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.

Image by: PhillipC

Talk with experienced angel investors, and you’ll realize that unless they have a trusted syndication partner across the border, proximity still matters.

True, tech advancement and the falling cost of communication might have enabled investors to invest farther from home, but the effect might not be as significant as we think.

After all, trust and face-to-face contacts are essential in angel investing.

Entrepreneurial angel Joshua Schachter, for example, doesn’t invest in companies that are out of his networks (Bay Area and New York). “I don’t like doing deals sight unseen,” Schachter avows.

Similarly, Canadian angel investor Boris Wertz, former COO of AbeBooks.com, which was sold to Amazon.com, told The Globe and Mail:

You need to be selective about it. Stick to an industry you really understand, and pick companies close to home – coaching over the phone is a tough one. You want to see them in person as often as possible.

In 2008, a team of academics from the University of Maryland drew a sample of 136 firms and examined proximity measures [PDF] based on the zip code of investors relative to the zip codes of the startups’ headquarters. They found that investors generally lived close to the companies they backed.

Sixty percent of angels lived within three hours of driving time from the firms in which they invested, and 18 percent were within the same zip code. The researchers also pointed out that pure angel-backed companies (i.e., those that haven’t raised money from venture capitalists) were most likely to be in the same zip code as the angels.

Yes, the sample size is small, but it does provide insights into investors’ preference in regards to proximity.

Why Angels Invest Close to Home

Angels invest for different reasons.

Some invest locally because they want to support local entrepreneurs as they’d been there themselves and want to “pay it forward” within their local community.

Others like Dharmesh Shah, an entrepreneurial angel and the founder of HubSpot, enjoys the welcoming advantages of helping out local entrepreneurs: “One of the side benefits of being an angel investor is that it builds credibility and good will within the local community,” Shan avouches.

For yet others, it’s due to the risky nature of angel investing. These investors invest close to home because it’s easier to monitor local investments and help resolve issues quickly at the first sign of trouble. They believe this helps improve company performance and reduce the risk of their investment.

Jamie Rhodes, chairman of Central Texas Angel Network (CTAN) in Austin, Texas, says: “We invest in Texas-based companies because investors like to drop in on their investments.”

Most investors don’t actually monitor their investment like a hawk or visit their portfolio companies every day, but the ability to do so without having to travel a long distance does offer them a sense of security.

Because they feel more secured, investors who invest close to home are more likely to “rely on trust in lieu of more formal control mechanisms,” according to Venture Capital: Investment Strategies, Structures, and Policies. Those who invest aboard tend to use more formal (and costly) control mechanisms to protect their investments.

Not to Say Angels Don’t Invest Abroad

Having said that, investors are willing to commute to find good deals. As mentioned in the beginning, experienced investors are more willing to invest aboard if they have a trusted syndication partner across the border.

They’re also more willing to back companies located in a distant area that they’re very familiar with or frequently travel to.

Even so, convenience still plays a big role.

As Forbes’ Maureen Farrell writes, “most angels and VC can only go so many places so often so proximity to investors or at least proximity to an easily traveled route helps.”

Don’t Do This Just Because It’s Close to Home

Of course, don’t invest in a company operating in an industry you’re unfamiliar with just because it’s close to home. Without knowledge of the industry, you can’t properly evaluate the real risks and potential of investing in that company. And you won’t be able to leverage your expertise if the company needs help.

But if you must invest in a sector that’s new to you, either due to a strong urge or whatever reasons that captivate you, then check out “Angel Investing: Effective Ways to Invest in the Unknown” to learn how to go about it.

This is a guest post by Christopher Grey, a contributor to TheStreet.com and the co-founder and CFO of CapLinked.

Grey was a senior executive and partner in private equity, finance, and banking for 15 years. He was directly involved in the origination and management of billions of dollars of debt and equity investments.

Other members on CapLinked’s management team include Eric Jackson, former VP Marketing at PayPal, and Dave Schwartz, former CTO at National Payment Network.

Nearly three years after the worst economic downturn to hit America since the Great Depression began, politicians, economists, business leaders, and commentators are still debating how to get the economy moving again.

Unemployment is stuck at 17.5% if you look at the broad measure that includes discouraged workers and labor force dropouts.

Business spending is stagnant.

GDP growth, even though it is artificially inflated by government stimulus, is weak, as is consumer spending.

Main street banks and businesses are still hurting and afraid to take on any risk.

Even state and local governments are slashing jobs and cutting budgets.

The only groups doing well are the Federal government and Wall Street, which is no coincidence since they are one and the same entity.

Yes, that’s right.

It’s well known that the Federal government and the Federal Reserve bailed out Wall Street. What isn’t common knowledge is that the existence and daily operations of Wall Street, the Federal Reserve, and the Federal government are inextricably connected.

They have a deeply symbiotic relationship. Even as Wall Street howls in protest over financial reform and politicians campaign against Wall Street, they need each other to survive.

The Treasury and the Fed need Wall Street to keep the government bond market functioning properly. This is critical to funding everything that the government does.

Wall Street also creates the appearance of a transparent financial market for everything from stocks to commodities to corporate bonds. Of course the market is anything but transparent, but Wall Street and their facilitators and the Fed, Treasury, and the SEC have a vested interested in making people believe that it is.

Regular investors are limited in what due diligence they are even allowed to do on investment in public securities. If investors, especially foreign investors, lost confidence in our financial markets, our entire system would collapse. Like it or not, Wall Street, the Fed, and the US government are joined at the hip.

The unfortunate consequence of this is that you need to go outside of Wall Street to find real capitalism and entrepreneurship. Private companies cannot rely on government backing.

Small- and mid-sized private businesses have the real risk of failure. They and their angel investors are the real risk takers. In the market for private capital, there is no reward without risk.

The good news is that the rewards for taking risk in that market can be larger than anyone ever dreamed. This is especially true in technology. Even during this terrible economy of the past few years, investors in private technology companies such as Facebook, Zynga, Mint, Linkedin, Quora, Twitter, Groupon and many other businesses have reaped extraordinary returns—returns that Wall Street can’t match.

Angel investing beats investing in Wall Street because it provides a chance to make significant money and you can do as much due diligence as you want. Even better, you can personally get to know the people running it.

Obviously there is also the risk that you can lose money. Any investment in a private company whether small or large, no matter what industry, and no matter how much due diligence you do, is a risky bet. However, you will at least have more control over your own analysis rather than just accepting what is spoon fed by Wall Street and will benefit more on the upside if the business does well.

Admittedly, I’m biased in speaking about this topic. I’m a co-founder of a software business called CapLinked. CapLinked is a secure, collaborative network for private companies, investors, and advisors to interact with each other.

Companies can use CapLinked to raise capital, do investor relations, and share information with their board, advisors, and key employees.

Investors can use CapLinked to manage deal flow, close deals, manage their portfolio, and share information with their companies and their advisors.

Advisors can use CapLinked to manage their deals and share information with their investor and company clients.

I’m passionate about helping private companies, investors, and their advisors. Capitalism is what this country needs to get things moving in the right direction.

Wall Street is corrupted by its connections to and dependency on government.

Real capitalism is happening on Main Street.

CapLinked is a tool that can help Main Street businesses, their investors, and their advisors to succeed. That’s why I co-founded this business and why I’m writing about it. It’s currently free to anyone who wants to use it. Please take a moment to check it out if you think it’s something that might be valuable to you or someone you know.

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

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.

Image by: Seth1492

There are two models in the field of technology transfer, says one veteran angel investor.

Innovations from research labs are either transferred to established corporations or startup ventures. The goal is to transform innovative technologies into marketable products and applications to promote economic growth and/or create money-making opportunities.

About 80 percent of lab technologies are suitable for established companies and 20 percent for startups, the angel continues.

University Technology Transfer: Traditional Model

In the past, university technology transfer managers predominantly used traditional licensing model as a technology transfer mechanism to generate revenues. Exclusive, rather than non-exclusive licenses, with upfront initiation fees, milestone payments and running royalties were pretty much the only way things were done, Garold Breit, executive director at the University of Manitoba Technology Transfer Office tells Venture Hype.

Universities were reluctant to license their technologies to cash-strapped startups because most can’t cough up the cash required by the traditional licensing model. In occasions where lab technologies were licensed to startups, equity was accepted only as a last resort method of payment.

Startups as Effective University Technology Transfer Vehicles

Garold Breit of UMTTO

Today, forward-thinking technology transfer managers recognize that startups are a powerful launching vehicle for new discoveries. And they realize the force young companies can bring to fortify local economic development initiatives, says Breit.

It’s startup firms, rather than their bigger corporate counterparts, that are the most effective when it comes to translating university inventions into commercial products or processes.

A licensed startup would focus entirely on commercializing the technology. A mainstream company, however, would be distracted by other undertakings. Commercializing technologies that are licensed to established corporations is “fragile at best due to competing projects, possible loss of the champion, change of management, change of company direction, etc.” Caltech opines opines on its website.

Enterprising University Technology Transfer Managers Do Creative Deals

Enterprising technology transfer managers who favor startups aren’t afraid of experimenting different structures to achieve flexibility. They’re receptive in granting co-exclusive and limited-time exclusive licenses. And they’re much more open to taking equity deals and reducing or waiving royalty rates.

Caltech comments: “This is very important to VCs or angels because high royalty rates together with the perennial problem of royalty stacking results in a lower valuation for a company at the time when an acquisition or IPO is being considered.”

According to “Equity and the Technology Transfer Strategies of American Research Universities,” [PDF] accepting equity in place of hard cash helps relieve a startup’s cash flow burden and benefits the licensing university by making the university a part owner of the startup.

Among other benefits, it reduces the time required to generate revenue compared to a traditional license, and aligns the interests of the university and the firm (towards the common goal of commercializing the technology).

These managers aren’t just accepting plain-vanilla equity. They’re making deals with creative configurations of equity, royalties, royalty holidays, and success fees (either in cash or equity), shares Breit.

For example, to prevent dilution, university technology transfer managers are structuring deals in which the university’s final equity stake may increase or decrease, depending on the company’s financial realities; commercialization efforts; technology development progress; and the technology’s attribution to the company’s success and ability to raise risk capital, according to Breit.

But if you think the technology being transferred is the key to successful commercialization, think again.

Next, we’ll reveal what really make or break a commercialization effort; why it’s difficult to commercialize public sector technologies; and the requirements for successful commercialization.

* Special thanks to Didier Leconte of MSBiV for recommending Garold.

On the back of a successful 2009 conference that featured billionaire Sir Richard Branson and 43 other prominent speakers and business success stories, PerfectBusiness is orchestrating an even bigger event this year, The PerfectBusiness Summit 2010, to be held in Las Vegas at Palms Casino’s 2,500 seat concert theater on October 7 – 8.

What the people in this room are doing is creating things which will make a difference to other people’s lives.

- Billionaire Sir Richard Branson at The Perfect Pitch 2009 conference

Watch The Perfect Pitch 2009 highlights.

The PerfectBusiness Summit 2010 is a 2-day event that showcases more than 60 powerful speakers, including world-class CEOs, founders, and business leaders, as well as celebrated investors who represent US$10 billion in investment capital.

This year, our own Joey Lo (Venture Hype) along with fantastic judges like

• John Babcock of Rustic Canyon Partners,
• C. Bryce Benjamin of Tech Coast Angels & Alta Ventures,
• Dan Bliss of PerfectBusiness,
• David Marshall of Santa Monica Capital Partners,
• John Nelson of California Capital Partners,
• Scott Sangster of Tech Coast Angels & OrganicStartup,
• Josh Stein of Draper Fisher Jurvetson & DFJ Global Network,
• Mark Suster of GRP Partners, and
• Andy Wilson of Momentum Venture Management

will once again evaluate pitch submissions received from all over the world. Promising entrepreneurs will win the opportunity to present at the PerfectBusiness Summit 2010.

If last year’s event is any indication, the judges will be up for a difficult task. The quality of talents and pitches PerfectBusiness received in 2009 were astonishing.

Are you an investor? Network in style with other investors and discover promising entrepreneurs at the PerfectBusiness Summit 2010. See a partial list of speakers and attendees and order your ticket here.

We say, give the judges an even harder time. Make them pull their hair out. Challenge them to seek out the bestest from the best.

You in? Enter the pitch competition in any of the 3 categories:

• Start Up businesses
• Established businesses
• Students (college/university)

The Top 3 submissions in each category will each win the following package:

• 2 VIP Tickets to the PerfectBusiness Summit 2010
• Airfare to Las Vegas and limousine to hotel
• 4 nights’ accommodation at the Palms Casino
• Opportunity to present LIVE to the PerfectBusines Summit 2010 audience

The winner in each category will receive:

• Perfect Pitch 2010 Award
• National media exposure
• Investor introductions
• Prize package from Deluxe Corp valued at more than US$2,000

PerfectBusiness encourages you to submit your pitch early to receive feedback or assistance. Last-minute pitches won’t receive this privilege. Sorry.

We were seeking funding that valued our company at US$10 Million dollars. We just received a commitment from an individual putting in another half a million dollars that is valuing our company at US$200 Million dollars. This increase is due solely to the amazing exposure we received and the people we met at The Perfect Pitch 2009.

- Dan Didrick
Winner of The Perfect Pitch 2009

Imagine being the winner of The Perfect Pitch 2010 and receive the funding you need to build your business empire. Don’t deny yourself the chance to experience that “pinch yourself moment”!

Learn more about the event and submit your pitch at the PerfectBusiness Summit 2010 website.

Alliott Cole

It’s no secret that investors fight head over heels for sizzling deals and promising entrepreneurs to increase odds of success and potential returns. But when demand for quality deals exceeds supply, you better come up with exclusive, creative, or effective ways to lure the Steve Jobses of tomorrow.

How to compete for hot deals? Are startup competitions a source of quality deal flow? What are the key terms to negotiate?

From deal sourcing and picking winners to negotiating terms, Alliott Cole of Octopus Ventures shares his perspectives with Venture Hype.

Alliott Cole and Octopus Ventures

Alliott Cole is an associate director at Octopus Ventures (@OctopusVentures) and a director at the British Business Angel Association (BBAA). He’s a broad member of several startups and he devotes his time advising and discovering promising entrepreneurs at the University of Oxford society Oxford Entrepreneurs.

Octopus Ventures is an award-winning early-stage investing firm in the United Kingdom. Its model is unique in that it prefers to back exceptional entrepreneurial teams rather than specific sectors, and co-invests with a private investor group, Octopus Venture Partners, in every investment. The group of private investors is made up of 110 scientists, entrepreneurs, businessmen, and leaders of commerce who can add value to the companies they back.

* Edited interview

Sourcing Deals

VH: How does Octopus Ventures source quality deals?

AC: Most entrepreneurs — around 4,000 companies each year — come to Octopus Ventures directly or are referred to us via the Octopus Venture Partners group. We also receive many introductions via corporate financiers and other venture capital houses.

In addition, I’ve been running monthly “Open Office” sessions in Oxford for undergraduate entrepreneurs and MBA students in the last 2 years. Similar sessions are also held periodically at our London office.

We also actively reach out to entrepreneurs through panels, conferences, and networking events.

VH: Competition is fierce for hot deals. How should investors position themselves as the most suitable/preferred investors for such deals?

AC: Not an easy question to answer!

At Octopus Ventures we look to build enduring relationships with entrepreneurs and to continually help their businesses in as many ways possible.

In competitive situations, we always ask the entrepreneur to do his or her own due diligence on Octopus. We encourage them to speak to the businesses we’ve partnered with in the past. We hope this will give a candid and accurate picture of Octopus and our modus operandi.

As to how should other investors position themselves as the most suitable investor for a deal, I think it comes down to building a strong, equal, and open relationship with the entrepreneur; communicating clearly at every stage of the negotiation; and demonstrating a proven ability to add value to growing businesses.

VH: You also judge startup competitions like the Innovate!100 competition held in March. What do you think of this type of deal flow?

AC: I love meeting entrepreneurs. Their enthusiasm and conviction is inspiring and infectious. If you add in the pressure and expectation of a pitching competition, you often witness something very special.

I’m always impressed by entrepreneurs who can thrive in this environment, articulating their proposition concisely and with force. I think these events provide a great source of deal flow for investors. I try to attend them as often as possible.

Picking Winners

VH: What do you look for in the businesses you invest in?

AC: For the most part, Octopus invests in companies that have revenues but may not be beyond breakeven.

We believe that the team is the single most important factor. We look for effective, inspiring individuals who can infect those around them with excitement and passion of their proposition.

Second to this, we look for companies that can scale quickly into big businesses addressing large markets.

Finally, these companies must resonate with the Octopus Venture Partners group.

To this end, the business must be simple to understand, has a product or service of value, with a clear route to market and a defined customer.

Negotiating Terms

VH: How does the negotiation process work?

AC: Octopus Ventures looks to build strong partnerships with entrepreneurs from the outset and the negotiation process is a critical element of this.

We provide detailed and lengthy heads of terms so that the entrepreneur can negotiate all of the critical terms of an investment at the same time — before committing his or her business.

Someone once described this process as moving in ever decreasing circles until both parties come together at an agreed focal point. We like to do this face to face and in an open and frank manner.

If the process becomes too difficult, we’ll agree to disagree and step away from the negotiation. It’s not in the interest of the entrepreneur or Octopus to force a partnership if either party isn’t directly aligned with the other.

VH: From an investor’s perspective, what are the key terms to negotiate? Why?

AC: The valuation of the business and structure of the investment are key terms.

It’s critical for all stakeholders in a business to negotiate terms that aren’t only fair and workable for the present but also for the future.

Early-stage companies often require several rounds of finance. Entrepreneurs and investors should be careful not to agree to terms that might make the business unattractive for follow-on investment (e.g. unrealistic first round valuations; complex distribution rights; ratchets and/or anti-dilution provisions) or misalign stakeholders when there are key strategic decisions to be agreed (e.g. on an exit).

It’s also important to strike the right balance on governance and ensure that nothing will prohibit efficient decision-making and action.

VH: Entrepreneurs and investors often disagree on valuation. How do you go about negotiating a realistic valuation with these entrepreneurs?

AC: Investment structures like ratchets and distribution preferences can be used to bridge these gaps, but they run the risk of misaligning the stakeholders in the business. And such structures may lead to bigger problems at a later stage.

With this in mind, a frank and fair agreement is always preferable but there’s no quick and easy route to arrive at this outcome.

To date, Schachter has invested in “34’ish” startups. His deal flow includes some of the hottest startups like Foursquare, Square, and Bump Technologies – deals that definitely not your average “junior” angel can get into.

We scoured the forum and found that buried within the Q&As are tips and insights helpful to truly beginning angels. Let’s check out what motivates him to invest, how he got access to such awesome deal flow, and how he “filters the crap.”

Joshua Schachter and Delicious

Schachter says he “never really had the idea of building businesses, just interesting things.” One of the interesting things turned out to be Delicious (former Del.icio.us), a popular social bookmarking service every cool geek and tons of non-geeks are using.

Schachter was an analyst at Morgan Stanley when he started Delicious as a side project in 2003. The social bookmarking site took off quickly and had received acquisition offers in the US$250,000 to US$500,000 range.

Feeling that Delicious would worth more if he’d work on it full-time, Schachter declined all offers, quitted his job at the bank in March 2005, and raised under US$2 million venture capital. The round was led by Union Square Ventures.

In December 2005, Schachter sold Delicious to Yahoo! for a reported US$30 million, according to BusinessWeek.

Joshua Schachter: From Entrepreneur to Angel Investor

Schachter left Yahoo! in 2008 and joined Google in 2009 to take on an engineer role. He says he still enjoys building something interesting every year. More interesting to us, though, is the portfolio he’s been building as a self-proclaimed “junior” angel investor.

The outspoken entrepreneur-turned-angel stresses that he’s a small investor who typically invests between US$10,000 to US$25,000 per company whose valuation is between US$2 million and US$5 million.

He makes it clear that he’s still learning so he doesn’t lead, negotiate terms, syndicate deals nor would he sit on boards. All these are left to the lead investor of each deal. “So that makes me subordinate to people who do these things; they are therefore my senior,” he insists.

What Motivates Joshua Schachter to Angel Invest

Schachter believes that angel investing “pays vast dividends outside of dollars.” He can “get connections, notoriety, experience, exposure, and so on.” He says, “I know about a lot of what’s going on in the Valley right now, for example.”

Other usual suspects are to

• make decent returns;
• avoid getting bored; and
• stay near to interesting projects.

So far, he finds that saying “no” to so many entrepreneurs is the hardest part of being an angel.

Joshua Schachter’s Awesome Deal Flow

A quick research reveals that Schachter has got his hands in deals like Bump Technologies, DailyBooth, Foursquare, Heyzap, SimpleGeo, Square, and Twilio. Mind you, these are high-profile outfits that many “senior” angels would drool after.

How did he get into these deals? Well, the fact that he’s the founder of the widely popular Delicious makes it so much easier to meet other A teams and promising entrepreneurs.

Schachter says:

Foursquare: I knew Dennis from NYC.
Square: I knew Jack from twitter.
StackOverflow: I was on a panel with Joel once.
Canvas: I suggested Moot to TED and introduced myself at the conference.
Dailybooth: Asked for an introduction to me.

Other than that, his deal flow comes from all directions. “One of my best investments came from a chance meeting with the now CEO at a party,” he adds.

But Schachter isn’t fond of email pitches. Unless the entrepreneur in question has done something great (e.g. built a successful company that he’s heard of), like most experienced investors, he prefers to invest in people he knows or has met. “Cold emails rarely turn into anything,” Schachter comments.

Joshua Schachter Believes Proximity Matters

Despite what entrepreneurs want to believe, proximity still matters to experienced investors (except when the investor has a trusted syndication partner across the border). After all, trust and face-to-face contacts are crucial in angel investing.

Schachter doesn’t invest in companies that are out of his networks (Bay Area and New York). “I don’t like doing deals sight unseen,” Schachter avows.

How Joshua Schachter Filters the Crap

And rarely does he invests without seeing a working prototype first — preferably a first version that’s already online and attracting users, rather than a prototype with just a few basic concepts. Schachter says that this “keeps a LOT of crap out of the way.”

He concludes that bad entrepreneurs are those who

• don’t have a prototype;
• will only walk him through the prototype in person;
• won’t even tell him what the product does without a meeting;
• don’t know how to communicate (way too verbose); and/or
• don’t have a clear pitch to deliver.

Coming Up

Next, we’ll look at the kind of deals that get his attention, his observations on round size and deal structure, and some of the fun stuff we picked up along the way.

The article draws upon information gleaned from leading platforms SecondMarket and SharesPost.

“[As] opposed to large institutional investors or the companies themselves, looking to raise capital,” small shareholders who are looking to sell their shares – employees, ex-employees, founders, and early-stage investors like angels and Series A VCs – appear to be generating the most activity on these electronic marketplaces.

And for the moment, traditional secondary investors aren’t really threatened.

Leading Online Secondary Marketplaces Platforms

SecondMarket came on to the scene as a licensed broker-dealer and at the same time SharesPost – an online platform where buyers and sellers of private companies stocks can find each other – made themselves known.

Despite the fact that the future of online secondary marketplace businesses is not yet clear, SecondMarket boasts US$150 million in trades in the first 3 months of this year.

SharesPost itself has clocked up enough interest to register more than 16,000 members, with the average post coming in at the not-so-paltry US$1 million mark.

“In the first two months of this year, members were actively negotiating over US$279 million worth of posts.”

Traditional Secondary Marketplaces Players

Traditional secondary players are normally on the rummage for bigger deals than those offered on these online marketplaces. Even so, Hans Swildens, principal of secondary firm Industry Ventures, said the likes of SecondMarket and SharesPost are a great exposure to new opportunities.

David Watcher, managing director of secondary firm W Capital Partners, said although he sees a market opportunity in online secondary marketplaces, “the firm finds most of its deals directly, not via marketplaces or agents.”

[These electronic exchanges are] in a business where personal connections are often essential. Wachter doubts that any part of private equity or venture capital lends itself to a truly liquid exchange.

“There’s just too much due diligence that’s required and a level of relationship that needs to take place before any deal can be done,” he said.

But SecondMarket head honcho Adam Oliveri is tipping his company and its cousins will “make inroads” in about 5 years, when the venture investor market comes to grips with a new way of doing things.

Your thoughts?

This is the first in a two-part series.

ABC’s reality show “Shark Tank” has helped bring the concept of angel investment to the mainstream. Millions of Americans who had never even heard the term now tune in each week to watch hard-working entrepreneurs pitch their investment proposals to self-made millionaires.

In the show, entrepreneurs are forced to sell their ideas and themselves before an imposing panel of investors. These small business practitioners must ask for a specific amount of money from the investors, who in turn seek a percentage of ownership stake.

Entrepreneurs typically unleash a torrent of impassioned pleas, tears and promises of future profits. The sharks, meanwhile, poke, prod and push to find holes or weaknesses in business plans and revenue models, all the while jockeying for position on the really standout pitches.

In essence, it’s reality television at its tension-building best. Too bad it’s giving viewers a warped view of what angel investment is really about.

Here are five ways that “Shark Tank” gets it wrong, along with the bad lessons it’s teaching entrepreneurs and angel investors.

1. Pre- and post-money valuations

In one episode, an entrepreneur says he is seeking $250,000 and will give up 1/3 of his company. The investor then questions the entrepreneur, asking how he can justify a valuation of $750,000 when they don’t have much in sales.

Here’s the problem: The shark isn’t correct in his valuation. The entrepreneur is not valuing the company at $750,000. He is valuing it at $500,000. This is the pre-money valuation or the valuation before the investment. Once the investment is made, the company would be valued at $750,000 — with $250,000 of that coming from the investor. And that $250,000 would get 1/3 of the post-money valuation. So the entrepreneur should not be forced to justify how the company is worth $750,000.

Instead, he should need to justify a $500,000 current (or pre-money) valuation.

2. Wacky company values

In the same episode, the investor claims valuations are based on a multiple of revenue or profits. However, this is not accurate in a startup or early-stage company.

Valuation amounts are generally placed on other things such as management, market potential, intellectual property and a few other key essentials. Sales can help justify a higher valuation, but they are generally given very little weight for startups and early-stage companies.

3. Unrealistic time frames

On “Shark Tank,” investors and entrepreneurs shake hands and seem to agree on a deal very quickly. But deals of any real merit are very rarely done without a significant amount of due diligence to help verify claims, checking out the entrepreneur and other things common in any due diligence process.

The idea of a quick shake and a sudden influx of capital runs counter to the measured and deliberate nature of angel investing. Angels didn’t make money by blindly rushing into business deals while relying on gut instinct alone.

4. One-track negotiations

When entrepreneurs and sharks are negotiating a deal, the focus is entirely on the valuation of the company and the investment amount. While these are clearly important to both stakeholders, the terms of investment deals in the real world of angel investing include a wide array of other cornerstones. We’re talking about things like stock options, liquidation preferences and so much more.

5. Adversarial relationship

For the most part, “Shark Tank” makes it seems like angels and entrepreneurs are pitted against each other. But it’s really not a zero sum game. Both sides are fighting earnestly for the same thing — to build a successful company with terms that provide mutual benefit and long-term growth.

Stay tuned for Part 2 of the series.

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