“We’re an angel investing organization. So it’s basically a conglomerate of over 150 accredited angel investors just here in San Diego, and we have chapters in LA and Orange County as well. And what we do is look for the best companies to invest money in them. It’s as simple as that.” — Ashok Kamal, Executive Director at Tech Coast Angels
Ashok Kamal (LinkedIn: @ashokkamal, Website: TCASanDiego.com) is a social entrepreneur and angel investor based in California with a lot of notches on his belt. Ashok is an executive director of Tech Coast Angels, an angel investment group which operates in San Diego, Los Angeles, and San Francisco. A wide range of experience with starting, leading, and investing in the private, public, and non-profit sectors has lead Ashok to believe that entrepreneurship is the foundation of re-purposing problems as opportunities, unlocking solutions, and unleashing human potential.
What Is an Accredited Investor?
“It basically means you’re a high-net-worth individual who is dumb enough to invest in startups and understand you may lose your money or you may make a lot of money. That’s sort of the risk-reward sort of trade-off. But according to the SEC – so accreditation is an SEC qualification – it means that you’re sophisticated enough to invest in private companies, and that’s why there is a, at present, sort of bar for professional angel investing. ”
What exactly is the “bar for professional investing?” through the lens of SEC accreditation, that bar is somewhere in the neighborhood of $250,000/year in income, $1,000,000 in net worth, and for married couples approximately $300,000/year in combined income. If you are claiming to be an accredited investor and you’re not, if something goes sour with the startup, you will effectively be stifled when it comes to any sort of legal recourse.
Since Ashok Joined TCA Has Funded 40-50 Companies
“I’ve been with TCA for going on three years now. I invested in a company when I moved to San Diego from New York City. I brought that company to TCA. That’s how I got involved. TCA was restructuring at the time and asked me if I would come on board and help run the organization. I’m in that now two and a half years. We’ve funded about 40 to 50 companies including some follow-on rounds.”
Ashok continues, “one of the principles of angel investing is to keep making bets on the winners, if you can tell that they’re winning,”
This is particularly important since a lot of early stage companies will not make it to the next stage. Of the 40-50 companies TCA has financed since Ashok joined, about half of them are new companies. With a typical round of financing ranging from $500,000 to $1,500,000, angel investing is no cakewalk.
How Does TCA’s Funding Process Work?
– “You come in, you do an online application, which basically gives us your deck and executive summary.
– “Basically, we want to match the right person to the right company at the right time. So when the company comes in, we get the eyeballs on it that first of all understands what they’re doing because you want people looking at companies that come from or are at least familiar with that vertical. ”
– “Then if we think there’s a fit, then we’ll have some sort of a meeting with the company. So we’ll either do a one-on-one or get a few people together and meet with them. We’ll do a conference call, or we’ll bring them into one of our committee screens, we call it. So just about every month we run the tech committee which you chair, and we have a parallel in life science. And we’ll have companies come in, do a short sort of orientation presentation.”
– “Then we’ll ask them to come in and do a truly formal presentation, which is kind of a Shark Tank style format without the jokes and kind of hopefully the mean guys on the other end of the table. But what we’re looking at there is the business opportunity, the team, the technology, sort of the ask for the entrepreneur. Don’t forget to tell us what you’re looking for and what you want to do with the money.”
– “If, at that point, we think there’s a deal to be had, we’ll go into our final due diligence. For us, that’s a 30-day process where we look really under the hood, and that can mean from the legal to the financing to the technology, of course.”
– “At the conclusion of that diligence process, which we purport to get done within 30 days, then we’ll invest in the company. And that can come from our fund, and it can come from individual investors. So, in total, you’re usually looking at a half a million to $1 million from TCA when we really like a deal.”
What Are Some Common Mistakes Entrepreneurs Make Coming Into This Process?
“… understanding your investor and knowing their thesis is the first kind of mistake that entrepreneurs make when they don’t understand who they’re pitching to. I mean, then you want to be prepared. So assume that things go right and that the investors say, “Hey, this is a deal that we’re interested in.” Have your cap table ready. Have your financial projections. If you have patents, have your patents. Have your formation documents. The kind of things that investors want to see in due diligence.“
When seeking a round of financing, you’ve got to bring your A-game. Seriously, this isn’t amateur hour. Be prepared, be diligent, be concise, and exhibit trustworthiness! Bare in mind that this is at least partially performance art. You’re interacting with a round-table of high-rolling investors who are being pitched 24/7/365 – assume you’ve got 15 minutes of their time at most, and prepare accordingly.
When Should Entrepreneurs Seek Funding?
“It really depends. But what you want to have is momentum kind of behind your company. Whether it’s through users. Whether it’s through revenue. Whether it’s through other fundraising your doing. So nothing gets an investor into a deal quicker than FOMO or sort of deal tension.”
Your company is most likely to receive funding when it has the wind at it’s back. If there’s not much momentum in the vein of revenue, users, or through other fundraising you’re conducting, it’s a pretty safe bet that you are not ready to receive funding. Additionally, you must know your Customer Acquisition Costs (CAC); if it’s not negative, that’s a good time to go to an investor. FOMO can be a powerful motivator in getting to “yes,” when seeking funding, but in order to induce that deal tension, you’ve got to bring the goods.
Due Diligence: Technical Fundamentals
“This has two aspects to it. There’s the technical fundamentals, and then there’s the sort of trust and relationship building of it, right? So focusing on sort of the technicalities, you’re looking at things like the financing projections, like the history in financing, maybe other investors that have been in the deal. The marketing plan is a huge part of what you’re going to look at there because as an investor you’re investing in the future growth of the company, so the marketing plan is the story, kind of, if you will.”
On interpersonal fundamentals, Ashok adds; “As you’re doing that, you’re also interacting with this human being that is the entrepreneur or their team. And that’s when you’re trying to establish: Are they credible? Is it somebody that we like working with, that will like working with us? Or are they people that we feel like we can be helpful to? Are they coachable? Do they want to take feedback?”
This is an excellent perspective on the technical fundamentals of due diligence. From the perspective of a would-be investor, it is critical that both the technical fundamentals are sound, as well as the interpersonal fundamentals. Perhaps this is where the art and science of funding collide, but it’s a valuable thesis to grasp from the perspective of both investors, and entrepreneurs.
Idiosyncratic Variables, Market Variables, and Hard Numbers Help Determine Business Valuation
“I think there’s sort of idiosyncratic valuation variables, and then there’s sort of market stuff. And it’s some combination where the end of the day the investors know this is an early-stage company. And unlike a publicly traded company with P/E multiples, you just can’t hone in precisely on a number, so you have to kind of triangulate on some different figures.”
Ashok adds, “let’s talk about what some of those kind of indicators are. Well, one is within the company itself, if they have launched. And if they’ve got some revenue, it’s a little bit easier. You can take a look at SaaS multiples, for example, of other companies when they got acquired or when they raised money at a similar stage, and then sort of you can back into what a fair valuation might be for your company today.”
Raising Money Does Not Equal Success
“As a founder … the key thing to remember is, it’s not a success to raise money. Making money is how you get successful.”
Sure, raising a round of financing might be a stepping stone on the path to success, but do not confuse the two. Consider it a means to an end that can calibrate the path towards making money, selling your company, or having some type of liquidity event; but do not allow yourself to misconstrue funding with success.
Final Thoughts: Prove You are Coach-able
“If they’re unsure, they should just say, ‘I’m unsure. Can you give me a little bit of advice?’ Because TCA, the members, they’ll give it to them, and then usually that is the first sign that says this person’s coach-able.”
Nobody wants to collaborate with a know-it-all, and that extends to the world of raising capital. An unwillingness to take advice, a lack of eagerness to constantly be improving, and generally being stubborn in your ways are all huge red flags in the eyes of investors. This is probably the top interpersonal quality that an entrepreneur can convey to would-be investors. Never be shy to show off your willingness be coached.