The Boston Angel Market
[Editor's Note: Chris Sheehan is a managing director of CommonAngels, which is an investor in Xconomy. This post also appears on Sheehan's blog.]
I was recently asked by a couple of early stage entrepreneurs to talk about angel investing in Boston. The angel market around town has always been fairly active and cuts across many sectors, e.g. software, hardware, networking, Internet, life sciences, optics, robotics, medical devices, cleantech, retail, industrial products, etc. There has been discussion lately about the lack of active angel investors in Web-based businesses—and the concerns are legitimate. But the truth is that there is a wide diversity of Boston-area angel investors, each with diverse interests.
For this post, I’ll focus on the market that I invest in and know best—early stage information technology. I’ve broken this into two parts: Finding angel investors to help get the venture started, and getting angel support for the go-to-market phase.
First step: Looking for Those First Angels to Get Started
The initial company creation phase involves building a product/service and testing some of your hypotheses about the business. This is the pre-seed or seed stage, or as one of my members puts it, going “from nothing to something.” For this stage many startups need anywhere from $10k to a few hundred thousand dollars, depending on the type of business (see my earlier post on case studies for this phase).
Around Boston, as in most geographies, there is a shortage of this type of funding—there are always too many startups and seed stage ideas looking for seed capital. I would say, though, that the gap “feels” a bit more acute at the moment for IT startups, in particular Web-based startups, as a result of three factors. First, the financial mess that hit us in 2008, and what it did to our investment portfolios—we are 1/2 to 2/3 climbing back, but it’s left a “psychological” mark in the short term. Second, more innovation, particularly around B2B and B2C Web-based businesses, meaning there’s more competition for seed capital in these sectors. Third, the lack of recent or sizeable IT exits that in turn creates a bench of wealthy high tech entrepreneurs to invest in the next set of entrepreneurs.
Most of the initial investment I see for this stage comes from:
- Founders’ own dollars/unpaid time and family/friends
- Angels who know the founder(s) or are one or two degrees of separation away. These angels have known you for a while, like you, and basically are betting on “you” along with what they perceive as an interesting opportunity. These relationships are business, personal, or both. And this is where there is a wide variation—I’ve seen some entrepreneurs quickly raise $200k from their network. On the other hand I’ve seen young, smart entrepreneurs with potentially interesting ideas who unfortunately don’t have a network, and struggle to raise money except from their closest friends and family.
- Domain experts. These are investors who are working in the entrepreneurs’ space (retail, marketing, EDA, online advertising, restaurants, you name it), and can easily identify both emotionally and intellectually with the problem being addressed. You don’t need to convince them that there is something worth solving. Having said that, many domain experts in the Boston market seem more willing to serve as advisers than as angel investors.
- Most check sizes I see are between $5k to $100k, typically $15k – 25k.
Angel groups will invest at this level, although I’d say most tend to look at the next major funding gap—the early go-to-market stage. Venture firms are less likely to invest at this stage. It’s not that they don’t do seed investing, it’s just not … Next Page »