John May is founding chair of America’s Angel Capital Association (ACA). He’s championed the cause of entrepreneurs and angel investors since realising big organisations weren’t for him, establishing five US angel groups and now working internationally to establish more. He’s co-authored books on the subject, is managing partner of angel investment firm New Vantage Group and is investment director for UK-based global venture fund, Seraphim. He came to New Zealand to meet our angel community. We asked him why?
I loved it when I was here before, but I wanted to come back for longer, not just for a four-day thing… to get a better feel for the New Zealand business community, the angel community, but also the neighbourhood. It hasn’t disappointed.
But to what end, exactly?
I’ve been around the world running the (Ewing Marion Kauffman Foundation’s) Power of Angel Investing series and trying to get a better feel for what’s going on in different countries and how best to collaborate.
We’re not looking for countries that have the best deals to go write cheques, that’s the big fallacy: we’re not running international angel development workshops and building global networks because we’re deal orientated; we’re movement orientated.
What happens when your company wants to go from here to a bigger market in Southern California? Wouldn’t it be nice if there was communication between the angels of Southern California and the angels backing the company here? You don’t want to hire a lawyer in Southern California to tell you how to run a business in Southern California…wouldn’t it be better to have mentors and supporters in Southern California who are co-investors.
So you wanted to come here to build connections?
Yes and more. One of my big things is to get more overseas investors to come to our ACA conference to learn what we are doing.
Here’s some sobering statistics: even in the US – the largest economy in the world, the largest venture capital community in the world – we believe only about 5% of households are wealthy enough to be angels, not friends or family, but proper angels. And my definition of a proper angel is an individual who invests their own money in a stranger’s business, in a minority position, gives their time as well as their money and there is no one else in-between.
And of those 5% who can, we think there’s only 5% who do. And now we’re getting to the bottomline: not only do we think that only 5% of those who can, do, only 5% of those who do, ever do it in a structured, disciplined, portfolio diversification, networked group way and I bet New Zealand is pretty similar.
You really push the group concept. But why is it so important for that 5% of 5% to be part of an investment group?
What we’ve learnt is that we need to diversify our portfolios, which means getting out of our comfort zones. It also takes more money than we have personally to take a company that’s going to be significant from startup to breakeven and it takes time to do due diligence on the opportunity. Who’s going to make the phone calls? Who’s going to have the meetings? Who’s going to do the market research? So if you decide you’re going to diversify, if you’re going to do due diligence to make you comfortable, and you’re going to have enough money on the table to make it a viable company, what you learn very quickly is you can’t be a solo angel and do this.
What our companies need are cheques for US$250,000 to US$1 million and to deliver that and diversify your portfolio you need to be in a group, even better, a syndicate of groups – that’s the big movement in the US right now – the syndication of groups.
Why is that so important?
Well if you need US$2 million, it may be above the capacity of an individual group, but you may be able to bundle four angel groups or funds together and all of a sudden you’ve got a couple of million dollars, so then the company can finish developing their product or get their first sales and really get on their way.
You wrote the book: “Every business needs an angel” – why does every business need an angel?
The real wink is every high-growth, successful business, as opposed to a mom and pop store, needs an angel because it’s lonely out there doing it on your own; you need a mentor; you need risk capital; there’s so many reasons why angels are important for companies…an entrepreneur gets a board member, a friend, an adviser.
Doesn’t it depend on the angel they get?
Yes, and it depends on the entrepreneur. Some entrepreneurs just give lip service to the help; they really just want the money. Then there’s the lip service of an angel who says I’m going to be your friend, I’m going to be your adviser, I’m going to be available and then doesn’t answer the phone. It doesn’t always work. But it’s an art not a science.
The real wink is getting the right angel with the right entrepreneur because some angels can be great board members, but aren’t good at helping to find staff, sales or marketing; while some are good as a shoulder to cry on, but aren’t good at financials; some are good for startup and some are good for growth companies. That’s another reason why groups are better than individuals.
The right angel should always be a joint decision between the entrepreneur and the investors. There should be a chemistry between them and there should be a staging of the need, so the right investor for the company at the right time.
Should angel investors always have representative on the board?
Advisory boards are very important, but companies don’t need boards of directors until they’ve grown a little bit.
It’s also very important for [the chosen investor representative] to have a way of communicating to the other angel investors, so the entrepreneur doesn’t have to waste their time communicating with all of them.
What’s the most common mistake entrepreneurs make when they seek investment
Thinking they know it all. It’s quite rare to find a coachable, industry-savvy, less egotistical entrepreneur their first time around.
I’m a big believer in investing in second-time entrepreneurs. A serial entrepreneur is a wonderful thing to invest in, because someone has already paid for their mistakes the first time round. But that’s another thing that’s fascinating about here: New Zealand is a place where almost everyone is a first time entrepreneur.
Entrepreneurs need to understand the first thing angels look for is management, management, management; the second thing is a large market; and the third, if we’re smart, is the product or service, the technology, whatever. Yet most entrepreneurs want to sell us on the fact their thing is faster, cheaper, better, slicker, more fun first. But we invest in the jockey not the horse.
The problem is an entrepreneur has to have the dream and the ego to handle it. So there is a natural tendency to want to invest in someone who has a lot of confidence and a lot of energy. But if they are really going to grow their business into a significant company, they need to be humble enough to understand they can’t know everything: they are going to have to hire people; they are going to have to listen to people, so finding someone who is coachable is important.
What’s the most common thing angels do wrong?
Hearts over heads… and not providing enough tough love once we’ve invested: are you being direct enough; are you talking about the exit; are you educating the entrepreneur; are you telling it like it is instead of waiting until it gets worse to say something? That’s why you have to have the right chemistry; you can’t be in awe of each other. The entrepreneur shouldn’t think we’re just money and we shouldn’t think they are running the company so we shouldn’t give them our frank opinion.
Why do you love this area so much?
It’s the people. It’s the entrepreneurs. They are so important because they make businesses; they make money. We benefit from the vision, the energy, the business model of the entrepreneur…so the excitement for me is being a part of this journey.
Plus it’s what it does. It boosts any economy, any city to find a way to finance innovative new technologies and products. Economies will go backward if they don’t stay in touch with newer, faster ways of meeting their needs. And it creates jobs, futures. Major corporations are net job losers; they cut costs, find efficiencies. All the research shows startups and SMEs are the net job creators of modern economies.
But angels also have to make money in the end or it’s a losing proposition and will fade away.
What should we be doing more of in New Zealand to improve our angel ecosystem
Find as many ways as possible to educate the media, the government, the wider community that supporting high-growth companies matters; make people aware of the benefits to the entire economy of making this work, of encouraging more entrepreneurs, of making smarter entrepreneurs and of helping to make more and smarter angels.
We need to encourage more angels to increase the amount of capital available, because the more capital there is available the more likely people are to diversify and thus the more capital there is for different sectors to develop new products, and we need more angels to bring different skills into the mix. There is so much going on in social media and some of the new technology, for example, that you almost have to find a way to search out the recently cashed-out, under 40-year olds because they can make a material difference to understanding the current consumer market for those sorts of companies. It’s also hard to be an investor and help an entrepreneur and do due diligence on them if you don’t understand what they are doing.
We tend to talk to ourselves far too much.
By Lesley Springall