New York Angels Play Fast but Tough in the City’s Startup Scene

6/29/11Follow @arleneweintraub

The New York Angels is a group of 61 individual investors who have invested more than $40 million in more than 70 startups ever since the group launched in 1997. The organization’s vice chairman is Brian Cohen, who himself has a long history of entrepreneurship—the lessons from which he tries to pass along to the new class of young companies.

Cohen was the founding publisher of Computer Systems News and InformationWeek, both published by CMP Publications. In 1983, he founded Technology Solutions Inc., New York’s first marketing and PR agency focused entirely on science and technology. He sold the company to The McCann Erickson World Group (owned by Interpublic Group) in 1997.

Among the New York Angels are some of the best-known figures in the city’s startup scene, including Esther Dyson (also an Xconomist), and First Round Capital founders Josh Kopelman and Howard Morgan.

Xconomy recently sat down for breakfast with Cohen in the heart of Times Square to chat about the New York startup scene, angel investing, and that nagging question that’s on every Big Apple techie’s mind: Are we in a tech bubble?

Xconomy: You are looking for new angels to join your group. Why?
Brian Cohen: We always limited ourselves, but now I’m increasing it dramatically. Generally speaking, the least amount an angel invests in a company is $25,000. If you look at the number of angels that actually write checks and you look at the number of startups that are scalable, there are not enough angel investors. The more smart angel investors we create the better.

X: You make a distinction between angels and smart angels. Explain.
BC: The Angel Capital Association had a conference recently where Scott Case, CEO of Startup America, got up to speak, looked around the room, and said “We need more of you.” One of the bright old angels got up and said “No you don’t. You need smarter angels.” That’s right. If you just have more angels, you’re going to have more bad deals, which leads to more down rounds. If you start with too much enthusiasm, the first round is price pooling—it’s frothiness. The valuation of some of the companies will not be rational.

X: What are the risks of having too many angel investors jumping in to fund startups?
BC: There’s something I call angel exhaustion. It happens when you spend your money too fast. The average amount of time that angels do due diligence is about 14 hours. Measure that against VCs and its not even comparable. But 90 percent of the seed money companies raise comes from angels. Angel investing without due diligence is like unsafe sex.

There are 450 or so angel groups in the country. Some of them confuse what they’re doing with urban development—they want to help the community. But it has to be about making money. That’s where the angel exhaustion comes in. If it’s not about smart money going after smart deals, bad deals happen, and there are no exits. Then a couple years in, the angels sit back and say, “What’s going on here? I’m not getting anything from this.”

X: How does your group avoid angel exhaustion?
BC: Better due diligence. But it’s competitive. To get the best deal, sometimes we have to move faster, which sometimes precludes rational, logical, good analysis. We can get challenged by that.

X: Also angels get disillusioned because they may have to put more money in to a company to keep it afloat, and then when VCs come in for the next round, the angels get diluted. How can angels avoid that?
BC: There’s a whole new thing called early exits. Generally when you consider investing in a company you always think it’s like marriage—it’s for the long term. But logically many entrepreneurs are saying, “Maybe we can build a technology, act as an innovation lab for another company, and sell the company sooner.” That means there are more opportunities for angels to sell. So if the entrepreneurs says they’re looking for an early exit, the angel will say that’s OK. VCs find it hard to do because their numbers are just not in line with that.

X: What’s the process for entrepreneurs pitching their companies to New York Angels?
BC: We have monthly screening meetings. Once they apply to us, we do a quick scan, then we do a screening committee meeting at the beginning of every month. The expectation is we’re going to choose one of the companies to come to a breakfast meeting with us. That breakfast used to be two weeks later, because during non-frothy times, we would spend the next week with the company helping them develop their presentation, so they could make a better impression at the breakfast. But with the need for speed, we may tell them to go directly to the breakfast.

At the breakfast, the presentation is made, then we ask if anyone is interested. Then we go into an immediate review so we can move forward quickly. We’re working hard to be as fast as we can. Then from there, we ask people to start writing checks. Our fastest funding of a company was 78 minutes. We wrote checks immediately.

X: You and I first met at the TechStars Demo Day in New York—one of many business plan competitions held in this city. What do you get out of those presentations?
BC: We’re looking to help foster a smarter, richer startup community. Sometimes there are real jewels coming out of those competitions, as well as out of the university environment. NYU, Columbia, Baruch—New York is a cauldron of business plan competitions. We have funded companies from them. We funded Comixology, which came out of the NYU business plan competition.

X: Do all the startups getting funded in New York signal that we’re in a bubble?
BC: What is a bubble? A bubble doesn’t occur until the wrong people start investing. If angels and VCs are investing, you have to remember that it’s money they’re willing to lose. Bubbles happen when the average Joe on the street starts buying into this it-can’t-go-down theory. We’re nowhere near that.

X: You mean a bubble is when individual investors start buying shares of publicly traded tech companies? What about LinkedIn going public at $45 and skyrocketing to $86 on the first day?
BC: LinkedIn is a great product. I don’t think that’s a good example of a company where irrational exuberance takes over. To some degree Pandora is scarier. GroupMe is scarier. There are no established business models there. That’s where irrational exuberance comes in. You have people pushing these stocks. And when they push too far, it reaches the person on the street, and they catch this wave of enthusiasm. Then you fear a bubble. It’s the wrong people investing for the wrong reasons.

X: Are angels in this city doing a good enough job of distinguishing between great products and me-too ideas?
BC: In New York City, there’s not enough tough love for the entrepreneurs. It’s like you can’t say anything bad to the entrepreneur. I think I want to start a devil’s advocate group. I’ll tell the entrepreneurs, “If you think you have something special come to this group, and we will seriously challenge you.”

X: That’s a great idea.
BC: Our mission wouldn’t be to hurt them. It would be to create a conversation. I think that would be great for New York entrepreneurs.

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