Navigating the Texas Angel Scene

2017 will be a great year for seed and series A companies in Austin and Texas. Knowing how to navigate the state as a entrepreneur will help in raising funds. This is a follow up to my interview at Startup Grind Austin.

Texas represents nearly 4% of all venture funding in the country and first quarter of 2016 marked the second consecutive quarter in which the venture sector scaled back investing since 2008 and Texas was no different. We saw more pull back in seed and series A funding (30% drop nation wide) throughout Q1 and Q2 of 2016, which was offset by an increase in Series B deals. At the same time the Venture world had an increase in fund commitments from LPs (VC's investors) as 2016 is looking like it will hit $40B (mainly because M&A exits jumped to $100M on average in late 2015 and 2016 and LPs like returns).

The last time we saw a similar situation was through 2010 when funds were tight. VCs wanted more revenue and traction before investing, so Angels too became more metric focused. Luckily we saw exits in 2012 and the LP world started investing in Venture again (mainly large funds and micro funds). VC, flush with cash from excited LPs, started investing more rapidly and that pushed up valuations. The seed round was no longer $250k, but $1-3M. Series A bumped from $1M to $5-10M.

The current Venture industry is yet again flush with cash, but with fewer Seed and A deals (the last 18 months is a long time to go without money, so many startups are no longer in business). We'll most likely see another bump in valuations for Seed and A as investors fight to get in a limited number of deals. For startups this is good for 2017 & 2018, but we have a new segment "pre-seed" (previously referred to as "seed"). The time after friends, family and fools, but before seed - $250k. The pre-seed is where Angels at one time invested and I hope they return.

The last 18 months were not ideal to be seeking investment in the Lone Star state, especially as a software B2C company. But, that is exactly what we did and just closed $2M in seed funding. We applied and were selected as a final company by the five largest angel groups in Texas.  From start to close took nearly 8 months, 74 investor meetings and travel amongst 15 cities and towns multiple times.

Below is our story on preparation and outcome of that experience. I share our story to help other entrepreneurs looking to raise in Texas and for the Angel community to compare each other based on an entrepreneur's perspective. It worries me that the Angel eco-system is becoming less focused on entrepreneurs and more focused on key-criteria (e.g. revenue, high traction, existing lead-investor, pitch deck, etc.). Angel investing should be early-funding-based and pre-revenue, before high-traction and at least some pre-product. As VC gets closer to PE and Angel pushes closer to what was the VC realm, we are leaving opportunities in our own communities without access to capital.

My charge to Angels reading this is to venture out on your own and meet with entrepreneurs privately. Get to know them personally. Find character traits that convince you to be an early seed investor and help that entrepreneur share those traits with other investors. Do not sheepishly follow the group, but become a leader in your own right helping seed stage companies create jobs in your local area. This is a people business, so stop focusing on pitch decks (unless your expertise is sales). Angels are looking for valuations in the $5-12M range and we should be in the $1-2M for both returns and impact.

The Texas Two Step

Texas is home to some great enterprise based companies and exits, which has solidified the focus in enterprise business models in regards to startup investing. That usually means investors are looking for existing revenue, big name venture investors, or maybe a billion-dollar-exit-founder - we had none of those.  However, we did have a willingness to meet with every investor who would let us buy them lunch or coffee.

Pitching to a large network is great because there are many Angels in one place, but that is where the work begins. I noticed many startups felt that getting selected was the goal, but it isn’t. Getting as many businesses cards or contacts for setting up an in-person one-on-one meetings later is the only objective.  

Having that many meetings with Angels requires some efficiency, so I researched the angel prior to meeting and spent our time focused on learning about them rather than my pitch. There are two general types of Angels:

Leads - those who look at a deal on their own and make their own decision irrespective of the network.

Co-investors - those who rely on the network for due diligence and invest only along side the network or a lead.   

Both types of investors are needed and crucial, but knowing when to engage each with a pitch is very important. Co-investors will often make up the larger portion of a round, but won’t get involved until they see a lead of which they are familiar. Part of fund raising is finding the core of co-investors, so once you have a lead you can then return to them with your pitch.

Once we found a lead investor (in our case we found three amazing lead investors) we then focused on narrowing down terms and structure. I didn't know any of our investors prior to fund raising, so don't count on and spend too much time on investors you think will invest due to a prior relationship. After finding lead investors - I was then prepared to call on all the co-investors and sit down again with each of them and give our pitch.

The “Loan” Star State

Texas has been home to an abundance of convertible debt in the past, but over all we did not find a great deal of interest for convertible debt. Originally we were raising with a simple convertible instrument, but quickly changed to a more traditional note. However, we ended as an LLC equity round. The lack of interest for convertible debt could also be due to timing - low funding available swings the terms more in the investor’s favor.

Worth noting is that CTAN had a preference for us to stay an LLC structure, whereas Cowtown preferred C-corp. The other groups were willing to consider different structures, knowing that eventually we would convert to a C-corp. Texas investors are savvy and aware of the IRS section 1202 and 1045, which could also be why they had a proclivity to equity over debt.

Deep in the Heart of Texas

My favorite angel networks focused on people and therefore got to know the entrepreneurs and vice versa. Most startups don’t get funded, but who knows what those founders will do next or what startup they might join next. Helping all entrepreneurs find a potential investor relationships, while learning from one another can pay off in talent-scouting/employment for each other and portfolio companies.

Networks that focus exclusively on pitches seem to have turned the business into a modern day gladiator event where foreboding angels group together in tearing down entrepreneurs one by one until a victor arises. Angel networks should be more focused on networking with entrepreneurs and less on voting for "winners." A vote should equal a soft circle, pending due-diligence.

To an entrepreneur the value of an Angel network is getting as many contacts as possible for setting up in-person meetings later. Some networks are better at this than others. If I could put together a network process it would include CTAN’s office hours (once a month speed dating for investor feedback - free), BAN’s pre-selection due diligence with intern and Angel expert, Cowtown’s well attended one-hour follow-up meeting, LAN’s pitch structure with flexibility for Q&A and HAN’s open forum for entrepreneurs to watch each other's pitches.  

Here is my synopsis of the Texas Angel groups processes of which I pitched, and my take on the experience, in alphabetic order:

Baylor Angel Network (BAN)

1. Application
2. If selected you are matched with a Baylor intern and an industry expert from their network and they thoroughly go through a due diligence process with some ongoing communication.
3. Once selected we then pitched (10 minutes) at Baylor campus and were one of 4 companies (well attended meeting - 100+)
4. The network put us in contact with interested investors directly

My Take: Out of all the groups BAN is the most efficient. It was a breath of fresh air to have a Baylor student intern and an Angel who knew the industry work on due diligence in advance of a single pitch. Great group and process.

Central Texas Angel Network (CTAN):  

1. Application & fee
2. In person video pitch with no Angels present
3. Once selected, moved to a live pitch (10 minutes) and were one of 10 (great attendance, 50+)
4. Moved on to a live pitch (10 minutes) the following week and were one of four
5. We moved on to a due diligence meeting and were one of two selected.
6. After the due diligence meeting we were told interested investors will contact us
7. The network will then try and assign a network member, who may or may not be planning to invest, whom will research the company.  
8. We could send email notices to the group leader, but no direct communication with interested investors

My Take:  As you can see CTAN loves process, which required a substantial amount of time and effort. Twelve weeks and you will still be waiting for direct contacts. Three rounds of pitches (reducing attendance), two extremely low attended due diligence meetings seems like investor fatigue. Amazing group of investors and finding them on LinkedIn and Twitter for cold intros got us more face-to-face meetings and much faster.   

CowTown Angels (Fort Worth)

1. Application and fee
2. Once selected we were invited to pitch at their monthly luncheon as one of four
3. Once selected we were invited to return the following week for a due diligence meeting and work directly with an intern from TCU to learn the depth of the company as one of two companies
4. After the due diligence meeting we were put in contact directly with investors

My Take: Great group that spends a little time in advance researching companies before inviting them to pitch. Their one-hour due diligence meetings are designed for the whole group to get to know the company in depth, so be prepared for high attendance. Instead of regurgitating a pitch, the hour is spent on in depth questions and answers with the group.

Lubbock Angel Network (LAN)

1. Application
2. Once Selected you are invited to pitch (10-15 minutes) in front of their group (well attended group - 50+)
3. The network put us in contact with interested investors directly
4. Follow-up due diligence meeting for in depth questions and answers (large attendance)

My Take: LAN is very under valued. Their leadership works with Texas Tech interns to review the companies and the pitches. If selected, the pitches are limited to a couple, so as to allow more time for questions. The Investor pool is made up of many lead investors who engage you immediately.  The leadership makes a huge effort to connect you with investors.

Houston Angel Network (HAN)

1. Application
2. Once selected you are invited to pitch (8 minutes) at their monthly breakfast
3. After the breakfast you are put in contact directly with investors

My Take: HAN also has a sidecar fund, so one of the more advanced groups, which seems to fully understand the plight of a startup that has no funding and even less time. Very efficient and the leadership helped in connecting with investors immediately. Most networks also separate entrepreneurs during pitches - HAN allows entrepreneurs to intermingle for pitches, which allows entrepreneurs to learn from each other.