One of the more enjoyable panels at last week’s Opportunity 2006 conference in Wilmington, NC was titled, “Finding the First $1-2M - What Angels Think.” Donna Jensen-Madier, who raised money for her “venture accelerator,” Startups.com, during the bubble, recounted her steps in raising money from a combination of angel investors and a venture firm. And Marty Hackney and Tim Janke, both representing established angel funds in North Carolina, described what they look for and what the entrepreneur should expect in the way of process. The result wasn’t “What Angels Think,” which can be all over the board, but rather ”What Sophisticated Angel Groups Think” (i.e. much closer to standard institutional investors). If you’re interested in pitching angel investor groups, check out this great primer and ignore its title which includes “for Software Entrepreneurs.” The document is broadly applicable.
Being a stats junkie (it’s a complex world to distill anecdotally), and generally understanding the angel perspective, I honed in during the panel on the following from Tim who runs Inception Micro Angel Fund:
- On average, a first-time entrepreneur who has successfully built a business with several rounds of capital ends up owning 7-8% of the company at exit;
- On average, the second-time entrepreneur (as in has one success notch in the belt) ends up with an ownership stake in the mid-20s at exit.
The disparity is striking, especially in the face of inconclusive data on the topic. Prior success is not necessarily an indicator of future glory; in fact, some data shows prior failure is a stronger indicator of future success than prior success. So what’s happening here? I’d expect some portion of the delta is attributable to the second-time entrepreneur’s newfound savvy which leads to better valuation negotiation, and perhaps the selection of more “forgiving” investors. The bulk of the delta, though, is likely an assessment of management, particularly as it relates to downside protection. I haven’t seen related data, but I’d expect that second-time entrepreneurs are much better at avoiding a flameout than first-timers. Evan Williams of Blogger and Odeo is a strong, though unusual, case in point. There’s comfort in “riding a winning horse.”
Anyone have additional relevant data? Here’s another post on the topic of founder’s dilution from European investor Max Bleyleben.
[...] Rob May, who has created quite a following at Businesspundit (and is something of a blog mentor), linked to my founder’s stake post yesterday afternoon with the following comment: Matt Winn writes about the founder’s stake at exit for VC funded startups. It’s low enough to make you think hard about taking VC money. [...]
What Venture Capital Might Get You…
Via Business Pundit I came upon this post by Matt Winn talking about how much a company founder might expect to come away with if he/she teams up with venture capitalists to build a business.
Winn quotes Tim Janke of the Inception Micro Angel Fund as s…