Thanks goes to Wall Street Journal‘s Russell Garland for taking us to the recent 2010 Angel Capital Association Summit in San Francisco and recounting how angels and VCs rivaled for the top spot. We all like a good scrum!

According to Garland, attendees listened intently to speeches about the need for angel and VC harmony, and about angel investors’ slow-but-sure rise to fame.

Garland further reports:

An informal electronic poll of attendees found that 48% sometimes look for investments that subsequently will require venture capital and 55% thought relations between the two groups are okay but have room for improvement.

Co-Invest with Angels Only

As exit strategist Basil Peters put it during a passionate speech at the conference, it’s angels’ time to rise above the VC “dinosaurs” and reign supreme when it comes to offering startups the proverbial booster they need to make it to the big time.

“VCs are essentially dinosaurs saddled with too-big funds at a time when entrepreneurs can create companies cheaply and quickly, sometimes over a weekend.” Peters asserted.

Peters has a point. Many startups need only a limited amount of outside capital which can be best provided by angel investors who know when to exit by “selling to corporations hungry for dynamic young companies whose revenue can scale from [US] $10 million to $100 million or more.”

Those who target small exits will find that their interests are better-aligned with those of angels than with most VCs, such as the case of venture firm Charter Life Sciences, which bets on relatively capital-efficient health care companies that can get to an exit on US$3 million to US$12 million.

Co-Invest with VCs

But angels sometimes need to connect with VCs too, said James Geshwiler, managing director of Boston’s Common Angels — even though it took him 5 to 6 years to learn how to syndicate well with venture firms.

Geshwiler later comments:

I think the best answer [to whether or not to syndicate with VCs] is “it depends.”

As our panel highlighted, the decision depends first and foremost on the best financial strategy for the company to optimize value; and second, on aligning the incentives and capacities among the investors.

Neither angel investors nor VCs are one size fits all. Entrepreneurs and both parts of the capital markets need to understand the various trade offs in much greater detail and have much more open discussions these days given the state of the capital markets and of exits.

What’s that saying about keeping your friends close and your enemies in your pocket?

Just kiddin’.

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.

According to Vernon W. Yates, Chairman of Governors, Tech Coast Angels, angel investing is a team sport. In working together, angel groups provide a variety of benefits for both the entrepreneur and the angel investor as these groups bring a diverse set of talents and skills to the table that can be leveraged to maximize the return on investment. And, by participating in an organized group, angels can more professionally identify and fund the most attractive companies. [1]

In reality, the number of angel investment groups is growing substantially throughout the world. Those investors who are seeking to combine their skills and talents with those of others are finding that the networking benefits alone are enough to consider joining one of these groups. But there are other factors that enter into the decision to join a network or not. For one, you must decide just how much investing in startups you want to do and where you want to do it.

Many angel investors prefer to keep their investments local. For some, operating within the network is enough to make more deals “local”, but for others, geography matters, too. The ability to “re-live the startup adventure” is a perk for a number of angel investors who are also entrepreneurs. They want the same level of excitement that they found in their own startup experiences. [2]

In addition, many angels invest by way of referral as a result of the circles they already travel in. Angels also often tend to want to support “local” entrepreneurs as they have been there themselves and want to “pay it forward”. [2]

Jeanne Lee at Fortune Small Business recommends that first time angels should not enter into investments alone as they can get too emotional about deals. She recommends either informal or formal networks to help create more structure to investment deals and to allow the angels to invest smaller amounts in more deals to reduce the overall risk. [3]

Whether you decide to go it alone or work with a group, it is important to understand yourself and what you hope to gain from your investment experiences. If you want 100% involvement, going into an investment alone can often grant you as much access and control as the entrepreneur. But, keep in mind that won’t always be viewed favorably by the entrepreneur.

If you are seeking promising investments that require little time and just a portion of what you are willing to invest, consider finding a group that fits your needs. Understanding yourself and your limits will put you in a better position to enjoy the angel investing experience – no matter how much money you make.

Notes:

[1] Angel Investing Is a Team Sport

[2] Why Angel Investors Tend to Invest Locally

[3] Angel Investing 101

A syndicate of good guys

It’s not uncommon for a group of angel investors to form a syndicate, or for a single angel to join a syndicate, with the purpose of loaning a relatively large sum to a single startup company. (For those of you who are hooked on film noir, who own copies of Chicago Syndicate and The Big Heat, and who consequently believe that the word “syndicate” spells trouble – it’s time to move on.) In the world of finance, there is nothing underhanded or shady about syndicated investing.

It’s a simple concept: a syndicate is an alliance that brings together a large collection of angel investors to invest in a particular startup; they share the risk, and they’ll eventually share in returns from their investment. In most cases, one angel group will take the lead in deciding whether to form an investing syndicate; the group’s leadership will decide who they want to invite to join the syndicate and they’ll coordinate the syndicate’s activities.

None of us is as strong as all of us

Some angel investors say they no longer approach their investments from an individual perspective; instead, they make business deals in association with an angel organization of some sort. Their reasoning is pretty solid. The collective wisdom of the group is focused on screening every startup for potential. Each member of the group brings a distinct set of skills and experiences that will add to the overall strength of the group. And for new angels, working with an angel group is the perfect classroom to learn the ropes.

Angel groups can be formally organized (you call your lawyers and they draw up the paperwork to form an LLC or some other legal entity) or they can be a more informal, member-managed group (you’re probably still going to want to consult with legal counsel). And at some point, an angel group may make the decision to join with another group to take advantage of a particular investment opportunity.

Before you become a syndicated investor, you probably will want to work with a legal expert who specializes in financial services who can put together the details of the syndicate. Then, of course, you must make yourself entirely familiar with the terms of the agreement to ensure that your investment offers many of the same rights and privileges as an individual angel. Along the way, you may find value in the words of poet Alexander Pope, who tells us, “There is a certain majesty in simplicity . . .” (A brief interpretation for those lacking in poetic spirit: keep it simple.)

These shrinking investments have not left angel investors unscathed and some are shying away from making investments. Not only is the status of growth in the market a problem, but some may view now as the wrong time to launch a startup – no matter how promising the opportunity.

For those startups that are seeking seed money, angels are still a primary source for consideration due to low entry barrier, simple and quick decision process, low return rate requirement and flexible time limitation relative to venture capital. In the Chinese market especially, angel investing is taking a more dominant position, especially in high-technology firms.

In reality, now is the perfect time to invest. Valuation is low, helping to produce a better overall return. In addition, this is a great time for angels to invest in syndication. Thanks to the free-flow of exchange of information and deals between angel groups, companies are better prepared with their presentations and angels are more educated about the industry.

Angel syndicates are enjoying strong growth as angels are seeking increasing opportunities to spread the risk through pooling their money. Not only is this good for investment-shy angels, it also benefits those companies seeking investments as syndicates are investing much higher amounts than stand-alone angel investors. According to a survey of Angel Capital Association members, the average pooled investment in 2008 was US$281,000. Individual angel investment ranged from US$10,000 to US$200,000 per startup.

Remember that old saying that you are always safer in pairs? The same is definitely true in investing. It can be scary to go in on a deal all by yourself. It can be especially intense if you are a new angel and the opportunities seem to outweigh the amount of time you have to evaluate each one. In working with others, you have the opportunity to share the burden, even if you do have to share the spoils.

Often dubbed “Smart Money”, syndicate investing allows for not only the pooling of financial resources, but also expertise and skills. By combining incisive business knowledge together with cash, angels of all backgrounds can benefit from working together. This creation of Smart Money is causing the number of angel syndicates to experience strong growth.

If you’re not sure how to get stared with a syndicate, you haven’t been asking the right questions. Use your networking skills already in place to identify opportunities in your field of investments. Others are looking, too and enough of the right conversations will create for you the right connections.