investments that Tom Alberg made was in a first- time founder with a plan to sell books on the internet – Jeff Bezos and the company that became Amazon. 25 years later, Amazon has fundamentally changed retail as we know it.

It took four years of investing as angels before the founders decided to raise an outside fund. Building on this history, we, at Madrona, have consistently had a focus on investing in the early stage of companies over the intervening years and have a deep understanding that, for founders, these investors, and other assistance such as accelerators and incubators, at the earliest stages are the most crucial.

We have a long history of collaboration with the angel community here and continue to invest alongside them. Over the past decade, Madrona has participated in 78 deals alongside angel investors, mostly in companies here in our region. In fact, some of our most recent investments have been alongside angel investors, including The Riveter, OctoML and MontyCloud.

The total capital invested by angels in the PNW has steadily increased over the last decade. Alliance of Angels, Keiretsu and Element 8 have been among the most active angel investing groups in the PNW – investing in a combined total of over 1,300 deals over the last decade.

While the individual checks an angel investor or group write may feel small in comparison to the ever-increasing later-stage rounds, that amount adds up. According to Pitchbook, there were 25 PNW angel groups that made investments in 2019, totaling $145M in capital contribution. In contrast, 2009 had 12 PNW angel groups that invested a collective $11M. As part of angels’ commitment through the long run, they participate in later-stage rounds as well. In fact, angel investors participated in over 200 deals that raised $2.8B in the PNW in 2019 alone.

It is important to note that angel investing’s importance extends far beyond capital. While these investments may come in different forms and sizes, a common denominator is the support they provide at a critical time in a new company’s journey. Angels invest early, sometimes alongside seed stage investments from larger funds like Madrona. These investments are personal, ones that the investors are particularly passionate about – and subsequently, angels are known for rolling up their sleeves and getting deeply involved in formative stages. Not only can they be a key factor in reaching the next stage of funding by bringing other investors and VCs to the table, but angel investors provide advice, coaching and network access that remains influential throughout the entirety of a company’s journey. As an example, the Angel Capital Association estimated in 2017 that roughly 40% of angel investors take board seats, and almost 50% have active board advisory roles. In short, when angel investors commit to fostering this growth, they are giving back to the community over the long run – and truly living up to their name.

For those who have yet to take a step into this community, angel investing can be an incredible way to get involved in the rich and vibrant startup community in the PNW. To some, it may seem risky a risky endeavor, rife with unknowns. In many ways, this is the beauty of angel investing; taking a bet on a founding team in an early stage company and helping them navigate growth challenges is an invigorating way to allocate both your capital and time.

A study of over 1,500 angel investors in the US showed that nearly 66% initially got involved in the discipline through angel groups. Participating in these larger groups and communities can create a structured approach, share risk across a variety of investments, learn from each other and alleviate some of the initial apprehension to starting angel investments.

Downturns do affect investing but if history is to be believed, not that much when it comes to angels. Take 2008 for example where angel investing was relatively consistent through the downturn. The total early-stage venture funding raised in the PNW dropped by 13% from the prior year, and again by 9% from 2008-09. However, seed stage and angel investing only decreased by 10% from 2007-08, and actually increased by 18% the following year, bouncing back to pre-recession levels within 2 years.

If we use sentiment as a historical guidepost, we would have expected to see the venture community invest in fewer deals, at lower valuations and increase their focus on existing portfolios. We have demonstrated, however, resiliency in the face of difficulty. And now, more than ever, fostering innovation is critical.

Madrona has always been excited about the technology innovation and start-up ecosystem in the PNW, but today, we are reaffirming our commitment to invest through the downturn. We continue to remain focused on investing from Day One to the long run. As Seed stage investors, we will roll up our sleeves and partner to go the distance together. By extension, that means working closely with angel investors, other seed funds and entrepreneurs in the community.

We will continue to support Create33, TechStars, Madrona Venture Labs, AI2, FFA among other groups that help get startups ready for any kind of early stage funding. Further, we have a roundtable of start-up founders and senior technology executives working with us on our Pioneer Fund. These experienced technology execs are also angel investors. The Pioneer Fund enables them to bring more funding to startups through partnering with Madrona in their own angel investments.

To other members of the ecosystem – angel investors and other funds alike – let’s lean in through this tough period. We have a shared responsibility to help both existing and new start-ups continue to innovate through this downturn. Washington State has led the country in COVID-19 responses in a number of ways already. Together, we have the potential to continue leading by demonstrating our commitment to the start-up ecosystem in the Pacific Northwest.

A Call to Action for Angels in Cloud City

As recent entrants into the Venture Capital world, we continue to be positively surprised by the vibrancy of the start-up activity, the quality of tech talent and the richness of the innovation ecosystem in Seattle. Neither of us are new to the technology scene. Soma has been with Microsoft for a couple of decades since its early years, and Linda was previously at a security start-up in San Francisco. However, VC is a different game and we didn’t know quite what to expect from the Rainy City. It was not long before we discerned that unlike the Bay Area, the Seattle start-up community is tight knit and perhaps quieter, but no less innovative.

Much has been made in the past regarding Seattle’s lack of available early stage angel investments especially relative to the size of the ecosystem and the depth of the city’s talent pool. However, recent data suggests this is changing.

Seattle angel deals grew a whopping 80% (in 2015)

Linda Lian

According to Pitchbook, angel-backed deals grew only 10.6% in California in 2015, compared to a 58.1% increase in the Pacific Northwest. Within the core tech verticals of information and B2B, Seattle angel deals grew a whopping 80%.

Angel investing chart

 

Data: Pitchbook

This clearly indicates that angel funding growth in the Pacific Northwest is not only accelerating, but bucking national growth trends.

The city’s resistance against boom-and-bust investment cycles certainly lies in its strength within the fast-growing cloud space. However, there is a lot more in Seattle’s wheelhouse than just cloud. Seattle is also a burgeoning worldwide hub for VR technology and space exploration in addition to pioneers in ML/AI, chatbots, and natural user interfaces.

 

. . . if Seattle is to fully capitalize on its talent and resources, more of the area’s successful technology execs and veterans must leave the sidelines and get in the game

S. Somasegar

While Seattle’s growth has been remarkable and talent is in no shortage, there is still much to be done before the city’s full potential can be realized. According to a recent BCG report, there are 1.4x the number of angel investors relative to ultra high net worth individuals in the Bay Area. In Seattle, that same ratio is half. The extremity of the comparison must be taken with a grain of salt, as San Francisco’s core cultural identity cannot be separated from the reputation of the city’s startup ecosystem. The age distribution of SF’s wealthy is also likely to skew younger than Seattle. However, this does indicate that if Seattle is to fully capitalize on its talent and resources, more of the area’s successful technology execs and veterans must leave the sidelines and get in the game.

As an angel investor himself prior to joining Madrona, Soma believes angel investing is one of the best ways for a technologist to give back to the innovation ecosystem. This comes not only in the form of capital, but perhaps more importantly in mentorship, guidance and valuable relationships.

somasagar-grid

For angels that are already actively investing, they can also make a more substantial impact by getting involved with great entrepreneurs or products earlier in the funding cycle and not wait for somebody else to “bell the cat”. While Seattle’s strengths in B2B and enterprise software are indisputable, the willingness for the community to step out of its comfort zone to help nurture and develop consumer-facing companies that sometimes have the characteristic of viral growth before monetization kicks in could be the key to Seattle’s next big win.

It is amazing to see the wonderful, vibrant start-up activity that is getting bigger and broader every day. Seattle and the Pacific Northwest have an amazing amount of potential to be a phenomenal technology and innovation hub and we are excited to be a part of that journey.

Commentary: From Angel to VC – Five Things I Learned in the first 100 days

Over the last 10 years, I had been doing — or should I say dabbling in — angel investing. With time and some hard knocks, I ended up with a simple philosophy.

If I liked the founder(s) and thought they had the execution capability and they wanted me to invest, I would. It is hard to spend any meaningful amount of time on this when you have a full-time job — and I had what I call a more than a full-time job at Microsoft during this time. So, it was more like spending an hour or two with the founders and either you invest or you don’t.

A VC investment is a long-term relationship

S. Somaseger

When I joined Madrona Venture Group in November 2015, I was excited to spend more time digging into the new startups and possible investments that had taken so little of my time in the last ten years. I quickly learned that, far beyond the pure scale issue, there is a world of difference between angel investing and venture investing. It has been a fascinating learning experience so far, and I wanted to share some of my learnings and key take-aways that are specifically important for entrepreneurs as they think about growing their company and possibly seeking funding to accelerate their growth.

  1. Investing in a start-up as an angel investor is different than as a venture capitalist. There are a number of common attributes that you look for when you invest in a start-up – team, idea, execution capability, addressable market opportunity and the like. At the same time, some of the angel investments that I have made in the past aren’t necessarily the ones that I would make as a venture capitalist. One difference at the angel investment stage is that we are looking to find entrepreneurs and investment opportunities that will not only be great angel investments but have the potential to be great venture investments as well as big, lasting companies. But as an angel investor scaling to have a meaningful return can be a different equation than as a venture investor. For example, a $50M exit as an angel investor is exciting whereas that may not move the dial much for a venture fund that needs to return hundreds of millions of dollars to its investors.
  1. Every start-up is not necessarily right for VCs and not every VC is right for a start-up. There are many reasons why a particular VC may not be the right fit for a particular start-up and vice-versa. As an entrepreneur, do not take it personally or think you are going to be unsuccessful when a VC says “no”, though there is always value in trying to understand why someone doesn’t invest. As an entrepreneur you want to consider, do you want to build a business that you control solely, do you want to slowly and organically grow and/or do you want to stay small? If so, VC backing might not be a good fit. A VC investment is a long-term relationship, particularly with early stage VCs. Like any other relationship, having a high level of trust and comfort level, a strong alignment of vision and the willingness and ability to be open and respectful in working through disagreements and strategic misalignments are critical for a successful partnership. You want to feel that right off the bat with your investors because, at the end of the day, we are all on the same team focused on building a long-term, sustainable and successful business.
  1. Valuation is an art, not a science. On the one hand, valuation is very important and on the other hand it isn’t the most important thing. I like to say focus on the valuation but don’t fixate on it. There are many things that go in trying to determine the valuation including status of the product, customer engagement and traction, usage and adoption rates, revenue, track record of the founder, etc. The key thing to remember is that 100% of zero is still zero and likewise a smaller percentage of a ginormous pie is still very meaningful.
  1. Raise money from the “right” people for the “right” reasons. There is no fixed formula for when to raise money or how much to raise or at what valuation to raise. One principle that I like is “If the trajectory of the business is going to be significantly better with additional cash, by all means go raise the money.” When you think about which VC to partner with, money is important but is only part of the equation. The value that the partnership will bring to you (strategy, connections, mentorship, accessibility) is equally if not more important. For example, at Madrona, we invest a lot of time, thought and people resources in systematically helping our portfolio companies grow. This value-add is both at the company-specific level and across all our portfolio companies as we connect people and learnings across our portfolio.
  1. Time and money are equally important resources for a venture capital firm. From a venture capital perspective, the size of the investment does not necessarily dictate the amount of time they spend thinking about your business, but if this size is too small, it can discourage VCs from investing. For example if there is room for a 500K investment in a round, but the VC firm usually likes to invest at least $2-3 million in each company, the firm has to decide if it is going to devote the time and resources to an investment that feels smaller and likely has less ownership in a company. While money is a limiting factor for everyone, time is an equally important factor as VCs consider how they can best help all the companies in the portfolio.

As I think about these last few months – every interaction has been one of learning this new and somewhat different world – but what is consistent is the prevalence of cool and innovative technology, great businesses and excellent founders in our ecosystem here in the Seattle region. I’m excited to see where it will all go and remain optimistic about our future as a major tech hub of the world.