This past holiday season, I had the opportunity to ask Joe Platnick of the Pasadena Angels a few questions about his group. I want to thank Joe for taking time out of his busy schedule to answer a few questions and to help educate our community about the benefits that the Pasadena Angels has been providing to our community since its founding in 2000. Click here for Joe Platnick’s professional profiles. The mission of the Pasadena Angels is to:
Our mission is to create a unique investment community of successful business and professional leaders that identifies promising start-up ventures and provides the capital and counsel necessary for success.
(Q1) Does the Pasadena Angels provide funding for all types of businesses regardless of the industry or their vertical market? Do the investors have a preference for a particular type of business such as mobile applications, medical devices, biotechnology, etc.?
The group provides financing for many different types of companies. However, the vast majority of the companies we’ve backed—and probably all but two—have had some sort of technology orientation. We typically don’t do service-oriented businesses, pure content (digital or print), restaurants or retail establishments.
Because the backgrounds of our 100+ members are very diverse and cover many different areas of technology, we tend to cover a very broad spectrum—including life sciences, software, internet/web 2.0, chips and semiconductors, mobile, and digital media. At the end of the day we’re not biased toward any particular types of businesses, just early-stage, local Southern California companies that have the potential to produce favorable (i.e., venture-like) investment returns.
(Q2) On your website, it says that $25 million dollars has been provided to over 65 companies. This comes out to an average of $384,615.38 per company. Can you let us know the max and min range of the funding that the angel investors are willing to invest? What is the preferred range?
Although our typical investment range per round is $300k to $1m, we don’t have any preferred amount. For each investment opportunity, we tend to consider the company on its own merits and do some thorough liquidity planning to determine the optimal amount to invest. In a couple of cases we’ve had very capital efficient enterprises in the Internet space that required only $200k to get to breakeven. Alternatively, we had another company that I was involved with where we raised $10m and co-invested with two Venture Capital firms. By the way, and as of today we’re probably closer to $30 million and over 70 companies.
(Q3) In addition to monetary funding, your blog post also highlights the importance of assembling the right team? Is it better for the company to assemble the right team before pitching the company? Alternatively, will the investors help to assemble the right team?
There’s really a two-part answer to this question, depending on how you define the term ‘right team.’ If you’re referring to having all of the positions filled, that’s not important when approaching the Pasadena Angels. What’s more important is that you thought through what skill sets and experience are required to get your venture to the next level and have identified the critical hires. Since many of the Pasadena Angels members have extensive networks, we can help fill those slots post-investment.
On the topic of ‘right team’, one of the problems we frequently see with early stage companies is having too big a team and/or the wrong backgrounds. For example, I’ve lost track of the number of companies that have come to us for funding that have a CEO, COO, CFO, CTO, VP of Sales, Chief Architect even before they have a product or revenue. For a company at that stage, that’s way too many people. The other thing we sometimes see are people that aren’t a good fit and were given positions because they are a relative, old college roommate, investor, etc. If you’re feeling inclined to do this, please base your hiring on what’s optimal for your company and stage—and not based on who you enjoy working with or who you owe a favor to.
(Q4) I can imagine that founders have strong willed personalities and do not want to give up control of the company. What types of checks and balances do the investors require to ensure that the investment isn’t squandered? Do they get a seat on the board, etc.?
A couple of years ago there was an interesting article in the Harvard Business Review called the Founder’s Dilemma. In this paper the authors divided founders and entrepreneurs into two categories—those that want to be rich and the ones that want to be king. Based on experience, we typically invest in those that want to get ‘rich’, since the ‘kings’ often don’t care about building successful companies and are more focused on how much control they can exert.
In our experience as Angel investors since 2000, this is a pretty accurate description of the two types of personalities we invariably encounter among startup founders. If a founder is so consumed and pre-occupied with control, then they’re probably not a good fit for the Pasadena Angels and are probably a ‘king.’
With respect to the checks and balances, those tend to be unique to each company. However, some of the common ones include board approval of the annual budget, restrictions on taking on more debt or equity investment without board or shareholder approval. In many instances, we’ve taken board seats. However, the decision to do (or not do) that is based on the specific needs of the company at the time of financing.
(Q5) Great post on The Truth About Early Stage Pre-Money Valuations. The post describes the various factors used to estimate the value of a company for the investor. Is there a mathematical formula that can help the company arrive at a general ballpark max or min value? For example, can you peg the minimum value of a company as a multiple of current gross sales or profit? Are there any other useful formula to estimate value?
For a startup with no, or minimal revenue, the valuation metrics such as multiples or discounted cash flow don’t really apply. At this stage determining valuation tends to be part art and science. One very rough way to calculate valuation is to determine the exit valuation and time horizon and that investors are seeking a 10x return. Based on those numbers, you can then work your way back to the present time (incorporating option pool activity and subsequent funding rounds where dilution will often occur) to determine rough valuation. One of the pitfalls we often see from founders when they do this calculation is that they assume their company will exit via an IPO at a Google- or Facebook-like valuation, which isn’t realistic. The other rule of thumb you can use is to look at valuations for comparable companies (i.e., same sector and stage) that are being funded by VCs and Angels. Some of the other factors that can also influence valuation are strength of the IP, dollars invested to date, founder’s track record (e.g., have they returned money to investors in past ventures), and meaningful customers and/or partnerships with high signal value companies.
Should you have any further questions, please feel free to contact Joe Platnick at the Pasadena Angels or me at (949) 433-0900 or James@OCPatentLawyer.com. Please feel free to forward this article to your friends. As an Orange County Patent Attorney, I serve Orange County, Irvine, Los Angeles, San Diego and surrounding cities.