Earlier this year, I wrote a relatively thorough blog post on how my partner Jose Marin and I make angel investments: A SuperAngel’s Investment Guide. While revisiting the topic, I realized a few elements were worth clarifying.
In the article I mentioned how we only focus on consumer facing companies and how we invest in a wide variety of geographies. It’s worth pointing out that our geographic focus is bounded by the nature of the idea, that our investments fall into three categories, that we never join the board of the companies we invest in, and typically don’t do follow-ons.
1. Geographic Specificity:
We invest in innovative ideas in the US market.
If we are going to take concept risk, we don’t want to take market risk. To the extent an idea is unproven; we’ll place a bet on the US market. Should the market prove to be a niche, the US market might be large enough for the company to be a success. Getaround which recently won Techcrunch Disrupt is such an example (and hopefully won’t be a small niche 🙂
We invest in proven models in Brazil, Russia and Germany and to a lesser extent in Turkey, China, the UK and the rest of the world.
If we are going to take market risk, we expect the model to be proven. We don’t have absolutes in terms of what “proven” means, but for the most part we expect the original concept to have reached $100 million in revenues and to be either profitable or have a clear path to profitability given its gross margins and potential net margins. Viajanet falls into this category.
2. Investment Types:
Traditional Angel Investing
For up to 40 companies a year, we are small investors in projects where the funding is led by others. Typically the funding is led by our VC friends (Redpoint, General Catalyst, Bessemer, DN Capital) or our angel friends and friendly early stage funds such as Oleg Tscheltzoff, Team Europe, and Xavier Niel and Jeremie Berrebi of Kima Ventures. In those deals we mostly play a passive role. We involve ourselves only to the extent the entrepreneur wants an introduction to a VC or potential partner, or quick feedback on the product or deck.
Projects we Advise and Accompany
For up to 6 companies per year, we lead the round. We do the full screening of the project. We help the entrepreneur with his presentation. We bridge the entrepreneur if necessary. We raise the funds from our angel network (200 first tier angels). We do monthly follow-up calls and 3 yearly meetings in person. We are typically very involved during the first 12-24 months – basically until the startup gets a VC on board who takes over from us.
Projects we Initiate
For up to 2 companies per year, we start the companies. This is Jose Marin’s and Carlos Martin’s day job at IG Expansion and I help out a little. We identify the model, bring in amazing co-founders with 20-30% of equity, invest the first $2-3 million and raise the first VC round after that. In 2010, we started Viajanet, an Expedia for Latin America. In 2011, we launched Lofty, a next generation HomeAway / Airbnb. Later this year we will help launch a new ecommerce project in Brazil headed by my brother Olivier.
3. We don’t join the board of companies we invest in
When I started angel investing in 2005, I invested a lot of money in very few companies and typically joined the board, organized regular meetings and was very involved. This early batch of companies mostly failed, and I realized that most of the time spent was not productive and definitely not scalable given my day job as Co-CEO of OLX and my desire not to spend more than 5 hours a week (or 10 hours in a crazy week) on angel investing.
An email update or a 5-10 minute phone call once in a while is more than enough to get a sense of how the business is doing. Moreover, rather than having structured times to talk, it’s much better to be available punctually when the entrepreneur needs help. This works better for the entrepreneurs because they get the help they need when they need it and don’t have to spend nearly as much time on reporting.
We sometimes don’t talk to the entrepreneurs for 6 months or more, but then end up spending a lot of time with them discussing a term sheet they might have received if they are fund raising, etc.
4. We typically don’t do follow-ons
Jose and I typically invest $10 – $250k each in companies we decide to invest in, with an average of $50k for me and $25k for Jose. We typically get a few percentage points of the company and our investment is typically part of a $500k – $1 million round. Pre money valuations vary dramatically based on the product development stage, capital requirements, team experience and company traction, but range from $300k – $3 million with an average around $1.5 million.
The reason we typically don’t do follow-ons is that the VC round tends to happen before the model is really proven and at a high enough price that our pro-rata would represent a significant amount of capital which just does not fit our model (though it makes sense for VCs which have more capital to deploy). This is all the more true in these frothy times as the duration between an angel round and a VC round has compressed while valuations have increased. We would rather invest the money in new startups.
We follow-on only when it’s a no brainer and we would look like idiots if we did not given the company’s traction and the terms of the fund raising.
Angel Investing Update
As mentioned in the prior angel investing post, 2010 was a year for the record books. We invested in 22 companies, followed on in 4 others and had 5 exits. At the end of last year, we decided to slow down the pace of our angel investing due to the frothiness of the market and the trend, especially in the US, towards convertible notes, either uncapped or with high caps, instead of priced rounds.
We never invest in convertible loans unless they have a low valuation cap. We feel that the 15-25% discount to the series A they typically offer is not enough compensation for the much greater risk of investing at a very early stage, especially since a series A round is far from guaranteed to happen. If the entrepreneur insists on the convertible structure, we will just wait to invest in the series A.
Moreover, we feel that convertible loans are a bad idea for a startup. They typically are due in 18 months. They work out better for the entrepreneur from a dilution perspective if a VC round happens during that time period. However, should a round not happen, it guarantees a failure as the company will not have the money to repay the loan. In these frothy times, it’s easy to assume that a company will raise a VC round, but people forget how rapidly investment conditions can change and should focus on building companies that have staying power instead. Even in these times, many companies will not, and many should not, raise VC money given the market size they are going after, the market dynamics, etc.
It’s not inconceivable that a technical default by the US or a real default by Greece, or worse Italy or Spain, could send the credit markets and all investment markets in a deep freeze. If this was the case most of the companies which raised convertibles would fail. In 2000-2001, I invested in 7 companies. One went under immediately. If you had asked me how much the 6 remaining ones were worth in 2002, I would have told you zero. Yet over the course of the next 6 years most of them ended up doing incredibly well with 1 IPO and 4 very successful exits, despite the fact most failed to raise venture money for many years. Had they raised money through convertible loans, they probably would not have had the same staying power.
Somehow, despite the frothiness of the current environment, we ended up finding many great entrepreneurs to invest in and are on track to invest in twice as many companies as in 2010, which was by far our most prolific year. In 2011, we have already invested in 23 companies, followed on in 5 companies and had 4 exits with many more investments pending.
We had a partial exit in Viajanet and full exits in Dineromail, Phanfare and FamilyBuilder. The first two were huge wins: Dineromail was my largest angel exit in absolute dollars and Viajanet my highest return on investment ever with a 50x return in a year. Phanfare was the only loss with a 90% write-off.
Here are the companies we invested in so far this year:
January 2011: eVenues.com, an Airbnb for meeting spaces
June 2011: Gezlong, we helped structure the round for the Jetsetter of Turkey
June 2011: Newpeaks Invest, stealth Brazilian ecommerce project
June 2011: Follow-on investment in Martingale which runs a hobbies marketplace
July 2011: Falcon, stealth German ecommerce project
July 2011: Visual Revenue, front page performance improvement for online media
July 2011: DeporVillage, online Spanish ecommerce site for sporting goods
Excluding the companies I ran (Aucland, Zingy and OLX), I have now made a total of 77 investments ($10 million invested), had 16 exits or closures (11 gains, 5 losses, $9 million recouped) and still have 62 companies in the portfolio.
We’ll see what the rest of 2011 has in store for us. We would actually like to slow down the pace of our investing, but we keep running into fantastic entrepreneurs we feel compelled to back.
I am also including the post keynote interview for your viewing pleasure: