Bruno: Yeah, if you are a foreign investor you need to be patient to make your first investment, but the return could be much quicker than it is in the US.

* This is an excerpt from an interview report. Download full report at Angels and Startups, Don’t Play in China Until You Read This.

Right now, there’s a lot of hot money in China. The differentiation you can make is the people you know on the ground. Being here, or working with people whom have been here for a while, is one of the keys of succeeding as an investor here. I have been able to — and my group as well — to find companies that are both a good investment from a team perspective, as well as from a valuation perspective.

To be credible, to be consistent, and to make sense, you need to be on the ground for a little bit. When you’re confident that you’re working with the right people on the ground, let’s say AngelVest, my angel group, or any other person that you feel is trustworthy, then once you have made the first investment it’s actually pretty quick to…

Photo: ~Brenda-Starr~

Rich: So, the patience comes not so much with the return, but with getting started, making sure you’ve got your feet on the ground and that you’re working with credible people.

Bruno: Yeah, and it’s much easier now than it used to be because you can now easily connect to investors in the US as well as China.

To be confident that you understand the market well enough you need to spend time on the ground. Otherwise you’ll need to rely on other people; however talented they may be, it’s always better if you see the company that you’re going to invest in.

The other thing is investing here in China is no different. Because the market has been educated about this offshore legal structuring, it is not that difficult to invest here in China.

What you have to focus on is actually the same as what you have to focus on elsewhere, which is the team, their talents, and their track record.

And you need to understand the regulatory environment because this is apparently a component that is not as strong as it is in the US, especially in the Internet arena.

* This is an excerpt from an interview report. Download full report at Angels and Startups, Don’t Play in China Until You Read This.

Bill Payne

You just read another story on how quickly certain angels invest and you’re secretly admiring their ability to make decisions on the spot. Now you’re thinking: Due diligence is SO yesterday – screw it and close more deals already!

Do what you want; you’re investing your own money, not ours. But first, check out our interview with Bill Payne, Angel of the Year in 2009. You might want to rethink your “strategy.”

What you’ll learn:

• How much time should be spent on due diligence
• Due diligence process
• Whether angels should speed up the due diligence process and why
• Whether angels and angel groups should hire due diligence service providers
• Payne’s due diligence red flags
• Whether intellectual property (IP) protection is important
• Due diligence on IP
• And more…

More About Bill Payne

Payne co-founded Solid State Dielectrics, a capacitor dielectric materials company, in 1971 and sold it to DuPont in 1982. Having made his first angel investment in 1980, he went on to become one of the most prominent angel investors in the U.S.

Payne’s received the Hans Severiens Award (the highest honor in angel investing in the U.S.) in 2009, and a similar designation as the Arch Angel of New Zealand in 2010.

As an angel educator, Payne was appointed Entrepreneur-in-Residence to the Kauffman Foundation and he’s served on the founding committee of the Angel Capital Association. To date, he’s taught over 80 workshops and seminars on angel investing in five countries.

At the time of writing, Payne’s invested in over 50 startup ventures.

* Edited interview

Time Spent on Due Diligence

VH: As you’ve already pointed out, in a 2007 study, “Returns for Angels in Groups,” angels who did less than 20 hours of due diligence per deal received portfolio returns of 1.1x, as compared with the 7.1x return received by those who spent more than 40 hours on due diligence. So, it does appear that there’s a positive correlation between portfolio returns and the time spent on due diligence.

However, we often hear that good angels make decisions quickly. Some super angels even go as far as to using an “index fund” approach to angel investing. They make a bunch of bets across a wide range of startups, hoping that a few would turn into Facebook or Groupon. Some did, and went on become some of the hottest companies of our time. Their portfolio is diversified, no doubt, but these super angels appear to spend significantly less time on due diligence.

Based on your experience, how much time should average angels spend on due diligence?

BP: 100 hours sounds about right.

Super angels spend significantly less time on everything. Remember, angels invest time and money in portfolio companies. How much time per company can super angels invest when they have 100 companies in their portfolios?

Super angels aren’t typical angels, who invest with their own money. Super angels are just prolific seed-stage investors, most of whom invest from a fund that consist not just their own money.

VH: Some inexperienced angels believe that if super angels are using the “index fund” approach then it must be a good strategy. They might model super angels at a much smaller scale, making small bets on a bunch of startups without doing much due diligence. What warnings or advice would you give to average angels who attempt the “index fund” approach?

BP: Average angels won’t try it because they know better.

New and naïve angels may, but frankly they won’t have enough money to make 100 investments at US $25,000 a pop.

If the wealthy want to invest in 100 untested and unstudied companies, what can I do? They could spend their money on a 10-year cruise around the world!

VH: Yuri Milner and SV Angel recently announced that they’ll invest in every single Y Combinator startup, some 40 startups in total. They’re investing in these startups sight unseen and basically outsourcing due diligence to Y Combinator. How do you feel about that?

BP: Well, how will Y Combinator handle the next 10 people who want to do that? It’s a one-time thing that physically can’t be repeated.

REMEMBER: Super angels are a Silicon Valley phenomenon. There are angel groups and entrepreneurs all over the country. Why focus so much time and effort on Silicon Valley? Let’s talk about trends outside Silicon Valley…in the real world.

Due Diligence Process

VH: You made half of your 50+ investments before joining your first angel group. What was your due diligence process like before joining a group?

BP: Solo angels don’t have the time or sufficient knowledge to do adequate due diligence on all deals, so they do deals less frequently or they do less due diligence. Now I only invest through angel groups.

VH: Can you briefly explain the due diligence process? For example, what does validating the business plan mean? What are involved? How long does it take?

BP: Due diligence is a process for comparing reality with a target company’s business plan.

Groups usually assign due diligence to a team of five or so. Some focus on background checks on the team and the entrepreneur, others validate the technology, size of the opportunity, financials, competitive landscape, and the “must-have” nature of the product.

By talking to customers, we determine if the product is something those potential buyers need or must-have.

All this takes about 100 hours of our collective time.

VH: Some criticize angel groups for turning into micro VC firms because of the relatively long due diligence process. How can angels speed up and streamline the process without skipping necessary steps?

BP: Frankly, angels in groups don’t care what others think about our doing it. Due diligence is clearly important. The 2007 studied you mentioned in the beginning clearly shows the value.

It’ll take a couple of months to validate any business plan. There’s no need to speed up the process. We’re part-time investors. Get over it!

And, we’re not VCs – we do our own due diligence. Are we really being criticized for doing more preparation before investing? Is this really a justifiable position for anyone to take?

The bottom line: We’re part-time investors. Due diligence is going to take a while. Be patient.

VH: Should solo angels and angel groups outsource due diligence to due diligence service providers?

BP: Let’s see…I’m personally investing US $25,000. How much can I afford to outsource? Clearly none of it!

It also can’t be justified for angel groups, who make an average investment of about US $300,000.

Due Diligence Red Flags

VH: What are the top 5 to 10 red flags you look for during the due diligence process?

BP:

• Entrepreneur
• Team
• Size of opportunity
• Competitive landscape
• Amount of capital required
• Customer validated product/technology
• IP ownership (who owns the Intellectual Property)

VH: Some investors believe IP protection is important while others believe otherwise. Which school of thought is correct? What does due diligence on IP involve?

BP: Angel-funded companies never have enough money to defend infringement. This is why the importance of intellectual property is questioned.

Nonetheless, investors seek a competitive advantage. We use our networks to attempt to ascertain the exclusivity and freedom to operate.

Where I find IP valuable is at exit.

* Special thanks to exit strategist Basil Peters for recommending Bill.

Rob Delman (aka "Golden Dude")

Another brilliant guest post by Rob Delman, a professional angel investor and the managing director at Golden Seeds in New York. He’s proud to be nicknamed the “Golden Dude” by his female forum mates.

I have noticed a disturbing trend lately when listening to entrepreneur pitches at various angel investor forums. The investor has a “burning question” that cannot wait until the Q&A portion of the presentation (at least it shows they are listening) and interrupts the entrepreneur.

C’mon people, let the entrepreneurs finish their pitch. There will be plenty of time to ask questions afterwards. Write it down so you don’t forget! We have told them that they only have x minutes to present and they have most likely spent considerable time honing and refining their pitch to meet these guidelines. With interruptions, they will most likely never finish their presentation and then we will penalize them for not being focused and getting to all their slides. On the flip side, I guess this is also a good reason for them not to have a lot of slides. If you are interrupting to “test” the entrepreneur’s ability to perform in a stressful situation, the initial presentation is not the time.

It is our responsibility to be respectful of their pitch and effort. What else can we do (and not do) during and after the pitch?

• Make them feel welcome and comfortable while still maintaining professionalism.
• Praise them when appropriate and give criticism when warranted – honesty is crucial for everyone’s benefit.
• Be accurate in the number of investors in the room so the entrepreneur can bring the correct number of deck printouts.
• If you advertise the forum as an investor event, make sure there are actually investors in the room as opposed to all sponsors and service providers looking for clients.
• Temperature in the room should be comfortable.
• Block out ambient noise from the hallway and adjacent rooms.
• Provide a glass and pitcher of water.
• Make sure tech is set up with remote. Nothing is worse than having a tech glitch at the beginning of the presentation. Discourage the use of “live” content from the internet.
• Put e-devices away – only exception should be computers if you are genuinely using them to view their website or do quick research during the pitch. However, even this will divert your attention from the presentation.
• Have a timekeeper and give them 5 minute, then 2 minute warning. As timekeeper it is your job to start and end on time.

The entrepreneur is already feeling a lot of stress. Let’s not make it worse!

Interested in submitting an article to Venture Hype? Just follow these guidelines to get your article featured.

To give a vivid picture, we asked Paul G. Silva, managing partner of Angel Catalyst and group manager at River Valley Investors (RVI), about his group’s recent syndication effort with 7 other angel groups (North Country Angels, Granite State Angels, Walnut Venture Associates, Boston Harbor Angels, eCoast Angels, Northeast Angels, and Boynton Angels). Silva was generous enough to offer some terrific advice on group syndication process design.

The syndication involves 33 Series A stockholders in total, raising US$1.83 million for Incentive Targeting, a company that presented to RVI in mid-September 2009. The entire syndication process took roughly 120 days and the deal was closed in January 2010.

Here, Silva continues with the interview and talks about the advantage of syndicating early, what he’d do differently if he’d do one thing all over again, under what circumstances he’d go against syndicating a deal, and more.

* Edited interview

VH: What’s the advantage of syndicating early?

PS: This effort was an excellent example of the advantage of syndicating early – by that I mean BEFORE a regional syndication summit.

My group’s team (led by Dr. Widder) liked the deal but didn’t have a critical mass of capital and expertise. We reached out to a group of angel group managers whom I know well, and did so well ahead of the next summit.

This proved critical as it helped get us 2 other key angels: Ty Danco (North Country Angels) and Michael Mark (Walnut).

With their help, we finally had enough domain knowledge to gain real momentum on the due diligence effort. This in turn gave us enough progress to:

• nominate the company to the next regional angel syndication summit, and
• walk into that summit with the due diligence essentially complete and a term sheet not very far off.

Walking into the summit with angels from 3 different groups already behind it proved critical to gaining interests from more groups, and things snowballed from there.

VH: What were the criteria to selecting syndication partners?

PS: Our group had domain expertise in only 1 of 3 critical areas. We needed experts in those other areas and so that was our first priority. We knew that once we had the expertise on board, and assuming we liked the deal, securing funding wouldn’t be as large a problem.

VH: If you could do one thing all over again, which one would it be?

PS: After due diligence and before negotiations, I think I could’ve done a better job if I’d solicited input. I relied on people writing in, but this topic was too important to be very passive about.

I gave our lead negotiator the best data available and, while it all worked out in the end (to his credit!), I can’t help but think the process could’ve gone smoother for both investors and entrepreneurs.

VH: Under what circumstances would you go against syndicating a deal?

PS: If your group has all the expertise and money needed to pull it off, there’s little incentive (beyond diversification of risk) to syndicate.

If there’s plenty of expertise and money to go around, then by syndicating, the angels are diluting their own interest in the company. They’d probably get a better deal by working the deal alone and keeping it all for themselves.

And any other reasons to NOT participate aren’t syndication-related. They’re deal related, at least the only ones I know are.

VH: How would you describe an “ethical angel syndication”?

PS: An ethical one is easy to recognize. It’s highly transparent to the entrepreneur, and it’s clear that each angel group participating is adding value (either domain knowledge, money, or both).

Critical Elements of Angel Group Syndication

While the benefits of angel group syndication are obvious, issues such as conflicts and competitiveness between groups might impede them from participating in deal syndication. Cross-border and international syndication faces additional challenges such as taxation and legal issues.

To enable successful syndication, ACA executive director Marianne Hudson said that a systematic set-up, where groups can get to know each other and build knowledge and trust between each other, is critical.

Such set-up would require groups to:

• reach general consensus on terms;
• develop standard documentation [PDF];
• agree on minimum standards of due diligence, so that when one group brings a deal to the table, the others can trust that some basic homework has been done; and
• sign an angel group treaty [PDF] under which groups promise not to be litigious over due-diligence issues if an investment goes bad.

Most likely, it’ll engage in an angel group syndication, “a practice that allows groups to pool their funds to support larger investments” that are often over US$1 million, reports Robert Buderi of Xconomy.

“Groups are increasingly in discussions about syndicating deals to help existing portfolio companies accomplish the milestones to reach cash flow positive and also to invest in new deals,” according to Angel Capital Association (ACA).

Syndicating deals offers more than just a bigger piece of the money pie. It allows groups to reduce financial risk, leverage the expertise of other groups, and steer clear of venture capital money if one so desires.

However, “securing investment from 1 herd of cats (an angel group) is hard enough,” says Paul G. Silva, founder of Angel Catalyst and group manager at River Valley Investors (RVI). “Trying to get herds of herds of cats (a syndicate) to all meow on key can be… exponentially tougher.”

Let’s see how Silva’s group did it.

A Syndication of 8 Angel Groups

Earlier this year, RVI led a syndication effort involving 7 other angel groups, namely, North Country Angels, Granite State Angels, Walnut Venture Associates, Boston Harbor Angels, eCoast Angels, Northeast Angels, and Boynton Angels.

There are 33 Series A stockholders in total (26 new investors and 7 promissory note holders that converted into Series A), raising US$1.83 million for Incentive Targeting.

The company presented to RVI in mid-September 2009. The entire syndication process took roughly 120 days and closed in January 2010, Silva tells Venture Hype.

The Investee

Incentive Targeting is a company whose “technology allows marketers to gain deep insights into shopper purchase behavior, and to put those insights into immediate action through targeted promotional campaigns.”

In other words, it makes sure “the coupons [customers] get at the check-out register are extremely relevant,” says Silva. The company will “dramatically reduce marketing costs for brands selling to grocery stores while simultaneously allowing brand managers the level of experimentation and analytics that Google AdWords users have taken for granted.”

When asked what made Incentive Targeting especially attractive to all, Silva shares:

In every sector I know of, Big Things Happen when modern targeted marketing shows up. Incentive Targeting has found out how to bring lightning-speed turnaround and vast amounts of personalized data analytics to an industry stuck in the 1970s. If they execute right, the impact could be staggering.

Syndication Process Design

Paul G. Silva

So what’s the trick to successful syndication? Silva offers some fantastic insights into the design and development of angel group syndication process:

Syndicate early. If you need other angels to get to critical mass of capital or domain expertise, then get other angel groups involved when your own group is in the preliminary due diligence, or post-presentation due diligence, stage. Don’t wait until you’ve already got everything done.

1 due diligence team. Unite ALL interested investors from all groups into 1 due diligence team, all sharing 1 set of tools. In our case we all used AngelSoft’s Co-invest feature to make sure everyone was on the same mailing lists and looking at the same documentation.

Go into the summit strong. Ensure you have your champions (from multiple angel groups) in place and ready to attend the summit. Ensure the entrepreneurs are fully informed about the process, e.g. what it’ll take and how they’ll benefit.

Clear roles. With a due diligence team composed of dozens of angels from over a half dozen groups, it’s easy for the process to grind to a halt. It’s critical to have 1 person responsible for keeping communication lines open and processes moving forward.

This is distinct from negotiation or due diligence. Those areas of expertise might or might not lie in the same person. Just because someone is good at negotiation doesn’t mean that he’s also good at facilitating the syndicate, or vice versa. It’s unwise to assume that.

Keep the momentum going. Meetings must be conducted on a fairly regular and frequent timetable (every 2 to 3 weeks). This means you’ll lose some people on any given call, but so long as all the KEY people are on the major calls, momentum can continue to be built.

Want more tips and insights on angel group syndication? Stay tuned for Part 2 of the interview, where Silva recounts the advantage of syndicating early, what he’d do differently if he’d do one thing all over again, under what circumstances he’d go against syndicating a deal, and more.

Made my first angel investment last year and ready to make my second. I’m very interested in this SaaS venture (a startup) but I do not have experience in this particular sector. How should I go about this?

Also, would it be possible to request some SaaS topics?

Thank you so much. I’m a fan!

Thanks, Taliba! It does seem like SaaS is getting sexier by the day, doesn’t it?

Just 2 years ago in 2008, Bessemer Venture Partners said “the emergence of Software-as-a-Service is currently the single most important trend in the software industry and that this tectonic shift in the global software ecosystem is just beginning.”

A year later in 2009, Mint was acquired by Intuit for a handsome US$170 million. The Consumer SaaS startup was only 3 years old at the time of acquisition. Its runaway success nearly burst the SaaSiness meter right off the charts and on it went to become “The 2009 Poster Child of Early Exits” for angel investors.

You bet we’d be happy to cover the basics of SaaS companies in a series of articles! But let’s focus on you in this post.

Understand Your Motivation

First and foremost, you mentioned that you don’t have experience in SaaS ventures. What motivates you to invest in this SaaS startup?

According to Scott Shane, author of “Fool’s Gold?: The Truth Behind Angel Investing in America,” motivations of business angels include:

• to make money
• to get involved with private companies
• to learn new things
• to invest as a hobby
• to find a job
• to help the community
• because a friend of a friend has a business

If the investment amount is small and painless (which is subjective as it’s tied to your personal net worth), or if making money isn’t your primary motivation, then you may simply treat the investment as buying something you like in exchange for psychological return. You know, the warm fuzzy feelings.

But if the amount involved is relatively painful or if your primary motivation is to make money, then it’s best to avoid the unknown and invest in areas that you’re familiar with, so you can draw on your expertise and experience when weighing an opportunity.

Having said that, we understand that investors sometimes just have to get their hands on an unknown sector that they’ve developed an interest in. So read on for some ideas.

Co-Invest

If you’re keen on investing in sectors that you’re not familiar with, you should co-invest with investors who are experts in the field. In your case – someone who knows SaaS inside out. And if possible, start with a small amount.

Note, though, some investors don’t accept “dumb money” — investments from people who don’t have experience in the investee’s industry. These investors only co-invest with people who can bring more than just money to the deal. For example, providing expert advice, helping out on due diligence, and connecting the startup to the right people.

Therefore, personal connections are important. Your best shot is to approach an investor friend who has expertise in SaaS. Ask if she’d accept your investment and let you learn along the way.

Or, you may join an angel group. See if any members would be interested in the deal and let you tag along. Network with fellow angel investors in your group and at networking events. Ask if they, or anyone they know, have experience in SaaS companies and wouldn’t mind co-investing with someone who doesn’t.

Hire a Consultant

If you can’t find anyone with necessary experience, you may hire a SaaS consultant to help you vet the deal. Of course, this would depend on how much money you’re investing. The investment amount should justify the fees paid to the consultant.

Even if you hired a SaaS consultant, it’s not recommended to go it alone. Again, the best is to co-invest with experienced investors. It’s the best way to learn the ropes of angel investing and the best way to ensure the startup will be receiving proper guidance from people who understand the characteristics of SaaS companies.

Be a Good Student

Let’s say an investor friend of yours happens to be a SaaS expert and doesn’t mind mentoring you along the way — congrats! You lucky you — now your work has just begun. You want to do what any good students would do. You want to be prepared. Do your homework and speak the language. You’ll learn more if you make it easy for others to teach you.

We love to learn, especially along with our readers! In our upcoming articles we’ll look at:

• What Is SaaS / Why SaaS Companies Rock / Why SaaS Is Costly
• Enterprise vs. Consumer SaaS / SaaS Capital Requirements
• SaaS Monetization Models
• How to Evaluate Saas Startups
• SaaS Finance / Business Metrics

Like the rest of the content on Venture Hype, this isn’t investment advice. We’re not telling you to invest in SaaS ventures. The purpose of the series is to learn the basics and make it easy for others to teach you, assuming you’ve already decided to invest in a SaaS startup.

Sorry if we’re stating the obvious, Taliba. But some people just don’t understand. We’ll state this over and over again in all the articles in the series, so other readers who stumble on the series wouldn’t mistaken this as investment advice.

These are some of the questions Thealzel Lee will answer in this interview.

Lee is the senior partner of Rocket Builders, a management consulting firm that sponsors Vancouver Angel Technology Network (VANTEC) and Vancouver Enterprise Forum. The firm also actively supports the annual Canadian Financing Forum.

Previously, Lee was an advisor at Science Council of Canada and a management development consultant at United Nations Development Programme (UNDP). She’s also worked on the technology portfolio at CIBC Investment Banking Division.

* Edited interview

VH: You took over the VANTEC’s Life Sciences portfolio in 2006. How did you first get involved with life sciences and subsequently with the angel network? What’s your story?

TL: I was originally in pursuit of an academic career in life sciences – having received an undergraduate in microbiology and seeking a doctorate in biochemistry and immunology – but was seduced by the business world so I obtained an MBA from the Richard Ivey School of Business at the University of Western Ontario instead.

It’s been a great ride since, with stints in public policy, biotech companies, and third world development. I later became an entrepreneur and an investor in real estate.

I began to delve into the world of angel investing almost a decade ago, first as an advisor to local startups, then as a senior partner with the Vancouver-based management consulting firm Rocket Builders, and recently as an angel investor with “skin” in the game.

Together with VANTEC-founder Mike Volker, I manage the monthly angel investor meetings and the pre-screening sessions with entrepreneurs.

VH: What are the unique characteristics of life sciences companies? For example, how are they different from technology ventures? What advice would you give to investors interested in backing life sciences companies?

TL: Life sciences encompasses many different types of products and services in the bio/health sectors – such as biopharmaceuticals, medical devices, bioinformatics, health IT – and bioenergy and other bioproducts in the environment, agriculture, marine and other resource sectors.

These companies operate in heavily regulated environments; and hence, investors in life science companies face longer timelines to exit than investors in not so regulated sectors such as social media and Internet companies.

The metrics for success are also different for life sciences. There’s a strong emphasis on proof-of-concept, which highlights the significance of the science behind the products and services.

The success of the life science company is tied to the achievement of the next regulatory hurdle, which is akin to receiving customer orders in businesses that don’t face the same types of regulatory controls.

Exit opportunities for investors in life science companies often occur when these companies reach a tolerable investment risk and valuation commensurate with their regulatory achievements – and often before revenues are generated.

My advice to investors interested in backing life science companies is to be

• confident in the management team’s ability to execute,
• very comfortable with the science underlying the business, and
• very, very patient for the exit opportunity to occur.

VH: A reader asked:

“Would you advise folks against becoming part-time angels, i.e. maintain a day job and be an angel investor during evenings/weekends? Has this worked for anyone in the past?”

What would you say to this reader?

TL: It depends. Different individuals have different personal reasons to become an angel investor, and these reasons affect the way they participate in the angel investment community.

So, if someone wants to be an angel investor part-time, that’s fine. What’s more important is that everyone understands and accepts the roles and commitment levels of everyone involved in the venture.

If the motives of the angel investor and the entrepreneur aren’t aligned, the relationship – and the venture – will sour very quickly.

VH: Brad Feld of Foundry Group recently wrote a post in an attempt to “define the parameters that qualifies someone to call themselves an angel investor.”

Opinions vary. Some believe the term “angel investor” should be strictly defined. That is, one shouldn’t call himself an angel unless he’s invested a certain dollar amount in a certain number of companies per year for a number of consecutive years.

Others disagree. One argued that some angel investors simply invest quietly in companies they like, however often they like. Not meeting the so-called minimum threshold doesn’t diminish the fact that they are angel investors.

What’s your opinion on this? How would you define an angel investor?

TL: The key is that an angel investor invests his/her own money (unlike VCs and other institutional funds) and isn’t part of the entrepreneur’s “friends and family” source of funding.

It’s not the size or the check that matters either. In my own experience with the local angels, I’ve frequently found that angels who are most capable of writing big checks don’t, and a surprising number of lower net-worth investors do. Go figure!

VH: Agreed. Another thing: Some people invest in their own company and call themselves an angel. No, investing in your own venture doesn’t make you an angel investor. So don’t call yourself that if you don’t want to become a joke.

Link:

• Angel Networker

Delman was the president of Delco International Ltd., a US$76 million manufacturing and distribution company of tableware products for the food service and transportation industries. In 2000, Delman sold the company to Oneida Ltd., the world’s largest producer of tableware products. Since then, he’s become an active angel investor investing in high-potential companies.

So far, Delman has held equity positions in 11 companies and has had 1 positive exit. The rest of his portfolio companies have survived the tumult of 2009 and are still in business today. Delman expects some positive exits within 2 years.

VH: One of the ways to learn the ropes of angel investing is to co-invest with seasoned investors. What etiquette should new investors adhere to in a syndicated deal, in order to avoid doing things that might annoy experienced investors?

RD: A seasoned and professional angel investor is always happy to help a new angel. Other than common sense and professional courtesy, there are no specific etiquette rules that we require. It’s our job to make sure they understand the opportunity and the technical issues of the term sheet. Most of all, we need to constantly remind them that there’s no such thing as a “dumb” question.

VH: Your colleagues and friends at Golden Seeds have given you props on the way you conduct due diligence. When you take lead on DD:

a. What data do you analyze immediately? Why?

RD: The benefit of working on a due diligence committee is that you have people with different areas of expertise.

Some of the first items the team looks at are:

• the funding requirements
• valuation
• historical sales
• forward looking projections
• gross margins

Of course, hard data is only a small part of what we look at. The management team, product phase (alpha, beta, etc.), market size, revenue stream model are all just as important.

b. There are varies ways to do credit and background checks on entrepreneurs. How do you go about conducting these checks?

RD: There are various services that you can employ on the Internet but we always ask the entrepreneur if they’ve ever been convicted of a felony or declared personal bankruptcy.

We also do reference checks with past employers.

It should also be noted that during the due diligence process, we spend a lot of time with the entrepreneurs so you definitely develop a gut feeling about their integrity.

c. How much time should be spent on due diligence for a typical deal?

RD: Of course that all depends on how detailed you want to get, but 4-8 weeks is usually the norm.

Remember that due diligence should include:

• financial modeling
• exit opportunity analysis
• research of the industry
• validation of market size
• competitive analysis
• site visits, and etc.

After all of that is completed, we generate a comprehensive deal memo to be circulated among our members.

d. Any organizational tips that would help speed up the due diligence process while making sure all bases are covered?

RD: You should definitely have a checklist of generic due diligence items to send to the entrepreneur.

Establish a timeline at the beginning of the process and deadlines for submission of specific items.

Try to highlight all your deal-breaker points early on.

e. What due diligence advice would you give to individual investors who are just starting out?

RD: There’s no question that being part of an organized angel group helps in the process. You learn all the right questions to ask and things to look for when evaluating a deal. It’s tremendously difficult to do a good job on your own unless you’ve been doing it for a very long time.

VH: The Golden Rule of Angel Investing from the Golden Dude is …

RD: Have fun and listen to your gut.

Link:

• Golden Seeds
  

Delman is a professional angel investor and managing director of Golden Seeds New York, an angel network that invests in women-led ventures. In addition to Golden Seeds, Delman belongs to 2 other groups in the NY Metro area.

So far, he’s held equity positions in 11 companies and has had 1 positive exit. The rest of the companies in his portfolio have survived the tumult of 2009 and are still in business today. Delman expects some positive exits within 2 years.

* Edited interview

VH: How did you become an angel investor? What’s your story?

RD: In 2000 I sold my business, a 60+ year-old importer and distributor of branded tableware products, to a large public company. After staying on with the acquirer through 2003, I began looking for new opportunities. I looked at franchises and independent businesses for sale but couldn’t find one that “lit a spark.”

One day I read an interesting article about “angel investing” in the Wall Street Journal. I did some research and joined a group in NYC and began my career as a full-time, professional angel investor.

I love working with motivated and passionate entrepreneurs and helping them develop their business!

VH: What drove you to invest in women-led ventures? What makes investing in women entrepreneurs especially attractive?

RD: It goes to the old adage of men retreating to their caves. There’s no question that women make excellent leaders because they’re so collaborative in everything they do.

Joining Golden Seeds enabled me to be part of an organization that has a wonderful process for screening and evaluating deals and performing due diligence.

Over 90% of Golden Seeds members are women, so the entire process is very collaborative. Since the companies we invest in are run by women, we find that the organizations themselves are also run collaboratively with the CEOs being very transparent and open to new ideas as well as our input.

VH: Share with us an unpleasant experience you had throughout your angel investing career. What have you learned from it?

RD: One of the very first investments I made as an angel was in a tech company that was owned by a relative of my attorney. I invested out of obligation without really getting to know the CEO or perform significant due diligence. The lesson learned is to remove any sense of obligation or nepotism from an investment opportunity.

VH: A critical item you look for in a term sheet is?

RD: One overlooked item is often information rights. It’s critical that you make sure the term sheet calls for you to receive quarterly updates and financials. If your investment is substantial enough, you should also try to get board observer status even a board seat.

Next, Delman will share some due diligence tips with beginning angels. Stay tuned.

Link:

• Golden Seeds
  

As an angel investor, have you ever sat in a room listening to a pitch and have had no idea what the entrepreneur was talking about? Do your eyes glaze over while your hands reach for your BlackBerry?

So often, I find that entrepreneurs forget that angels are typically a little knowledgeable about a lot of things and very knowledgeable about nothing. If the entrepreneur is speaking “above” the audience but is still engaging, they may stand a chance of obtaining funding but it is doubtful considering the multitude of opportunities available for angel investment. It is easy of course to put all the blame on the entrepreneur but at the end of the day, we share some of the responsibility as well.

Lately, I have found a very effective way to combat this situation. It takes some effort but if you want to really give every pitch the full attention it deserves, it can be worth it. The vast majority of entrepreneurs submit their applications online via Angelsoft. This is a wonderful piece of software written by angels for angels.

Check with your angel group to get a schedule of presenting companies at your upcoming forum, log onto Angelsoft and see if the entrepreneur has uploaded a video or any other supporting documents. This is also a great time to review their application and do some very light due diligence of the people, product, competitors and industry.

We are all experts at using Google (although personally, I now prefer Bing) so now is the time to show off our skills. Take no more than 10 minutes to enter search keywords based on their application. Also review the company’s website and do a search for the founder/CEO. If you are going to hear 6 presentations, this will take no more than an hour which is time well spent if it enables you to engage proactively with the entrepreneur and ask probing, but appropriate questions during the Q&A part of the presentation.

Remember, it is the responsibility of both the entrepreneur and the angel to come prepared to the pitch!

VH: This is our last post until New Year. Happy Holidays to all venture igniters!

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