Been shot down by angel investors?

Now I know how you feel. It stings and stays with you, I'm still smarting the day after, so I'll write this post to hopefully put the experience behind me.

I'd been working with a serial entrepreneur for almost 2 years. He's an accomplished serial entrepreneur. His prior startup built specialized semiconductor chips. He sold that company to another who was quickly acquired, too, then the combination was sold for over $100M. His piece of that pie was not great, but that is an impressive resume. And he continues to be an exceptional entrepreneur. He's built a gaming engine of his own design and has attracted several commercial customers as well as gamers to his site. Besides being in revenue, he's invested $700k of his own money into the deal; that's skin in the game!

He's coachable and well read. After reading Basil Peters' Early Exits, he formulated a fund raising plan that Basil would love: a small raise, maybe followed by another sometime, but no major VC raise. Accordingly, his revenue forecast was modest, rising to $20M in Year 5. But this is exactly what Basil suggests, that we fund companies like this and find an acquirer to buy the company in the $20-30M range; that's why it's called an early exit. We're not "strapping a rocket onto a small company" as Garage Venture's Bill Riechert laments that too many VCs do when they invest millions.

But all this preparation would be for naught, we left LA with "no material interest".

I've gotta be a big boy and take it on the chin. I can deal with the outcome, it's the rough and tumble of the Q&A that leaves me unsettled. Know this, very few new companies are getting funded, that's because so much is going to keep existing portfolio companies alive, a ratio of 8:2 locally, in terms of number of companies getting funding from angels. So money for new deals is scarce. We both knew this and we consulted extensively with fellow angel Ray Chan about the critical ingredients to his success with Vokle. They raised a modest amount in the form of a convertible note, capping each investor's investment to only $5K. We thought since that approach worked, we'd tweak the numbers a little and try to raise a little bit more, but copy what works. In a small raise there's little money available to pay attorneys for a complicated Series A Preferred agreement. Convertible notes are less costly, making them more appropriate for small deals.

So of course that's the first question. What's in the convertible note? What will be the conversion ratio? And... uh-oh, I forgot to update the online application, so on his laptop he can see our earlier thinking when we were going to propose a Series A with a $1M pre-money, so he has more questions about discrepancies between then and what we're proposing now. Maybe I should just admit that there is no way to recover from a situation like this and not still be wracking my brain with "I wish I had said this..." scenarios. But since I get the last word here, what I wish I had simply said is: "we haven't written the convertible note yet, we're here to see if there's any interest first", and finally, "I'm sure you'd find us flexible on terms." None of that occurred to me at the time.

Smelling blood in the water, the next questioner coolly suggests that if there's intransigence on conversion ratio issues, then that could bring the discussion to a close pretty quickly. How much do I bare my neck in response to this? And how did I get in such a deep hole so fast, I'm wondering. I'm negotiating terms in real time? I'm not that quick on my feet, you should see me writing this, I write a paragraph, reread it, make some edits then move on. No Clarence Darrow here, so I'm out of my league quickly, and I know it. Finally a few softballs, let the entrepreneur run the show, besides, I'm starting to look defensive, and I know this, too.

"If you've got a gaming possibility why don't you raise the money it would take to develop that and offer us a better investment opportunity?" He's never read Early Exits; he wants to strap a rocket on us. But it's the next question that still rankles, "if you've had such a successful prior exit why do you need any of our money?" I've heard this question raised before of course, by many angels, posed to many presenting entrepreneurs; I've always thought it poor sport. The answer is obvious; it's a way to humiliate the presenter. As the leader of an angel group I've voiced my disapproval, I've discouraged asking this question, but I'd never been on the receiving end. I wasn't happy with my friend's reply, and not just to this question of course. I've spent more than a few moments critiquing his performance in my mind, but the outcome is always the same, I realize I'm guilty of more missteps than he.

My friend has a sunny personality and the long ride home from Los Angeles to Newport Beach seemed to be all the time he needed to turn the page and move on. That's one of his great qualities, it's what makes him a great entrepreneur. All obstacles are only temporary to him. I guess I have to add that to the list of what I wish I had said yesterday...

Disclaimer: since I wrote his executive summary, have gone on sales calls to some pretty significant customers, designed marketing pieces, attended trade shows in CA and NV, and setup a meeting with a local VC, he granted me some shares of Founders stock. I don't even remember how much, but there you go, now you know. There is no payment for success in attracting funding.