Entrepreneur Uncovered: Parker MacDonell – Angel Investing

How do you ultimately make a determination to fund or not?

In the case of angel investors, I hate to say this but we’re looking as much at the person who is making the presentation in deciding whether we think we can help this person succeed as we are looking at her or his business plan or the market that she or he is in. Having said that, a couple of criteria  we look at when we decide to invest are, in a addition to whether we believe in the founder or CEO of the Company; we do look at the size of the market because we only invest in companies that we think can scale quickly with a relatively small amount of capital and then can become attractive to a strategic buyer 3 or 5 years after we invest.

When is the right stage [of business] that a company might approach you?

Every angel investor has a different answer to that, but there are a couple of general answers. In the case of OTAF, the fund that I lead, we don’t invest in a company until it’s got a product out in the market and it has a little bit of revenue validation; not the kind of revenue validation that a venture capital investor would be looking for.

There are other angels who say “I want to start working with this company as soon as they’ve come up with an idea for a product or a service and have gone through a process of validating that out in the marketplace” by talking to potential customers and saying:  “if we build what we are describing to you here, would you buy it and how much would you pay for it?” Some angels get involved that early in the company.

By the way, the earlier you get involved as an angel investor, the higher the risk is that the company will fail and the higher the return is if the company succeeds.

You mentioned that you put as much weight on the person as you do on the company in the market. Can you dive into that?

By saying, “what are we looking for in a person?”; well obviously we’d like to find someone who’s had prior success in starting a company and leading to some kind of conclusion. By the way, it doesn’t matter to me whether it was a successful conclusion financially or whether the company went out of business, but there is no substitute for experience when it comes to running a company. So, if we have two entrepreneurs standing in front of us and we can only invest in one, generally all other things being equal we are going to pick the company that has the CEO and founder who has been there and done that before.

Having said that, every entrepreneur has to got to have a first company whether it succeeds or fails. What we also look for in that person is therefore some evidence that they’ve got some skills above and beyond coming up with a product and designing a product. A lot of the entrepreneurs that come to our fund are people who have developed very deep expertise in one area that is typically some kind of technical expertise whether it be software development or sales and marketing or maybe some kind of biomedical product design but if that entrepreneur has never hired or fired an employee, has never had to go out and raise money other than going down the hall to ask the treasurer of their big company or their division to fund a project then we know that there is a little bit more risk in investing in that company than there would be in investing in a company that is led by those kinds of experiences.

Is there an ideal time horizon range that you ideally look for to prepare a company to sell?

Well, because of the time value of money we would always rather get our money back sooner rather than later…We used to think that a reasonable amount of time from when we invested to when the company sold was three to five years, but the data that I’m seeing lately indicates that its more likely to be five to seven to maybe seven to eight years before we, angel investors get our money back on average.

Are most angel investors looking to invest in companies that are preparing to sell?

Most professional angel investors are looking to only invest in companies whose founders say “I’m going to take your money and grow the top line and sell this to a strategic investor in three to five years and get you a 20 – 25% return on your money or better.”

What advice do you recommend to entrepreneurs who are seeking funding?

You get the investors you deserve and you’ve got to be very careful as an entrepreneur in picking an investor whose got goal congruence with how you want this business to run and how you want this business to end up.

What are some of the do’s and don’ts in approaching an angel investor?

One of the things that they should do is give themselves plenty of time to go out and find the right angel investors, get the angel investors comfortable that there is a good fit here and then eventually get checks from the angel investors. Too often I see entrepreneurs who get frustrated if they can’t get an answer of yes or no in a couple of weeks… I like entrepreneurs who are impatient and have a bias for a sense of urgency, but they also need to understand the marketplace and understand that most angels don’t make their decisions that quickly. So, if you present to an angel investor and say, “Look, you’ve gotta decide now because I’m going to run out of cash in four weeks;” that’s a big red flag. That’s somebody who hasn’t thought far enough ahead.

 

I think the other thing that an entrepreneur really should do… is to really research the angel investors that she or he is approaching to make sure that the entrepreneur understands what those angels are looking for, what kinds of deals that they’ve invested in before and to be able to say to the angel: “Look I’ve done some research and here is why I think that we’d be a good match for each other.” When an entrepreneur calls me up and says, “well tell me about OTAF;” that’s kind of a don’t. It’s not dissimilar from a job interview. So please do some research before you approach angels.

 

One of the things that I really think is beneficial for entrepreneurs is to come to an angel investor and say: “You know what I would really like your advice on how I’m running my company. I’m not here to ask you for money. I’d really like to ask for your advice and by the way, I’ve read about how your angel group works on your website, but it might really help me understand how your group works if you’d care to invite me to one of your meetings as your guest. Then I could really see how you do things.”

 

That’s a long way of saying: the best way to get advice from an angel investor is to ask for money, and the best way to get money is to ask for advice. So a great thing to do with an angel investor is to ask for advice and say “here is what I’m doing with my company; what do you like about it and what would you do differently?”