have their own well-structured ways of doing things like forecasting market potential for a new venture—practices that can be worlds away from the approach angel investors take to evaluating nascent businesses that may still be looking for their first customers.
Working with a diverse team through SAC, Tan says, “has opened my eyes to the range of methodologies one can use to evaluate markets and businesses, and make those projections. They [the other SAC participants] each bring slightly different viewpoints as to how to find big winners.”
The SAC participants narrow the field to six finalist companies who present at the culminating conference. They select a winner to receive the investment, usually in the form of debt that converts to equity when the company raises its next round of capital. (SAC participants learn about deal structuring, too, and smaller groups may also decide to make separate side investments in the finalist companies.)
Broader impact
It’s too early to say what impact SAC is having on the ranks of active angel investors in Seattle.
A “very small minority” of new members in Alliance of Angels last year came from SAC, says Ngo. And representatives of Element 8, TAGS, and Keiretsu Forum Northwest, say they know of no SAC members who have joined their ranks, though some have attended meetings as guests. The existing angels expect it to take time for new angel investors to gain confidence and step up their activities. It can take two to three years for people to find out whether angel investing is right for them, Ngo and others say.
The experience in Oregon suggests that programs like SAC could eventually make a difference, however. Wiltbank, the Willamette professor, says he hasn’t seen any empirical evidence, but has noted new angel investors and more activity in the areas where the conferences on which SAC is modeled have been running for longer.
The model of educating new investors through the course of an actual investment began around 2005, when organizers of Oregon Angel, an education conference and startup pitching event begun in the late 1990s, formed a fund to invest in the winning startup. About a dozen investors in that fund—some of them rookies—made up about a third of the initial investors in the Oregon Angel Fund, a group that now numbers 170 and has $7 million to invest this year, says founder Eric Rosenfeld. Since then, the new investor conferences have been a steady, if small, source of new members in the Oregon Angel Fund.
“Almost every year there’s one or two people that ask to join the Oregon Angel Fund from one of those events, people we haven’t met before,” Rosenfeld says.
If there is one concern with programs like Seattle Angel, it’s that it is conditioning new investors to think that angel investing means making the occasional $5,000 investment. McDonald, whose group has sponsored the similar events in Oregon in the past, applauds efforts to get more individuals involved. But, he adds: “At the end of the day, companies typically need hundreds of thousands of dollars. We need more $25,000, $50,000-plus check writers. … $5,000 a year ultimately doesn’t make much difference in the angel capital marketplace.”
Sechrest agrees, but also sees a role for smaller check-writers like the ones he’s trying to serve with SAC, and his next step is to create a mechanism for them to write small checks more frequently.
Research by Wiltbank and others suggests that angel investors with more companies in their portfolios have better chances of success. Hypothetical investors with $1 million net worth might devote at most 10 percent of their portfolios to angel investments. To spread that $100,000 across a portfolio of say 20 angel deals means individual investments would typically be too small to be worth the effort for even very early stage startups.
That’s why angel investors band together in groups.
Sechrest is now working on Seattle Angel, which would be an umbrella organization including a fund to enable a group of less-wealthy accredited investors to pool their checks and make more, smaller investments. He hopes to have this fund up and running next year, and sees it as another way for the broad population of people with more than $1 million but less than $5 million to make angel investments, and put the skills they may have learned in SAC to work, leading new deals.
“What we’re trying to do with this is increase the bottom end of the angel investing community so we have a strong startup ecosystem,” he says. “To do that… we need to grow more lead investors.”
Seeing success, but taking time
While the impact of efforts like Sechrest’s may take some time to be seen, early-stage investing in Seattle could also get a boost from the region’s recent run of successful initial public offerings. Zulily and Tableau Software went public in 2013 and watched their stocks soar. Zillow did so in 2012. Employees with stock options could become tomorrow’s angel investors, bringing with them the perspective and experience of being inside a company during its high-growth phase.
Libes is among those hoping that the wealth from these companies “will recycle faster than the Microsoft and Amazon wealth.”
Keiretsu’s McDonald adds “there’s money definitely spilling out” from the wealth those companies created. The IPOs have had a clear positive psychological impact on area angel investors, he says.
“Having Mark Vadon make half a billion dollars in one day is pretty sweet,” McDonald says of Zulily’s co-founder, whose 30 percent stake in the company was worth more than $1.2 billion by the end of the first day of trading last November. Venture capital firm Maveron also had a phenomenal return on its early investment in Zulily, he adds.
That said, McDonald hasn’t seen new angel investors showing up to Keiretsu meetings as a result of the IPOs. Not yet, anyway.
“It takes some time to ripple through,” McDonald says. “It’s definitely out there.”
Chris DeVore, a venture capitalist with Founders Co-op (which just raised $10 million for its third investment fund focused on early-stage Pacific Northwest software startups) and managing director of Techstars Seattle, says investors from other sectors are also paying attention.
“I *am* seeing more non-tech investors dip their toe in the water of early-stage tech investing, so that’s a plus, and I’d attribute it to a generally broader awareness and more positive view of the strength of the Seattle tech ecosystem and its ability to create value for investors,” DeVore says in an e-mail.
However, he can’t point to any specific uplift in investing activity or new angel investors either from the recent IPOs or programs like the Seattle Angel Conference. “I know it takes time for these things to play out,” he says.
Time has also been a factor for Desney Tan, the Microsoft researcher participating in the SAC. “The time commitment is perhaps a little larger than expected,” he says. “But the fun and the impact on my world view was also more significant than I was expecting.”
Two things in particular stick out. He has been surprised at the “raw energy” of the startup scene in Seattle, and of the entrepreneurs he’s encountered. He has also come to realize that angel investing can be an intensely personal experience.
“We’re not dealing purely with businesses and numbers here. These are people with dreams,” Tan says. “We’re really … enabling these dreams, and doing it with something that happens to be an investing tool, but it’s greater than that.”
