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!

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

Over the past 30 years, Zwilling has led technical business transformations, held a wide range of tech management roles, as well as done due diligence and funding analysis for investors. Though he does little investing, Zwilling has a world of knowledge to share with new and aspiring angel investors.

Zwilling is a member of the Arizona Angels Venture Group, managing partner of Southwest Software Ventures & Consulting, CEO & founder of Startup Professionals, and advisory board member for several startups.

* Edited interview

VH: You started your career as an executive in software engineering. What’s your story?

MZ: My initial career was with IBM, where I held many positions over the years in sales, technical support, services, and software development. I was part of the early IBM PC Development team in the early 1980s that worked with Bill Gates, and many other industry executives. I managed software development for early versions of PC DOS, and later software test tools, compilers, and applications.

I left IBM in the 1990s to work for a couple of startups in Silicon Valley and learned many things about software development, investing, and startup operations. About 4 years ago, I moved to Phoenix, AZ, and decided to focus on the business side of startups, including joining the local angel investment group.

VH: How do you identify promising opportunities? What are the characteristics?

MZ: Opportunities come to me through the angel group, through my blog, and other personal contacts. Like most investors, I look for a solid business plan, and give high priority to the qualification of the startup executives.

Investors invest more in the people, than the ideas. Also, I’d only invest in local opportunities, because I like to “touch and feel” the company and key people.

VH: When investing in startups, what terms would you insist on, if any?

MZ: There are no magic terms. Every case is different. Like most investors, I tend to focus on the percent of the company offered (valuation), and like to see traction — some revenue and customers to show a proven business model before investing.

VH: How would you explain the due diligence process and funding analysis to Kevin, a new angel investor?

MZ: Due diligence is just independent verification of as many facts as possible, and validation of the startup executive backgrounds.

The process involves talking to all the key players in the startup, calling their references, talking to industry experts and customers to validate their claims, and logically analyzing their business plan and financial model. It’s hard work, but doesn’t really require any special skills.

VH: How would you explain “proof-of-concept” to Kevin? How does he know whether a startup’s idea has passed proof-of-concept?

MZ: “Proof-of-concept” for the product means at least one of the products has been built, tested and works.

“Proof-of-concept” for the business model means that at least one has been sold for the normal price (give-aways don’t count), and has the expected profit margin.

Both of these are important and easily verified.

VH: Kevin is presented with the opportunity to become a member of the board; what can you tell him about the formalities, if any?

MZ: The biggest concern these days is liability of board members for company problems. He should make sure he’s indemnified and insured against liability. All else is like a normal employment agreement.

VH: Kevin is planning to make a small investment of US$10,000 and he wants to know how big a slice he should get. What should he do?

MZ: With a small investment like $10,000, he’ll be a minor player. As such, he should follow the lead of the major investor to get a proportionate share. Major players will absorb the cost of valuation validation.

VH: Kevin wants to learn more about various deal structures. What can you tell him?

MZ: All investors expect preferred stock, to get first shot at any proceeds if the company is dissolved or sold.

Convertible notes are a good alternative in early-stage investments if the valuation is unknown now or very low.

VH: He also wants to know which structure you prefer. Why?

MZ: Preferred stock – for reasons listed above.

VH: Kevin is now going to invest US$100,000. He’s worried about dilution and would like to know if there’s anything he’d do to prevent it.

MZ: Nobody can prevent dilution, if the company gets into trouble and needs more money than planned. The alternative is to watch the company die. Would you rather have a larger percent of nothing, or a smaller percent of something?

* Martin was recommended as an interviewee by Clynton Caines.

Link:

• Startup Professionals Musings

The main argument for a shark-fee-based pitching system is to cover costs and weed out frivolous entrepreneurs. The rationale is that if an entrepreneur is serious enough to pay thousands of dollars to pitch to an angel group then his idea must be worth hearing.

True, some entrepreneurs might see this as a shortcut to get in front of the investors, but many promising individuals simply look elsewhere or find a way to look elsewhere. They don’t buy opportunities; they create opportunities. And investors in such angel groups miss out on what could be a solid investment.

I’m not suggesting that all angel groups that charge a fee are scams. For some, a cost of several hundred, max, might be justified. But asking cash-strapped entrepreneurs to cough up thousands of greenbacks is a whole different story.

Real angels create wealth by investing in promising startups, not by charging entrepreneurs pitch fees. Set investment guidelines and look at the text or video submissions you receive. You can quickly tell who’ve done their homework and followed your criteria. Weed out those who haven’t. No need to put a ridiculous price tag to help make this assessment.

Shark hunters like Calacanis are out there. It’s just a matter of time sharks are turned into shark fin soup.

Note: Angel Capital Association (ACA) has published some guidelines for entrepreneurial fees [pdf], which include a survey and the association’s recommendation to angel groups regarding charging fees:

The fees should be no more than a few hundred dollars for applications and no more than [US]$500 for presentations. Transparency to entrepreneurs is of utmost importance, so full information about fee amounts and what the fees are for should be included on the group’s home page and/or other prominent portions of the site and other important promotional materials.

Based on a 2008 survey of ACA member groups’ fee practices, 62.2% don’t charge any fees. For the remaining 37.8% that do, application fees range from US$55 to $250 and presentation fees range from US$175 to $750, with two “outliers” at US$1,500 and $3,000.

But if you’re meticulous and are up for the challenge, you may consider managing angel groups as a career. Today, Silva recounts how he got into angel group management and suggests the best way to get involved.

* Edited Interview

VH: What drove you to become an angel group manager and founded Angel Capitalist? What’s your story?

PS: Short version: I was a physicist. Graduated college and co-founded All inPlay, an online game company focusing on the blind and visually impaired. We ran out of money and went into a bootstrap, no-salary mode. My former mentor had just founded an angel group and needed help. He made me his partner in the angel group after a year.

A year later, my mentor raised a few millions and launched a new business.

Another year later, I realized that managing multiple angel groups could be a fascinating and rewarding career and launched Angel Catalyst.

Yet another year later, I consulted with a group of angels and helped them design what would become the Boynton Angels of Worcester MA.

VH: Say an angel group is interested in hiring a professional manager; how are angel group managers compensated? For example, what’s the structure? By monthly salary derived from membership dues, a percentage fee upon successful exits, or others?

PS: There are a variety of angel groups and compensation structures. The group I currently manage has no affiliated fund; therefore, it pays a flat management fee to Angel Catalyst. Groups that have affiliated funds usually compensate their group managers VC-style, 2/20 from the fund (2% management fee/20% carry).

VH: What advice would you give to those who’d like to become a professional angel group manager?

PS: Intern at a professionally-managed angel group. Ironically, most of them have small budgets with overworked staff. An intern can make a big difference. And if there’s no affiliated fund with the group, most managers will eventually move on to greener pastures. This opens a path for past interns as they may be promoted to paid assistants.

Just for fun

VH: Angel hair or spaghetti?

PS: Angel hair!

Link:

• Angel Catalyst