Blog

The post from two days ago Only Doing Seed Investments Without Follow-On Funding received a number of comments and questions. One aspect of being an angel investor that isn’t well understood is pro-rata participation in future rounds. As an investor you almost always get the right to maintain your percentage ownership if you invest more money each time the company raises money (this assumes an up round where the valuation is higher than the previous round). If you don’t invest more money with each subsequent round, then your percentage ownership of the company will decrease.

Let’s look at an example scenario for an angel investor over multiple rounds of financing:

• Angel investor puts in $25,000 for a company that raises a $1 million seed round on a $1.5 million pre-money valuation, making the company valued at $2.5 million, thus the angel investor owns 1% of the business
• Company makes great progress and raises a $3 million Series A at a $7 million pre-money, making the post-money valuation $10 million, and the angel investor has to write a check for $30,000 to maintain the 1% ownership (the $30,000 is part of the $3 million raise)
• Company continues to do well and raises a $10 million Series B at a $15 million pre-money, making the post-money valuation $25 million, and the angel investor has to write a check for $100,000 to maintain the 1% ownership
• Company is in super growth stage mode now and raises a $25 million Series C at a $75 million pre-money, making the post-money valuation $100 million, and the angel investor has to write a check for $250,000 to maintain the 1%
• Company goes public or is sold for $250 million making the angel investor’s 1% worth $2.5 million

Of course, this is an unusual and highly successful scenario (most cities are lucky if they have one success story of this size per year). In the end, the angel investor put in $405,000 ($25k + $30k + $100k + $250k) and earned $2.5 million (again, hypothetical). The key piece is that an angel investor who put $25,000 into a startup really had to put in a total of $405,000 to maintain that position as that’s the way to make the most money (by putting more money into the startups that are doing well). People that have $25k to put into a startup generally don’t have an additional $380k to allocate towards a single, illiquid startup investment. A general rule of thumb is to reserve 2-3x of all money invested in startups for follow-on funding. Pro-rata participation and potential dilution are important considerations for angel investors.

What else? What are some other thoughts on pro-rata participation for angel investors?

Last week I had the opportunity to attend a YPO Southern 7 conference in Cape Cod. Two of my recent posts came from the event including Three Strong Bones to be Successful and Runner, Jogger, Walker, and Sitter. Some of the speakers included Ron Clark (founder of the Ron Clark Academy), Dr. Bob Rotella (famous sports psychologist), David Marquet (author of Turn the Ship Around!), and Bruce Pearl (Auburn basketball coach). After the event I reflected a bit on the speakers and content, coming away with a renewed enthusiasm about the human spirit.

Overwhelmingly, the speakers had the same message centered around three areas:

• Passion – Love what you do or learn to love what you do
• Optimism – Believe in greatness and the ability to triumph
• Hard Work – Serious effort is required and the top performers put in the most hours

It’s always great to hear from engaging speakers with a strong message. I was surprised to hear the same recurring theme throughout the talks, but in reflecting on them it makes complete sense. Love what you do. Believe in the possibilities. Put in the time required to be successful.

What else? What are your thoughts on passion, optimism, and hard work being the keys to success?

After doing half a dozen investments in the last 12 months I’ve had the chance to better formulate an investment strategy going forward. My favorite spot is seed investments as I have an opportunity to help entrepreneurs get a new idea off the ground and start the search for product/market fit (see The Four Stages of a B2B Startup). Seed investments also happen to be the area that markets like Atlanta have the most need. Once a startup has some modest traction and good metrics it’s easy to raise money. Only, there’s almost no money to help an entrepreneur get an idea off the ground.

Now that I’ve done a number of seed investments, I’ve also been in the game long enough to see a few investments need to raise another round of financing. While I’ve participated in some of these, I’ve come to realize that I’m not interested in doing follow-on funding — I’d rather use my capital to help entrepreneurs get started and then let that initial investment ride. Like Dharmesh Shah outlines in his strategy on angel investing, I’m avoiding follow-on investments.

I realize that participating pro-rata and doubling down on the winners is how many institutional investors generate most of their returns. Right now, I’m willing to forgo putting more money into the ones doing well in order to cast a wider net and get involved with more details. It might not make the most money but I believe it’ll have the most impact in the community.

What else? What are your thoughts on only doing seed investments without follow-on funding?

Last week I had lunch with an entrepreneur that had an opportunity to work with a number of super successful business leaders 20 years ago including Jack Welch, Ted Turner, and Roberto Goizueta. Curious, I asked what it was about them that made them so successful. He said that all the great leaders were very different people, different personalities, and even differing levels of intelligence. The one thing they all had in common was actually quite straightforward:

Great leaders take complex strategies and simplify them down into key messages and action items that everyone can follow.

How good is an awesome mission statement if it’s too complicated and difficult to follow? What about this month/quarter/year strategy? Just think about all the complex situations that arise in business and in life. Having someone that can fully understand the situation, build a quality strategy, and get everyone on the same page, especially people at all levels of the business, is invaluable. Great leaders take the complicated and make it attainable.

What else? What are your thoughts on great leaders being able to simplify complexity?

Earlier today I had an opportunity to hear Dr. Bob Rotella, the famous sports psychologist, talk about his lessons learned. After sharing some excellent anecdotes and making the point that all the great athletes share the same internal belief that they can be the best (confidence and visualization), he offered up a story from 30 years ago. Bob was at a basketball camp for coaches and a famous Michigan State coach had just given a talk. A hand shot up in the audience and someone asked the coach about the key to success. Simple, the coach said, you just need three strong bones:

• Wishbone – Dream big. Know where you’re going. Have a vision.
• Backbone – Core strength. Do the hard things. Make it work.
• Funny Bone – Laugh at life’s curve balls. With so many unknowns a good sense of humor is required.

The formula is pretty simple: clear vision, strong internal fortitude, and ability to handle the ups and downs. Bob Rotella did a great job with his talk and I enjoyed the message about combining belief with work ethic.

What else? What are your thoughts on the three strong bones to be successful?

Brian Watson, an associate at venture firm Union Square Ventures, just put up a great post called Post Money Evaluations about his two year experience working one of the tops firms in the country. Here are 10 key insights on startups from his post:

1. VC is about story recognition. Remember the anecdotes (and how they’re resolved), because history often repeats itself.
2. Raising money is a trade-off between valuation and control.
3. Your reputation is everything. Only make an investment if you are committed for the long term.
4. Operating a company is a balance between doing the right thing (strategy) and doing it right (execution).
5. Good company culture is when the team feels accountable to each other, implicitly and explicitly.
6. Being selective — doing less—keeps you focused.
7. Once you have a core product, the goals should be growth, monetization, and happiness.
8. When you’re interviewing someone, ask what they don’t/didn’t like at their current/previous job. It gives them a chance to go off on a rant, which can teach you about them and provide insight on whether or not they’re a good fit.
9. A culture of collaboration is better than a culture of consensus. Get buy-in from the team, use proactive communication, set clear KPIs, and maintain a sense of alignment.
10. Running a network is like urban planning for the internet. It’s a social engineering problem, not an electrical engineering one.

Go read Brian’s post if you haven’t done so yet as it provides a wealth of information.

What else? What are some other key insights from Brian’s post?

As I reflect on Father’s Day and what it’s like to be a dad I can’t help but think of my dad. My dad has influenced me more than anyone else, yet I don’t tell him “thank you” enough. As a small business owner, my dad has been in business for himself for 30 years as an orthodontist in Tallahassee and is still going strong today.

Back in 1984 my dad left the dentist he was working for and started his own practice across the street, only the new practice was exclusive to orthodontics. One of his first initiatives was building a new office building with a large waiting room and open treatment area. Inside, the main motif is fish with several fish tanks and large aquatic murals. In terms of design, the space was very forward thinking with open areas, tall ceilings, and great natural light.

One of the most important values my dad instilled in me is that of hard work. My dad loves working — both at the office and at home. He would spend full days at the office and then come home and do extensive amounts of reading and landscaping. Growing up, there was always a new project or book and he would diligently put in long hours to see it through to completion.

When I was in middle school and desperately wanted a high-end remote control car, my dad sat me down and explained that I had to do 40 hours of yard work (mowing and pulling weeds) to save up enough money to afford it. Immediately, I went to work and got the job done during the hot Florida summer. Connecting the dots between hard work and getting what I wanted was a valuable lesson.

The value of hard of work was instilled in me at early age and I owe it to my dad. Here’s to all the dads out there, and especially my dad. Thank you.