26. A New Era of Startup Investing | Angel Evolution (Christopher Mirabile)

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Christopher Mirabile joins Nick on The Full Ratchet to discuss Angel Investing evolution and changes including:

  • Chris MirabileCan you briefly summarize the traditional Angel Group model from a decade ago and why it worked okay then?
  • You highlight four major themes that have evolved with the modern angel group.  The first is professionalism.  How has dynamic changed in recent years?
  • The next theme has to do with competitive responses.  What is the key message here?
  • What are the Structural and Process Improvements that Angel Groups have made and why?
  • The final theme revolves around environmental changes.  What are the macro drivers that have influenced Angels and Groups?
  • Overall, have angel groups strengthened over the past decade or do you believe that changing times have reduced their importance and/or impact?
  • Can you share your thoughts on the key crowdfunding factors, at present, w/ potential, significant impact that listeners should be aware of?

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Key Takeaways:


1- Old Performance Benchmarks

Having a crisp, efficient and effective process is now just table stakes.  Angels and Groups can no longer differentiate on the traditional elements of professionalism.  Getting strong volume and quality of deal-flow, moving through it quickly, having highly efficient meetings and conducting thorough due diligence are all now expectations, not differentiators.
2- New Sources of Differentiation
Christopher cited five elements that have contributed to the evolution and professionalism of Angel Groups.  Those included:
  • Becoming more returns and reporting-oriented to attract investors to groups
  • More effort into professionalism, focus and training of angels
  • Evolve into life-cycle financiers where more capital is committed and staged over a longer period of a startup’s lifecycle
  • Take on more responsibility in driving performance and, in particular, Exits
  • and finally take a more active role in incubating and accelerating portfolio companies
3- Unprofessional fundraising & investing
You don’t make money in this asset class by being sloppy, cutting corners, moving fast, not doing diligence and overpaying for assets.  You make money by making careful selections, protecting the investment and helping portfolio companies achieve their potential.  And also remember that there are ways within and outside of crowdfunding that can ruin a startup and their cap table.  Chris mentioned that raising money too early, too much and at too high of a valuation has many times led to the death of great startups b/c there’s not enough equity left for a subsequent fundraise to be viable.


Tip of the Week:  Current Drivers in Crowdfunding

Below is the “Tip of the Week” transcript from the Podcast Episode 26: Evolution of Angels & Groups (Christopher Mirabile):
Today we talked about some of the key drivers in crowdfunding that Angels or interested seed investors should look out for.  Recall that we discussed two major drivers that seem to be on opposite sides of the spectrum.
  1.  The first related to the definition of an accredited investor.  There is the potential that the SEC will change the definition of an accredited investor b/c it is one that hasn't been updated in quite some time.  The argument is that due to changing times and inflation, the values that determine accreditation are too low.  The proposal that I've seen, advocates for doubling the requirements.  So instead of $1M net worth excluding one's home, it would be $2M net worth, excluding ones home.  And instead of $200k of individual net income in two consecutive years, it could increase to $400k of individual net income in two consecutive years.  There also may be allowances for individuals that don't meet the monetary requirements to pass a test of sophistication that would grant them accreditation.  Either way, this clearly, this would significantly reduce the pool of "accredited investors" in the U.S. and subsequently significantly contract the amount of money available for seed-stage startups.
  2. The second factor has to do with Title 3 of the JOBS Act that allows for (more…)

*Please excuse any errors in the below transcript


Nick:      Today, Christopher Mirabile joins us from Boston, Massachusetts. He is co-managing director of Launchpad venture group, chairman elect of the Angel Capital Association, co-founder of seraf-investor.com, and contributes great content at scratchpaperblog.com. Chris, thanks so much for joining me.

Chris:     My pleasure. Thanks for having me.

Nick:      Before we jump into this topic today on the evolution of angel groups, can you start us out with your history and how you got involved in venture investing?

Chris:     Sure. You know, always been sort-of a “what’s new”, “what’s next” tech-centric kind-of a person, and you know, in terms of my alignment, my interest. And I really started my career as a management consultant on the strategy side right out of school. And that was awesome, but I didn’t really want to stay in consulting and I wasn’t sure what to do. Most of the kids in my level went back to business school and I don’t know how it happened exactly, but I ended up going back to law school instead, and took a very business-centric set of classes in law school and was a corporate and securities lawyer doing a ton of work in venture capital fund formation, venture capital investing, lots and lots of those kinds of deals in the mid 90’s, and really loved it. Loved being around entrepreneurs and innovators and wanted to get sort-of closer to that. And I took a little detour, took a software company client public on NASDAQ and ended up having an eleven-year run inside that company, ultimately as the company’s CFO in the end. And when I sold that company – we sold it to another public company – I had my chance to get out of the daily grind and get back to entrepreneurship and investing. And that was in 2008, and I’ve been full-time in this space since then.

Nick:      So how long have you been doing the Launchpad venture group?

Chris:     I’ve been a member of Launchpad. Originally I was a member and joined in 2009, and I was at the time… had started my own small group around my activities. And Ham Lord, who is my co-managing director at Launchpad, and I were close buddies and worked closer together, and eventually it just occurred to us, it made sense to merger two groups. And so we merged and I sort-of took over running the meetings and doing those kinds of things from Ham who had been doing it for nine years at that point. And that was in 2010.

Nick:      Yeah, I’ve read about how active Launchpad is, in particular in New England and even in the US.  Have you guys closed on deals this year?

Chris:     Yeah. We’re typically one of the top ranking groups in terms of deal volume and dollars invested. We add about a dozen new portfolio companies a year in terms of new investments, and somewhere in the neighborhood of twice that number of follow-on deals. So I haven’t looked at the stats this year, but we’re on track to do a dozen new companies this year, and by June 30 we’ve done 19 follow-ons already. So busy year for us.

Nick:      Wow, that’s going to be great for the entire startup ecosystem out where you guys are at. But, so Chris, we’ve done an episode in the past on angel groups – what they are, how they work, what benefits they provide. Today I want to go a level deeper and talk about how angel investing and angel groups is changing and why. Let’s start out with the angel group model from a decade ago. Can you briefly summarize the traditional model and how it worked in the past?

Chris:     I think the way to think about it is sort-of an evolution towards professionalism and towards responsiveness to the market. So angel groups kind-of came about initially in reaction to what I think is the absolute kind-of core tension in angel investing, which is that on the one hand these are really high risk investments that are [00:17:39.06] with a fairly high failure rate. So you need to be very diversified to have good returns and make money and be compensated for the risk you’re taking on. But on the other hand, these are very labor intensive deals to create and to manage after you’ve invested, and to make these companies successful. So that tension leads to a real difficulty, right? You’re either cutting corners on the work, or you’re cutting corners on the diversification. And I think that angel groups came about in recognition of the fact that by pulling resources you could address that tension. You could pull the deal flow collection and screening and scouting and diligence and negotiate one term sheet and get these deals done in a way that allowed you to be diversified and still have a manageable workload. And I think what’s happened in the last ten years is these groups have become more and more sophisticated. That was sort-of the initial problem set and that was kind-of what they were doing ten – fifteen years ago, right? It was just kind-of like, “We’ve got to be a little more efficient here.” And I think what’s happening is as some of the things, some of the forces in the market have evolved – you know, VCs have ended up with bigger funds and have moved a little bit upstream in terms of the size of the deals they do, and companies costing less money to get started, and all the various trends that have led to the growth in angel investing – a fair amount of money has got to come into the early stage seed and groups are sort-of recognizing being efficient is table stakes. You know, we sort-of need to be financier as a first resort, and we need to be a little bit more professional about this. And in particular, I think there’s a recognition that groups have to be fast and high-quality and add value and really help these companies succeed in the marketplace and get bought and get liquidity. So that’s kind-of how I see it. It’s sort-of a march towards professionalism, and I think, you know, at Launchpad we think and talk a lot about… I think calling angel an asset class is a little bit grandiose, so I wouldn’t want to take that nomenclature too far, but we think a lot about sort-of professionalizing the angel asset class at Launchpad.

Nick:      Yeah. So you’ve touched on this theme of professionalism. That’s one of four major themes that you’ve articulated in the past. Can you go deeper and tell us how this professionalism dynamic has changed in recent years?

Chris:     Well, I think that groups are sort-of approaching their market in a more sophisticated way in terms of recognizing that they may need to specialize a bit more, thinking about recruiting skills – specific skills. You know, we think a lot about what deal flow is in our area and what deal flow we have the skills to do and recruiting the skills that we feel we need to beef up on. You know, little things. The groups… You know, in the past, groups could be very informal and they had almost the vibe of a little bit more of a social kind-of an element to them, and a group like Launchpad sort-of typifies the new breed of group. We start our meetings on time, we end them on time, we’re very efficient with our members’ time, we’re efficient with entrepreneurs’ time, we try to add value in every interaction we have, we’re extremely selective about members and put a lot of effort into interviewing and scouting and screening members, and we’re very, very clear on the attributes that we’re looking for in members, we have a tightly enforced code of conduct. So it’s really much more like running a business than like running a club.

Nick:      Yeah, you’ve mentioned before that you guys have focused on returns and reporting, driving exits, you know, more acceleration and incubation of portfolio companies. Are these all things that your group at Launchpad is now focusing on?

Chris:     Yeah, I mean, that’s all we think about honestly, is… I hope, you know, when I’m pushing up daisies it says on my tombstone “Here lies Christopher Mirabile. Man, he put great people on startup boards.” You know, I’d be after that. I’m obviously joking, but the notion of really trying to figure out how to stage capital into a company, how to make that company successful, how to coach that CEO, how to help them foster the partnerships they need in industry, how to help them think about exits and maximizing exit value, I mean these are things that we think about all the time. The stuff like managing deal flow and having a crisp and effective investing process is table stakes, I think. It’s really more about focusing on creating real value and returns.

Nick:      The second major theme that you touch on, you refer to as competitive responses. And it’s there that you do talk about the speed of screening and diligence, deals that may have been ruined by crowdfunding. What do you mean by these and what are some of the levers that you guys now pull or criteria that you evaluate, focused on this competitive response category?

Chris:     Well so, first of all, I mean, there are a lot of ways to ruin a cap table and crowdfunding shouldn’t be singled out. Raising money too early too much at too high of a valuation makes it very, very hard to fix that company. You know, on some level, when a cap table gets messed up so badly that to fix it would be so dilutive to the founders and the early investors – sometimes you just can’t fix that – you know, they end up… too many bruised egos or hurt feelings and too many disgruntled early shareholders and the founders don’t have enough equity, don’t have enough skin in the game, and so you sometimes just recognizing… you know, I’ve seen this movie before and I’m going to… This used car has a bent frame, and there’s just know I’m going to be able to get it to work right, you know. So that’s, you know, I wouldn’t just single out any one particular thing. I think it’s these amateur rounds where the valuation is not really calibrated to market, it doesn’t reflect where a company is, and you get into a mess. You also see situations where naive founders have given away sort-of 5% of the company to each of a few crony board members. And you know, again, the cap table’s there sort-of irretrievably messed up. So making sure that you think about how to stage capital into the company and keep the valuation logical. And if the founders worry about dilution, you can try to say, “Okay, well that’s fair. Let’s raise less at this valuation and control the dilution that way and let’s go create some value, and then we can raise more at a higher valuation.” We’re fine with that if the value is there. But in terms of sort-of the competitive stuff that you were asking about, I’m really talking more about today’s entrepreneur is more sophisticated. It’s become much more mainstream – entrepreneurship sort-of as a career path. And they’re more thoughtful about how they want to raise money and what kind of partners they want to work for. There’s money chasing deals than ever before. There’s much more sort-of… startup founders are kind-of cultural heroes right now and in certain markets like Silicon Valley or New York or to a lesser extent, Boston, the markets are getting pretty overheated. And there’s just a lot going on. And in a market like that, you as an angel group want to be a financier of first resort.

Nick:      Sure.

Chris:     Not last resort, right? I mean, you don’t want to be the place where an entrepreneur with no prospects ends up because they’re desperate. You want to be a place they pick because they want value-added investors and they know that your brand on their term sheet will help them syndicate their deal, and that they can get specific expertise from you that’s going to accelerate their company. And they know that they’re going to be treated with efficiency and respect, and they’re going to be helped, and their company is going to be made better by that.

Nick:      Sure.

Chris:     And there’s a huge difference between being sort-of a last resort for a desperate entrepreneur and being, you know, the perfect financial partner, but you obviously want to strive towards being the perfect financial partner if you can. So that’s kind-of what I’m talking about – groups that are commercial, fast-moving, crisp and definitive in their decision making, transparent in their communications, clear about sort-of what the hoops are, and move companies along so that we meet their needs as they raise capital and go out and compete in the market.

Nick:      What is the typical time that it takes from say a pre-screen until a decision on an investment?

Chris:     It’s always a trick question because it can vary a lot, depending on how ready the company is, and we tend to lead the majority of rounds that we do. We tend to prefer to lead rounds and write out own term sheets. So it can take a while if a company is very, very raw and it’s a seed round. I mean, they’ve never raised before. They need to build a cap table and they have to negotiate a term sheet, and then the round has to be syndicated. And, you know, by the time you’ve had the second closing and gotten the last penny in the door, it can be months for a company that’s brand new, but you know, at the opposite end of the spectrum, we put a million bucks into a company in 28 days one time, [00:27:18.16]. And in that case the company was a little bit farther along, and the round already had some definition to it, and you know, we were able to use some existing diligence as a starting point. So it can kind-of vary. We work on a monthly [00:27:34.14] set at Launchpad, and that’s fairly typical. So typically, you’re booking a given month about a month in advance. We tend to have our diligence complete within two to four weeks. Usually in the sort-of low end of that range we’ve got the bulk of the diligence done, and if we’re coming out in a positive place, we start the term sheet negotiations before we’re done with the diligence, and we start the legal documentation before we’re done with the term sheet negotiation so that we can get around, negotiate it, and the soft-circling happening, you know, within six to eight weeks. It may take a little while to close the last of that round, but we’re amendable to having first closes. If their relatively close together we don’t mind the fact that there’ll be a second close. Some people are really religious about that, and we’re okay with the idea that a second close for the sake of convenience a few weeks later, that doesn’t bother us. And so, you know, we can get money in the company’s hands in four, six, eight weeks, which I think is pretty efficient. I think we would compare pretty favorably to any [00:28:45.00] fans or even a venture capitalist will sometimes will use outsiders for diligence and take longer and have additional meetings and postpone making a decision. You know, we’ll give you a yes or a now pretty quickly.

Nick:      Out of curiosity, do you guys have a fund vehicle like in Ohio Tech or at Tech Coast Angels that provides sort-of the core of the round and then the people in the group can bolt on investments with that, or is every financing a self-selection by the group members?

Chris:     We actually do not have a fund, and we feel pretty strongly about that. Funds can be good and they can be managed and made to work, and there’s nothing wrong with that model, but funds do introduce some complexity and some behavioral dynamics that are troublesome, and we have chosen philosophically to go in the opposite direction. And what I mean by that is, when you have a fund, you know, you can get into situations where some people in your world are more passive and some people are more active, and so you can get tensions around some people feeling like they’re doing all the work and other people are [00:00:58.03] riding and you can get into situations where the fund doesn’t follow on and abandons the people or individuals or vice versa. You get into situation around, you know, who knew what when, when there are disclosure issues. And so, and then you can get into some strange compensation dynamics for the people who run the group where you’re talking about people having transactional incentives. And Ham Lord and I who run Launchpad together, we feel very strongly that keeping the model very pure, focusing exclusively on very active angels who are not fund-type angels – passive investors – sharing the workload and eating off the same buffet that our members are in terms of… You know, Ham and I are both extremely active angels, but we’re busy, and we probably each do 90% of our investing off the Launchpad menu. And we don’t have any transactional compensation. We have no incentive to push the deal. We don’t care whether the deal gets done or not, financially speaking. And that keeps things… everybody’s active, everybody does their own work, everybody makes their own decision, and everybody’s comfortable with the level of disclosure, the level of involvement, and the clarity and transparency around the model. And there’s no right way to do it, and different ways can be made to work. But for us, that transparency and the lack of confusing incentives is really important to us.

Nick:      So you mentioned a couple differentiators, the expertise of your members, the speed with which you guys can make decisions. How do you currently compete with micro VCs or venture capital firms that have moved into this early stage seed investing space?

Chris:     Well, I would challenge the premise a little bit in that I think we cooperate more than compete. When you have a huge fund – a billion dollar fund – capital is not the constraining factor. Human capital is, right? I mean it’s doing the work. With angels, the opposite is the case. You know, you have lots of people but you don’t have an unlimited amount of capital. So angel groups tend, as you’ve experienced in Chicago and everybody in other markets has experienced, angel groups tend to be very cooperative, and we view each other not as competitors but as syndication partners. And in fact, Launchpad, we really specialize in very active angels that tend to have larger portfolios and tend to belong to multiple groups. So we have a big collection of sort-of multi-group angels. And so we syndicate 100% of our deals, even if we didn’t need to. We like having another partner in there. So we’ll co-invest with the active seed VCs in deals that fit our criteria, and we regularly co-invest with various seed funds, and we think those make for really complimentary investor syndicates and have no problem doing that as long as everybody’s on the same page in terms of the capital staging plan and the exit timeframe and all those kinds of things. You can get into issues when you mix. You can get into sort-of impedance mismatches when you mix different kinds of investors who are making different sets of assumptions. But assuming everybody’s coming in on the same term sheet and they’re all on the same page on the big issues, it’s fantastic. We love it. We’ll do it all day.

Nick:      So you guys are willing to follow if the right micro VC seed firm is an investor and they have a set of terms that’s well aligned with your set of criteria?

Chris:     Yeah, absolutely. You know, we prefer to lead our rounds, but if there’s an awesome term sheet, an awesome company, and we’re all on the same page, we’d be delighted. There’s some really, really good sort-of seed stage VCs and micro VCs in our market. I mean, just superb. And they’re great investors and we love to work with them.

Nick:      So Chris, the final theme that you talk about revolves around environmental changes. What are the macro drivers that have influenced angels and groups?

Chris:     So, you know, it’s funny. Not to plug myself, but I have a column in Inc magazine, and I did a piece on this sort-of. I think I called it the “Seven seismic forces” or whatever, and the way I think about this market is, there are a few things that have come together and really changed this landscape. You know, you sort-of say like, I mean, entrepreneurship wasn’t that common 25 – 30 years ago. I mean, it was around by the term wasn’t used as much and wasn’t as mainstream. And there really weren’t any angel groups or not many to speak of in the 1990’s. And you fast-forward to today, and there’s 350 angel groups and there’s syndication platforms and, you know, there’s just a lot more activity and it’s much more aware [00:05:59.09]. Angels are putting as much angel investing as… in the same ballpark as VCs, sort of in the $20 billion – $25 billion neighborhood. Angels are investing a lot more deals. You know, VCs are doing 4 000 deals a year, plus or minus, and you know, angels are doing 60 000, you know plus or minus a year. So it’s different deal size but, you know, what’s going on here? And I think there are a number of things driving it. We talked a little bit about the VC business changing and fund sizes going up as LPs, you know, put more money into that asset class for one reason or another. And when your fund is very big, you know, by nature you are needing to, you know, write larger checks if you’re going to move the needle and you’re focusing on sort-of billion dollar unicorns as an investing [00:06:50.02]. So you sort-of have to or you end up carrying a ton of staff and trying to figure out you’re you going to manage a billion seed investments. So that’s one piece. You know, the VCs have kind-of evolved a little bit and left a little bit of a gap. Another trend that’s kind-of out there is, it is less expensive to start a technology-centered company, and as a result there is a lot more of them around. Now, you and I both know that it’s not less expensive to market or pay rent for one of those companies down the road, so they still need inventional resources down the road. But, you know, getting one started is easier, and you know, companies need a little bit less money to get to the kinds of milestones that are associated with Series A rounds in financing than they used to. The sub $100 million IPO is kind-of gone forever, I think, due to Main street being a little bit burnt by Wall street during the dot-com era, and also because some of the regulatory responses that make being a public company a little bit less fun. So we’re seeing big companies stay private longer and we’re seeing entrepreneurs look to M&A exits as their path to liquidity in a much more primary way. We’re also seeing, I think, as I said, the professionalization of entrepreneurship and entrepreneurs being more thoughtful about their careers and saying, “Well, I guess if I had the choice of going for a one in 1000 shot at, you know, being the next Google or Facebook versus having a career where I just do the early years – the early fun years – of trying to find product market fit, and I do that three or four times, and put $5 million in my pocket a couple of times in my career, I think I’d probably rather do that.”

Nick:      Yeah.

Chris:     And angel investing really works well for that kind of thing and can be made to work and drive great returns at M&A exit valuations that are attainable earlier and in younger companies. Now people say, “Oh, listen. Aren’t you undermining the ambition and national competitiveness of America by, you know, focusing on early exits?” And you know, the answer is of course no. If a company is really taking off, you go ahead and put more capital in it and it becomes a unicorn and you go for it. But you jam a lot of money into a company assuming it’s going to do that, you can’t take that money out. You can always put money in quickly and easily but you can’t take it out. And so I think of it more about optionality and being flexible. And then of course, the other two trends that you and I talked about are, you know, more people working in a coordinated fashion with angels joining groups and platforms, and groups and platforms working in syndicates to form serious amounts of capital. So I think all those kinds of trends have kind-of come together to, well, the way I put it to my entrepreneurship students in the MBA program where I teach, I basically say, “You know, if you’re an entrepreneur today and you’re thinking about growing a company and gathering the resources you need to grow that company, you need to understand the angel marketplace because it is the place where interesting companies are getting their financing nowadays in the early stage. Not exclusively, but in a much, much more meaningful way than 25 years ago.

Nick:      So, you know, with all these macro drivers and all these changes, do you feel like angel groups have galvanized and strengthened over the past 5 years or do you believe the changing times have reduced their importance and/or impact?

Chris:     I think there may be a perception that they’re less relevant, and I think that actually the opposite is true. And this is obviously coming from the perspective of someone who’s kind-of inside that culture. So you know, take it with a grain of salt. But I think one of the things that’s a bit of a troubling trend to me, you know, the bubble word is coming up a little bit more frequently lately and, you know, I think in some markets and some segments the assets are probably getting overpriced a little bit. But we don’t need to have that conversation today. But I think one of the things that is worrying me a little bit is this notion that curation is the new diligence, for lack of a better way of putting it. And I get a little worried about this trend when you see money piling on and money following other money, and lots and lots of companies getting listed, and this idea of momentum rounds – things are hot – and people jumping on, and everybody assuming that somebody else is leading the round or someone else is doing the diligence. And I think that’s really a worrisome trend, and I’m not sure I like where it ends up when it’s played out to its logical extreme. And I think that the way I sometimes talk about this is that these deals are much more accurately analogized to adopting a puppy than they are to buying a lottery ticket. And there’s real work in doing these deals properly and in supporting them after the investment. And when you are just following a syndicate or investing on a platform, you know, in your bunny slippers with your mouse, you don’t necessarily know what kind of diligence has been done. You haven’t necessarily met the team, and you’re not really sure who’s in charge of, you know, the round. And Fred Wilson has written some interesting pieces on leading versus following and on the importance of having a lead in a round. And, you know, I think VCs are very aligned with angel groups in terms of the importance of doing diligence, and so there could be a little bit of a fashion of the day right now to think that, and we see this in overheated markets. We saw it in ’97, ’98, ’99, 2000. This notion that, “Oh, the internet makes everything better, and you can suspend gravity and all the other laws of physics and you can just do lots of deals without diligence. And you can fund this company and five copycat companies that are going to compete with it for resources, and everything’s going to be great.” And I think that even if doing things the old fashioned way and the hard way is a little bit out of vogue right now, I think the fundamentals are favoring this approach now more than ever.

Nick:      I know that I love going to AngelList and looking through the companies, but I can’t imagine somebody could make a decision from afar without going through, you know, a rigorous set of criteria and questions, just table stakes questions that much be asked…

Chris:     I think there’s a bit of it that gets done. I mean, people sort-of say, “Hey, this is a great syndicate. This angel has a great track record. And somebody’s probably done some diligence, and I’m just going to… It’s just a couple of bucks, so I’m going to throw the money in. You know what, I think AngelList is a great company, and I think they’ve really been innovative and they really are sort-of changing the landscape, but I would look at it more, in my mind, in terms of my investing, as maybe a place to top off a really properly built round than a place to go get all your funding. That may be just one person’s view, but I would never take the reputational risk of listing a deal on AngelList there wasn’t a proper round that I had done the diligence on. And I wouldn’t take the risk of investing in a deal that I didn’t understand its pedigree. And, you know, you can call me old-fashioned and call me a value investor, but there’s enough risk and enough failure in this asset class that you don’t make any money by being sloppy, cutting corners, moving fast, not doing diligence, and overpaying for assets. We need to be smart or we don’t make the money that we need to make for the risk we take.

Nick:      Yeah, I guess with a lot of these AngelList syndicates, the assumption has to be that whoever’s leading that syndicate has done the diligence, because without that, then there would be a pretty big issue, but…

Chris:     Yeah, I believe that is the operative assumption, but I found situations where someone’s leading a round and they’ve supposedly done the diligence and we look at it and it’s a good starting point. We’re not going to call the same customers back if the customer interview notes are decent. But in a lot of cases we do additional diligence. And that’s in a deal that’s diligenced properly to start with. So I guess if you can see the report and get comfortable with the methodology, great. But I don’t see that level of transparency in a lot of the deals that are being done, and you tend to see a little bit more of the party round, kind-of a round where nobody’s really in charge. Everybody’s just throwing in a couple of bucks, and when the *** hits the fan, nobody’s got that much skin in the game. Nobody’s really leading the round. Nobody really has any reputational risk. Nobody’s on the board. And there isn’t really a plan to make it right. You just get into a situation where you’re just writing the company off. Everybody just walks, because nobody’s really got any skin in the game. And I think those party rounds are really dangerous. You can get away with that kind of stuff in a market where a rising tide is floating all the boats and where asset, you know, valuations are just going up on everything all the time and everybody gets an automatic markup on every round. You can get away with that kind of nonsense for a little while, but you find out who’s going to make it when the tide goes out, right?

Nick:      Yeah.

Chris:     And that’s the old saying in the investing world.

Nick:      Right. So earlier you touched on crowd funding, and I want to circle back on that briefly. We’re going to do an episode specifically on crowd funding, but I know that you’ve covered this topic a number of times. You’ve got a lot of knowledge on it, and it seems like a moving target with the jobs act and when certain things are going to be implemented, not to mention a lot of downstream considerations and impacts. But can you share a couple of your thoughts on some of the key factors at present with potential significant impact that listeners should be monitoring?

Chris:     Sure, so there’s an awful lot going on in this space. There’s a number of different things going on and, you know, the best way to understand this is at a conceptual level to sort-of consider that there are two different views. There’s the good politics congressional view which is, it’s great politics to talk about freeing up capital and job creation, and all that stuff’s great. And congress really drove the jobs act and gave the SEC marching orders. And there’s the SEC view which is that, “Hey, we’re the ones being held accountable for having orderly markets and managing fraud.” And you know, there’s obviously a tension between those two. And the jobs act was great, but it didn’t really do the job completely. It simply told congress… Congress told the SEC, “You have to remove the prohibition on general solicitation.” So that’s gone, but the requirement that people be accredited is still in place. So true crowd funding is still a ways away in that, you know, you can talk about it but you still need to go find accredited investors on a platform or otherwise. So that’s kind-of one thing that’s going on. At the same time we have this epic battle going on around the definition of unaccredited investor, which is just ironic as [00:18:38.03] when you think about it, because you know, here we are, trying on one end to move in the direction of really democratizing things and moving in the direction of crowd funding, and there are some powers involved in pushing it in the other direction where the state securities regulators who are responsible for cleaning up the fraud when sketchy brokers go to nursing homes and dump crappy deals on them or the folks who are in the financial services industry and manage money for fees. Those two groups really would like to narrow the definition of what an accredited investor is, raise the financial thresholds, and really limit the amount of capital that gets formed. And it’s really quite ironic when you consider that it’s just the opposite of what we’re trying to do on the crowd funding side. And so there’s a lot of regulatory tension and confusion right now, and it’s not at all clear where we’re going to come out. On October 9th, the investor advisory committee that reports to the SEC gave a set of recommendations and basically they said, “We do agree. You should raise the thresholds. But we think there should be other ways to prove sophistication besides just financial thresholds.” But it’s a worrisome area really, when you consider that just taking out the value of the home from the definition caused us to go from 9% of the United States being accredited to 7%. You ask yourself, “How much lower can we go and still create jobs and have a vibrant early stage financing market?” So I’m not a big fan of making any changes to the financial thresholds, but if we need to do that for reasons of, you know, fraud or adjusting for inflation, I guess I can live with it as long as we really do revisit sophistication and allow people to demonstrate financial sophistication in other ways.

Nick:      Yeah, you know, it’s really confusing to me how there is these two competing sort-of ends of the spectrum. On one, you’ve got the crowdfunding movement, so let’s let anyone invest in private companies with certain criteria, right? And then on the other end of the spectrum, you’ve got the accreditation process, and there’s these proposals essentially to double the requirements, right, which is going to significantly contract the number of potential investors. I think my group would get smaller, so it’s just very odd to me that…

Chris:     But it really is different… It’s different forces at work, right? I mean, it’s great politics to talk about job creation and crowd funding, you know, when you’re getting reelected every two years in congress. It’s quite a different matter to regulate the markets and keep fraud at bay. And there are a lot of different… I mean angels tend to get thrown in with a whole bunch of other exempt deals under Reg D. I mean, there are unscrupulous brokers out there going and selling really sketchy investments to nursing homes. And those, they do cause an awful lot of fraud calls to the state securities regulators, so I’m sympathetic to that perspective. And I think that it would be tragic if a generation that barely has enough saved for retirement or arguably doesn’t have enough saved for retirement, goes onto some syndication platform, blows their retirement, thinking they’re going to double their money in two years.

Nick:      Yeah.

Chris:     So I get where they’re coming from on that, but we have an economy to run here. And angel investing is not those things. Angel investing is people who have career success and experience, choosing to invest their own money in very thoughtful ways with proper diligence and so forth. And I hate to see us get attired with that brush because I think that we are… our deals are generally not brokered. You know, so even just the existence of whether it is a broker or not, is I think, an important question. We’re investing our own money. We’re not money managers. You know, we look at AngelList syndicates and you get into some of these funds of funds. Even more of these are popping up every day which worries me a bit. I just did an interview with somebody recently about these new models like Maiden Lane and so forth. It does get to feel a little bit like the later stages of a rational market in some ways, but for the most part, angels are thoughtfully investing their own money. They’re not being paid a fee to run money or manage other people’s money, and they’re serious about creating jobs and helping these companies. And I think that’s pretty special and pretty sacred and ought to be protected.

Nick:      Yeah. Certainly, protections do need to be in place for those people that could be exploited by these people, you know, that are fraudulent.

Chris:     There is, you know, some fraud in the Reg D area, you know, in the sort-of kinds of stuff we talked about, but fraud in real angel investing is almost unheard of.

Nick:      Yeah.

Chris:     You know, and it’s because people are looking each other in the eye, and they’re meeting the teams and they’re making smart assessments, and there’s a relative over-supply of companies compared to the money. And so quality things are getting funded for the most part.

Nick:      So Christopher, can you talk about what you’re currently most focused on?

Chris:     Exit on the investing side. You know, getting our companies where they need to be and making sure they’re creating value at least as fast as they’re consuming capital, if not faster, hopefully. And I think a lot about the, you know, as I prepare to take over the Angel Capital Association this summer as the chair elect right now, I think a lot about the regulatory climate that we talked about earlier and about the asset class if you will, and about the future of angel investing. And I think, you know, I get a little bit worried that if things get a little too unregulated or too overheated, that we could have a little bit of a backlash if things go poorly and people get hurt. So I worry a little bit about that, but for the most part I think it’s just an absolutely fantastic time to be an angel – really, really interesting. There’s amazing new innovations some of these new platforms create, and I love what I do. When you love what you do, you’ll never work another day in your life, right?

Nick:      So if we could cover any topic in venture investing, what topic do you think should be addressed and who would you like to hear speak about it?

Chris:     Good question. I guess I think it would be kind-of interesting to have somebody go back and really look at what’s going on in green investing. There was a lot of fanfare around [00:25:42.25], some of these other really high profile green investors going off and doing a lot with it. And then some of those high profile battery chemistry kinds of things, solar cell kinds of things, didn’t work out and green fell a little bit out of favor. And I’d be curious who’s doing… I’d love to hear a podcast on who’s doing interesting stuff in the green space and who’s found a model and that kind of stuff. That might be kind-of a neat vertically focused topic for you to tackle.

Nick:      So what’s the best way for listeners to connect with you?

Chris:     You can always send me a tweet @cmirabile, M I R A B I L E. That’s one good one. And you can find me on my blog at scratchpaperblog.com. Leave me a comment there. And I’m hanging around at seraf-investor.com a lot – we’ve built a set of SAZ tools for helping angels manage their portfolios – and doing a fair amount of writing and work over at seraf-investor.com.

Nick:      I will include all of Christopher’s contact info in the show notes. Chris, thanks for everything you do for the community. Best of luck with your work at the ACA. Check out sratchpaperblog.com. Tremendous amount of great content. We really appreciate what you do for the angel community.

Chris:     Back at you, Nick. Thank you for this podcast, this opportunity to talk. It was fun!