“Angel fund launches to help startups”

Business Journal – March 23, 2007

http://portland.bizjournals.com/portland/stories/2007/03/26/story4.html
The lead paragraph to this article said: “An angel investment fund launching this month aims to help startup companies get the capital they need to grow.”

Any time I see the words ‘start-up companies” and ‘’angel investors’’ I immediately stop whatever else I am doing and read with interest. In this case I knew the reporter and some of the names mentioned in the article. But what a disappointment it was. When I asked myself if anyone in Oregon could take seriously a story to start a new fund with 20 investors putting in $25,000.00 each for a total of $500,000.00, I paused. To make it worse they will choose two to four companies to invest in over a year to 15 months.

What self-respecting company would approach this fund, knowing that (i) they have so little money; (ii) they leave the due diligence to the investors (to save on fees to the managers of the fund), and (iii) stretch out the process beyond a year? Come on Portland, get real!

If potential investors need this much effort and caution, they will not find a single worthwhile company in which to invest. The good candidate companies will go elsewhere rather than serve as laboratory mice so some investors can learn the process of investing in start-ups.

A number of years ago a study was done by the HarvardBusinessSchool and they evaluated the results of a number of venture backed companies. One of the findings was that there was no greater likelihood of success when the due diligence amounted to ‘analysis by paralysis’ than when it was a quick ‘Yes’ by an inexperienced investor.

I am all in favor of bringing start-up companies in front of investors, but the investors too have to be worthy. Using startups in the way described in the article will amount to a waste of lots of time and probably most of the money that is eventually invested. Furthermore, hiring a couple of MBA students to help with the market and industry research should be done separately from the process of investing. And, while a law firm has offered to do the legal work pro bono to organize the fund, that is probably because they can do the math. If they charged fees of $50,000.00 to $100,000.00 as mentioned in the article are typical, there would be even less to invest.

I feel sorry for the individual who is mentioned in the article as having invested $5,000.00 in order to learn how he could earn larger investor returns by investing in very early-stage companies. Besides if he doesn’t know already that there is no difference between a start-up and an early-stage company, how much more is he going to pay for his education? In my opinion, there is only one way to learn what this type of investing is all about. Get to know the people. That’s it. Everything else is so much hype, and in some cases, bullshit.

An undercapitalized company is a surefire recipe of a failure, waiting to happen. An under-funded fund is similarly a surefire recipe of a failure that will never get off the ground. And, if they make any investments how can the companies that receives their nickels and dimes count on more of their limited dollars, or its investors, for the always-needed succeeding rounds of capital?

This is an effort that, in my opinion, should never have been started. (Started-up?)

All of this is being said without touching on the subject of the fairness of the terms and conditions that will accompany a term sheet. Spare me from even speculating on what it will contain.

I have participated in this process for over 40 years. My heart goes out to start-ups in Oregon who believe this is a new fund, and to those investors who put their money into the fund expecting they will have a great experience and make more money.

Copyright, April 8, 2007, Jacques B. Nichols, If you wish to reprint, pass around, or copy for any reason, please contact me for permission. I am happy to share my written materials as long as I am given credit for the writing and you have included my blog address.