Is Angel Investing Out of Hand? Joshua Schachter Thinks So

http://blogs.wsj.com/venturecapital/2010/12/07/is-angel-investing-out-of-hand-joshua-schachter-thinks-so/

by yarapavan • 16 years ago

45 61 16 years ago

blogs.wsj.com

chrisaycock2• 16 years ago

He brings-up a good point that most start-ups don't raise enough capital:

“If you raise [$500,000 to $700,000], you can pay the two founders decent salaries, you’re able to hire one or two other people, and that gets you maybe eight months, almost a year, except you have to start fundraising again three or four months beforehand."

pedalpete3• 16 years ago

But isn't it true that most start-ups can't raise more than $1 million without a proven track record or traction?

Doesn't the angel round buy the company time to get either a higher fidelity prototype or actually launch the business and get some traction before going for the bigger Series A?

joshu17• 16 years ago

The context is more generally that a lot of companies are doing the 500-750 now and will all be raising again at the same time mid next-year. Which means many of them are going to fail to raise simply because of the timing.

Andrewski2• 16 years ago

I think a smart "founder" saves his Porsche buying until after the company is actually profitable.

A $50k salary for a founder is about the limit until the company is actually raking in some dough, unless the goal is to feel important and drive that sucker into the ground.

joshu17• 16 years ago

50k is often not survivable. Especially in SV, where everything is expensive.

I agree that if it is possible you should do that. I'm drawing zero salary right now myself.

But more importantly - strong talent is expensive.

ojbyrne• 16 years ago

Or you live in the Bay Area or NYC and hope to avoid poverty.

coffeemug• 16 years ago

Me and my cofounder both pay ourselves $65k/year. We live very comfortably, afford most things we want, and while we do have to worry about money on occasion, it's a very comfortable salary. Another $15k/year or so would help alleviate that, but really isn't necessary.

A bigger problem is that talent is very expensive. A top-notch engineer just out of college costs about $120k/year when you factor in insurance and other expenses (this number will likely go up even more). A senior engineer can easily cost $150k - $180k/year. That's not counting recruiting costs, which are about a third of first year's salary (You can find recruiters that will work for 15-25% but they won't get you any good engineers). Between a team of five, and other expenses, a startup that raises $500k is incredibly underfunded. People say startups are getting cheaper, but the primary expense is talent, and talent is getting more expensive. So startups are getting more expensive too. A superb team of five (with two founders) costs about $700k/year, so IMO raising less than a million at the least is irresponsible.

cvg• 16 years ago

50K may have worked in 2000, but we have 10 years of inflation since then. I think 65K is more in line with the times.

gyardley2• 16 years ago

Nothing in this article is wrong -- but raising that healthy Series A at the prototype stage requires a track record most of us don't have.

Any first-time entrepreneur who reads this and decides to forego today's very-entrepreneur-friendly angel environment to try and raise a Series A instead is doing themselves a disservice.

joshu17• 16 years ago

You can raise a priced seed round with a lead investor without going to an A.

You can raise a convertible note with a lead investor as well.

The article is a BIT confusing.

gyardley2• 16 years ago

Yes, I think the "it's important to have a lead that'll help get the Series A done" advice got overshadowed by the "angel-backed companies don't raise enough cash" comment.

Having a strong lead in my own (priced) seed round proved very, very, very helpful later on - but I still wasn't able to raise much more than $500K on the first go-round.

frederickcook2• 16 years ago

Regarding convertible notes: "“You’re putting in money now and getting a valuation later, whether the company is a failure or a success. If it’s a success, you get the valuation after it’s a success, but you really want the valuation of the company to be lower,” he says. “As an investor, that’s the wrong alignment with a start-up.”"

I didn't think sophisticated investors were doing convertible notes without valuation caps - something this article makes no mention of.

cdixon: "I believe that pretty much every other seed investor who advocates converts also assumes they have a cap. So any discussion of convertibles without caps seems to me a red herring." [1]

Clarification please? (Josh?)

[1] http://cdixon.org/2010/08/31/converts-versus-equity-deals/

EDIT: Congrats on the recent funding and founding!

joshu17• 16 years ago

Some strong deals have no cap.

More importantly, angels behind a note want your valuation to be as low as possible (so they get the most value) - it's the misalignment that's most toxic.

Also, I'm seeing lots of sky-high caps, too.

frederickcook2• 16 years ago

I don't understand. My company recently raised using convertible notes with a cap right around where an appropriate valuation might have been. Now my investors are all interested in seeing the company valuation at the next funding round be a multiple on the cap. Where are the misaligned interests?

Additionally, it seems as though high caps are a separate argument from the "conv. with cap vs. priced round" argument. With either, the market decides what an appropriate valuation, cap, or terms (no cap) a company is able to raise at. Therefore, it is simply the mechanics of the market that lead to no cap notes and sky-high caps, not the fact that the deals are done with convertible notes.

Not trying to be argumentative; I'm really interested in learning why you've taken a strong stance on this.

erik_landerholm2• 16 years ago

Glad we got to him before he decided this...

joshu17• 16 years ago

Yeah, well, you also were in my sweet spot for investing.

There's a huge class of startups that are just so... played out that I can't even bear to hear the pitches anymore.

erik_landerholm2• 16 years ago

Yeah, I hear that. It was/is awesome for us to have you as an investor. Good luck with your new venture. It sounds interesting. You should stop by the office some time. Get a hold of Tommy or me and swing by.

ashot• 16 years ago

which ones?

joshu17• 16 years ago

btw note that this article came out of a conversation about my motives from switching from angel back to entrepreneur.

a better title would have been "it's a tough time to be an angel" or even "now is an awesome time to be a founder"

zaidf2• 16 years ago

Just shows the importance of context. Knowing this, it makes you sound like a smart guy picking founding over angel investing for now.

The title makes you sound like some sour angel investor.

Of course both things could be equally true in real-life. But not equally communicated by a title or an article.

joshu17• 16 years ago

I think I have been pretty lucky as an angel investor.

I think right now a lot of not-great stuff is getting funded, and it's very hard to figure out who is good with all the noise. I do think social signal is valuable and important, and that information is gone now.

I just think it's a MUCH better time to be an entrepreneur - there's a lot of easy angel money out there!

joshu17• 16 years ago

Huh -- they changed the title!

Is Angel Investing Out of Hand? Joshua Schachter Thinks So

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