Angels and Pinheads

A few weeks ago, I had the pleasure of joining a dinner conversation with Deb Parsons, co-director of Investor’s Circle (IC). The purpose of the get-together was to determine interest among a representative group of local investors in building a presence for their group (short answer:YES). I was pleasantly surprised by what I heard from the mechanical perspective. I’ve been aware of IC for a number of years through my research and efforts in the “social entrepreneurship” sector, so I had already considered them a leader in the category of socially responsible investing. What I had not be aware of is how well-run they are as an angel organization.

Like many angel groups, they have chosen to focus on a specific industry sector or theme. The Investor’s Circle theme is “socially responsible investing”, which generally means investing in companies that not only have a profit motive but which also seek to create social and/or environmental betterment. Not surprisingly, this creates some self-selection of industry sectors (no military startups or oil lease deals here, folks). Specifically, they note that their members tend to invest in:

• Energy & Environment
• Food & Organics
• Education & Media
• Health & Wellness
• Community & International Development

They have a well-run screening and investment process that I can’t do justice to here, and present a strong bi-annual conference in Boston and San Francisco that includes not just pitch sessions, but good learning opportunities. The next event is coming up April 19-20 in San Francisco. They have also done a great job incubating new investment vehicles so investors can better diversify their portfolios.

One of the cool things they have done is prepare a multi-faceted rating on the companies from their history of investments, and have created a top-twenty list called IC20 that reflect the best outcomes on all three bottom-lines (financial, social, environmental) that they are tracking. It’s an impressive group of companies, and a great reminder that successful investing doesn’t have to come at the expense of other principles.

One might not expect rural burgs like Mankato, Minnesota, Mason City, Iowa, and Fargo, North Dakota to be hotbeds of angel investing activity. Nor might one expect really good innovation around the challenges of angel investing in small groups to come from the same areas. Think again!

The RAIN Source Capital network has put together a really interesting program for small angel groups to form funds, and provides these funds with “a process for due diligence, legal templates, management support, access to deal flow and other resources.” Bravo! This is a great way to help angels organize effectively without a lot of overhead. So far they have 23 affiliated funds in six states. These also host annual get-togethers for networking and educational purposes.

One thing I like about this approach is the focus on local interests: unlike a number of the high-profile emerging angel activities which are centered only on sexy Web 2.0-ish technology plays, RAINs investors have supported medical devices, enterprise software, industrial fabricators, and a woodworking tools company. These companies may not have the stratospheric exit potentials of a SaaS developer, but they are the companies that fuel the local economies.

One concern I have (as I do with all angel funds) is the process for selecting investments. I don’t know anything about the specifics of the RAIN model, but having looked at fund structures over the past few years, there is the inevitable potential for political stalemate trying to make selections; i.e., if a majority or super-majority vote is required for a GO decision, it can stall pretty easily. I’d be interested in hearing from entrepreneurs or investors with direct experience.

On a related note, I’ve heard rumblings that one of the angel groups I really respect from the Northeast is putting together a sidecar fund. I’m convinced that groups driven by individual decision-making but supported by a sidecar fund that diversifies risk and increases upside potential for the members are going to become the norm. Among other things, the fund structure helps with long-term sustainability. More on that later.

One of the most vocal critics of the pay-to-pitch angel model has been Jason Calacanis, internet entrepreneur and co-founder of the TechCrunch conferences.  Last fall he declared a “jihad” against all groups, events and programs that charged entrepreneurs, and ultimately launched his own angel event called the Open Angel Forum. Jason has a “Nation” of followers from his various media activities, and he stirred up a mighty rabble among the disaffected entrepreneurial crowd. The first Open Angel Forum event is set to launch tonight (1/14/10) in Los Angeles, and I wish them the best.

The format of the event is pretty common — a dinner followed by presentations — but has one key twist: sponsors will underwrite the cost of the event to the tune of $1500 apiece (max 5). While the investors are committing to cover the tab if enough sponsors don’t kick in, the goal is for the event to be free to both entrepreneurs and the money people. In return, the sponsors get… what? Logos everywhere, I assume.

Side note: as I reviewed all this again, I kept having flashes of another leader of a nation, swaggering and yelling, brandishing an automatic weapon, while surrounded by the logos of his corporate sponsors. Where was that?? Oh yeah…

Well, I’m sure it won’t be like that.

The two main criticisms I hear about dinner investor events are inclusiveness and focus. The first revolves around how the entrepreneurs participate in the overall event: are they peers, meeting and mingling with the investors; or are they the evening entertainment? No doubt the former is usually intended, but too often devolves into the latter. More than once I have seen these settings turn into circuses where the entrepreneurs take a beating, and no one likes being treated like the court jester. At one point there was a promise that the entrepreneurs presenting to the Open Angel Forum would get a free meal out of the gig, but that seems to be missing in the info online. No doubt they’ll have some little tables set up in a hallway next to the kitchen for the entrepreneurs, while the investors dine on…

…”steaks and fine wine!” Which brings up the second problem: focus. There’s nothing like pounding down some cow and chugging a few bottles of expensive Bordeaux to get ready to CHANGE THE WORLD. Or take a nap. Whatever. Neither of these issues can’t be overcome — they’re just issues to police.

For this first event, five presenters were chosen from fifty “qualified” applicants — an impressive weeding process. Fifteen über-investors will be in attendance this first time, and they’ll be assessing interest individually. As a result, there isn’t a sense of cooperation among the investors throughout the process.

Overall, my biggest concerns are scalability and sustainability. The goal is to use this event as a springboard for quarterly events in Los Angeles, and to replicate the event in additional geographies as a franchise of sorts. For this first time, the companies and investors were hand-picked by Jason as “chapter head,” and apparently that will be the approach going forward. (“Open”, it seems, has some obscure definitions…)  Granted, Jason has been transparent that he has a five-year goal to become “the most sought-after, and value-added, angel investor in the world,” and maybe building a network like this is a way to get there. However, I believe the series will quickly encounter pushback from their sponsors unless the format changes; and that may require new thinking about the financial model. Finally, the net new number of companies getting in front of investors is pretty small, so the overall impact on the investment ecosystem is nominal.

Final verdict: while there may be some initial flaws in the business model, and a fair amount of unrepentant self-interest, the core principles are solid and let’s hope it benefits some new companies.

[Update 1/15/2010: The inaugural event being called a grand success. Entrepreneurs happy, investors happy, a new Colorado chapter announced, and apparently minimal machine-gun fire. Congrats to all - keep it going!]