The Lowdown on Angel Capital from CommonAngels’ James Geshwiler

1/7/09Follow @wroush

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seven years, at a lower, more realistic, acquisition price than venture funds would require, Geshwiler says. And angels, in turn, like tech companies that require less capital investment to reach the break-even point. When that happens, their initial investments won’t be so diluted down the road by follow-on fundraising.

By the way, Geshwiler says he dislikes the term “angel,” even though the group he runs is called CommonAngels.”It’s a loaded term—it makes the investors sound too nice or too naïve,” he says. He prefers the term “individual investors,” and says the main thing that distinguishes this group is that they want the full return on their investments, sans the asset management fees kept by the managing partners at VC firms (which can be as steep as 2 percent of a firm’s committed capital per year).

But not all angels are alike. Citing a study by the MIT Entrepreneurship Center and Harvard Business School, he divides angels into a two-by-two matrix, with “industry experience” on the vertical axis and “entrepreneurial experience” on the horizontal. Some angels are in the lower left quadrant—low on both types of experience—and are mainly looking for financial returns. But most angels around New England, Geshwiler says, are in the upper right quadrant, with lots of both kinds of experience. The study called these folks “guardian angels”—people who “just sold their company, made a lot of money, and are bored with golf,” in Geshwiler’s words. They have the time and expertise to advise companies on getting through the tough startup years.

Speaking specifically about CommonAngels, Geshwiler said the group’s strategy is to put together investments totaling $1 million to $3 million, usually as part of a syndicate (a group of investors). The plan is to support companies that will need no more than $20 million altogether before they become self-sustaining or get acquired. The group focuses mainly on companies in the New England area that are exploring areas of information technology where the CommonAngels membership has some expertise, and that are likely to reach a “liquidity event” (an acquisition or IPO, in which investors cash out their stakes) within 5 years.

Entrepreneurs submit 30 to 60 plans per month to CommonAngels, and a screening team narrows down the submissions to between one and three that will be presented at the group’s monthly common meeting. For the companies that make the final cut, due diligence and term sheet negotiations are coordinated by Geshwiler himself and his co-managing director, Chris Sheehan. CommonAngels typically takes 25 to 40 percent of a company’s equity in the first investment round. That may sound like a lot, but founders tend to “get too worked up about that,” Geshwiler says. “The dilution in the first round pales next to what happens later,” he says.

While an entrepreneur might think they need a personal introduction before submitting a business plan to CommonAngels, things aren’t so formal, Geshwiler says. “People can submit to angel groups without a referral,” he says. “We all have LinkedIn, and this is not that big a town—figuring out who someone is usually takes only a click or two.”

Geshwiler left the budding entrepreneurs in the room with one parting piece of advice: try to get to break-even on your first investment round. “That doesn’t exclude raising more capital,” he says. “What it means is that you can walk away if someone offers you a lousy [acquisition] deal. It’s a matter of timing. We all want to build exciting companies—the question is how do we do it and not die in the process because the resources were not available on a particular day. I think as an entrepreneur, your best story to an investor is, ‘I can get by on the first round of money you give me, and I can build a great company on the second or third round.’”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • http://www.keiretsuforum.com Todd Dean

    James,

    Excellent article and I feel your comments are spot on! We seeing the same thing here in the Pacific Northwest as well. Thank you for writing this!

    Todd Dean
    President
    Keiretsu Forum Northwest

  • Curious

    25-40% for a first round? and they expect multiple rounds?

    Now how exactly is this different than a VC? seems like they take the same amount but they don’t actually assist in the management