Inside "The Dinner Club": How Angels Evaluate Entrepreneurs
For many entrepreneurs, angel investing has a certain mystique. There simply is not a lot of public knowledge about how business angels function. In this book, we hope to lift that veil of mystery and clearly explain what it takes to obtain angel investment in a fledgling business. To do that, we will rely on firsthand accounts from both entrepreneurs and investors relating their experiences and their advice.
As mentioned in our introduction, many of our stories come from the experiences we have had as managers of an early-stage investment group called the Dinner Club. These sixty investors meet monthly to listen to pitches from entrepreneurs and then, as a group, evaluate the companies' prospects and determine whether to make an investment. New CEOs and wannabe entrepreneurs frequently ask us about how groups operate, what the meetings are like, how angels make decisions, and the unwritten rules of the game. To answer these questions, we're going to give you a "peek under the tent," taking you inside a composite Dinner Club meeting.
The surprising thing is that this process is being repeated daily in communities across the country, with structured angel groups popping up coast to coast. Yet few entrepreneurs are aware of what it takes to break down the barriers and gain access to what appears to be a "members only" environment. Throughout this book, we will show you the insiders' view and share with you secrets on not only how to find angel investors but, once you've found them, how to convince them to underwrite your great new idea.The Monthly Meeting: Getting Started
It's 5:30 on a Monday evening, and rush-hour traffic has snarled all the approaches to Tyson's Corner in northern Virginia, the heart of the high-tech boom outside Washington, D.C. Members of the Dinner Club are due at a private dining room at Maggiano's Little Italy, a family-style eatery famous for large portions and noisy conviviality. As managers of the club, we're responsible for making sure the monthly meetings go smoothly, and now it looks as if rainstorm-slowed traffic is going to create snags.
But we're used to it, as is everyone else. This part of Virginia has become a New Economy boomtown, with all the ills and advantages of a fast-growing, commercial hub. A recent Fortune magazine story claimed that the Tyson's area contained more office space than all of downtown Washington, that more people worked in information-technology companies than for the government, and that there were more software engineers in the area than lawyers.
The main highway of the area is Route 267, the Dulles Toll Road, a rolling superhighway that stretches from the Washington Beltway to Dulles International Airport and slices through canyons of towering glass and chrome. This has become the main artery of our nation's capital for the telecommunications, networking, and Internet industries. The neon logos on top of the buildings announce only some of the companies: Nextel, Teligent, PSINet, Ciena. And nearby, there's AOL, WorldCom, and Network Solutions, to name a few of the biggest players. This nest of information-services companies may not yet have acquired a name like California's Silicon Valley or New York's Silicon Alley, but it's still got plenty of character and color.
The traffic jam that comes with growth is a mixed blessing for our group, being a sign of prosperity but making it a lot harder to get quality meeting time. We've told our presenting entrepreneurs that it's important that they arrive early so they can mix and meet with our members during pre-dinner drinks. And we know they probably want to get a sense of the room and its layout before making what could be a life-altering pitch. They've been coached and given directions, and appear ready. We enter the room reassured--one of the presenters is already hooking up his slide show; another is chatting with several members at the bar.
One of our key associates, Anne Lord, is handing out name tags at the registration tables and offering members copies of executive summaries from tonight's presenting companies. She's also distributing reprints of a recent feature article in Forbes ASAP magazine about angel investing in America. The article profiles several angel groups around the country and includes an in-depth interview with us about the Dinner Club. The article also describes the different types of angels that make up the typical angel investing group (see Exhibit 1-1).
We're especially pleased about the Forbes article for a variety of reasons, starting with the mention of our club as one of the leading angel groups in the country! It confirms what we've been suspecting: Angel groups are popping up everywhere. The article reports at least fifty such organizations. It emphasizes that angels prefer companies close to home, and that this is more a grassroots, local movement than a national network. The details it offers about angel groups adding affiliates in areas like western Connecticut; Hilton Head, South Carolina; and Tucson, Arizona, attests to the vibrancy of angel investing as a new segment in the country's private equity markets.
As the room fills up, members seem a little more alert, a little more eager than usual. Loud voices and bursts of laughter punctuate the constant chatter. At one table, several members talk about the success that one of our portfolio companies is having attracting interest from a major venture capitalist to lead its next round of funding. Although all of us are seasoned investors, there's still great comfort when the professionals, like a mainstream VC, validate our judgment and back a company that we like. The VC lead could also mean that the value of our investment will shoot up.
Another hot topic among members is an upcoming vote on a company that presented to us last month. The due-diligence committee of club members has finished its report, and the club is ready to vote. We've also received proxy votes from members who aren't here. Although most members know that the committee report is positive, there are no sure things in our club. Members have lingering questions about the prospective investment, and those answers could turn the decision either way.
And of course, the subject of the stock market's gyrations pops up here and there. Members are especially shaking their heads in amazement at the recent plummet of a local company, MicroStrategy, and the falling fortunes of its CEO, Michael Saylor, whom many of us know. The news that the company had to restate earnings for the past year chopped Saylor's net worth from $12 billion to $2 billion in less than a week. The room is also bubbling with gossip and news surrounding a local merger--AOL and Time Warner. And one of our members, Jonathan Legg, a broker with Morgan Stanley Dean Witter, is encircled by members wanting his take on upcoming IPOs. About forty-five members have now arrived, joined by six or eight presenting executives, who usually bring along two or three people from each company, such as the CEO, finance officer, and technology expert.The Meet-and-Greet: Entrepreneurs Mingle with Potential Investors
A little after six o'clock, waiters enter the room, their shoulders stooped with large trays covered with salads and bread baskets. Scattered around the room are eight round tables, each seating seven or eight people. People sit anywhere; everyone has a clear view of the screen in the front of the room. No pre-assigned seating arrangements are made. However, we ask employees of the presenting companies to spread out so they will talk to members, not just each other. We want to keep the atmosphere as informal and friendly as possible. Sure, there are a couple of business suits in the room, but they're a minority. Sports shirts and khakis appear to reign. Presenters, however, are loaded for bear and have coats and ties on. (Chapter 3 provides details on how to make successful presentations, with tips and guidelines.)
Our members are an eclectic group, their business and investing expertise stemming from an assortment of industries and experiences. There's very little homogeneity. Art Marks, a member who's also a general partner of New Enterprises Associates (NEA), is seated next to Brandy Thomas, co-founder of a young company, Cyveillance. NEA is one of the leading venture funds, with interests in California's info-hub as well as northern Virginia's. Marks came out of General Electric Information Services, where he was president of the Software Products Operation, and hooked up with NEA in 1984. NEA has had a number of home runs, including UUNet. Like many seasoned businesspeople who earned their spurs in the early days of tech investing, Marks joined the Dinner Club to stay in the loop. "I like to keep my ear to the ground and stay in touch with companies at the earliest stages," he says.
Marks liked the young Thomas and referred his deal to the club. He ultimately decided to persuade NEA to lead the second-round financing for it. The company raised $6 million in its first round, with the Dinner Club putting in about $200,000. Thomas is here tonight to update the club on his company's progress, as well as ask for another round of financing, and Marks is here to give support to the chief executive, who has become his friend.
A table over are two active members, Rhea Schwartz and Rick Leavy. Although Schwartz is a decided minority at this dinner, there's no awkwardness. While the Dinner Club has few female investors, it would like more and goes out of its way to welcome prospective distaff angels. However, competition, so to speak, has recently cropped up with the creation of WomenAngels.net, an investment club based in downtown D.C., whose membership is all female. This is a great first for our region--women angel investors coinvesting with VCs and other clubs on hot deals. Schwartz's background is in law and real estate. Formerly an attorney with the banking industry, she cut her business teeth in real-estate development.
Rick Leavy is a cashed-out real estate and high-tech entrepreneur who seems to relish the networking and interaction of club meetings. He exudes enthusiasm for bright ideas and eager entrepreneurs, and is often one of the first members to volunteer to help a funded CEO make a contact or develop a marketing strategy. While Schwartz keeps her ears open for articulate, thoughtful presenters, Leavy likes to hear entrepreneurs who are persuasive at selling their concept. "If someone can't sell, I have a real problem with that," he declares. Like Schwartz and many of the other club members, Leavy is turned off by presenters who seem too full of themselves or a little too hyped. (Again, chapter 3 offers guidance to entrepreneurs on how to present themselves in the best possible light.)
For the next thirty minutes, the group eats and chats, and dinner-table conversation is as likely to cover the Washington Redskins football team as it is the latest business bestseller on the New York Times bestseller book list. Only when people are well into their meals, so they can turn their attention to the podium as much as to whether they want chicken cacciatore or pasta primavera, do we start the meeting. We begin by asking any member who has brought guests to introduce them to the group.
Club member Steve Comiskey has brought his son, David, from Boston, and introduces him as the co-founder of his own start-up, a company called EInk. The proud dad declares, "This company is a rocket. My claim to fame is being the father of this fine young gentleman who is taking the business world by storm." While everyone in the group knows that Steve is motivated by family pride, we realize that angel investing is about networks and contacts. Who knows--in a couple years' time, young Comiskey and the Dinner Club may be investment partners.
A club member introduces the founder of European Business Angel Network, or EBAN, which is based in Switzerland. Angel investing is slowly catching on in Europe, though it's been going great guns for a while in England, and he is in the States visiting various angel groups and gathering information. We hope he'll give us an update on angel activity on the Continent.
Another outsider introduces himself. He is a producer from the A&E Network and is gathering background for an upcoming film on the routes start-up companies take to funding their enterprises. A couple of members have also brought friends, whom they introduce. Although we're given only these people's names and sometimes an affiliation, like a company name, we suspect they're looking us over, perhaps thinking about joining, or know of young companies that could use our financial backing. Again, it's all about networks and the unstated philosophy that we're all here to meet, greet, and learn about investment opportunities, regardless of where they come from. (Chapter 3 describes networking and getting referrals and recommendations that will lead you to angels who may invest in your business.)Reviewing the Growth of Companies In Which We've Invested
While waiters remove the appetizers and set down platters of meat and pasta, we review the evening's agenda, telling members whom they are going to hear from tonight, the due-diligence reports we'll be getting, and the deals we'll be voting on. We then introduce Brandy Thomas to give us an update on our earlier investment in his company and discuss the progress made in the past few months.
"Cyveillance is growing rapidly as the marketplace embraces our services," he begins. The lights are dimmed, and he clicks on the projector, which displays several milestones on the screen.
"We've gone from twenty employees, when you made your investment, to now over fifty people. We've added marquee clients to our customer list--namely, Disney, Coca-Cola, and Sony. We've gone from having one product, essentially a search service to determine any brand abuses online, to a suite of products that can be licensed by our customers," he continues.
As Thomas clicks through his PowerPoint slides, a murmur ripples through the group. People like what they're hearing and seeing. Six months ago, Thomas stood in front of this same audience, almost begging for its endorsement. A young African-American fresh out of business school, he hooked our group with his predictions of abuses of trademarks on the Web and his proposed solution for protecting those assets. At the time, Cyveillance was a ragtag team of programmers and marketers housed in a rundown townhouse. Now it was starting to look like a real company that has clients, products, experienced executives, and a head start into a lucrative Internet niche.
The slides pause for a few seconds, then disappear. "I'm pleased to tell you tonight that not one but two major venture-capital firms have presented us with term sheets to lead our next round of financing--and at a serious increase in valuation from where you participated less than a year ago." People put their forks down at this point. "When you invested, our company had a pre-closing valuation of $13.5 million. In the next round," Thomas declares, "we expect to raise about $20 million, at a pre-money valuation of $75 million."
Excerpted from Every Business Needs an Angel by John May and Cal Simmons. Copyright © 2001 by John May and Cal Simmons. Excerpted by permission of Crown Business, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.