Todd Gagne:

Andrew, welcome to the podcast. I appreciate you making the time today.

Andrew:

Absolutely. Thanks for having me, Todd.

Todd Gagne:

Yeah. Well, why don't we start off a little bit about just kinda your background and stuff? I mean, I think you have a pretty interesting path. From what I understand, you started off as a petroleum engineer. You did some stuff in supply chain, and now you're a champion and advocate for angel investing.

And so, Angie, you have a startup that's basically doing that. So maybe just talk a little bit about, you know, how did you end up there and and and the different steps that you kinda went through.

Andrew:

Well, you nailed it. I started out I didn't know what I wanted to do when I grew up, but I was pretty good at numbers. Strategic thinking was fun. I actually, one of the things that drove me to engineering in the first place was as a kid, I was fascinated by tower defense games. I don't know if you ever played

Todd Gagne:

these, but

Andrew:

the, you know, you you set up little towers and they shoot crawlers that come through it. I would just play these for hours and hours and hours, constantly thinking about how to optimize. And so it was only natural to go in engineering. I had no prior engineering experience in my family, but it seemed fun. And I ran my finger down the list of different engineering types and looked at petroleum engineering.

Oh, that seems challenging. It seems interesting. Dig a massive hole miles under the ground and a couple miles that way. That's pretty cool. So went to school for that, figured out pretty quickly that I was not in love with the technical elements of the work as much as a lot of my peers were.

And so I knew I didn't wanna become a technical sit in an office engineer. I was really interested in

Todd Gagne:

Reservoir engineer?

Andrew:

Yeah. It wasn't well, that was not for me. But, thankfully, I found myself right off right out of school in a sales engineering role where I got to kinda stand and and step into business a little bit. I got to work with customers, basically commercializing products to fit their particular needs. And so that was in the industrial automation space.

And over the course of about 4 years, this is for an Emerson Electric distributor. Over the course of about 4 years, I got to be part of moving about 3 ideas from concept on a whiteboard all the way through to product on the shelf. And I loved it.

Todd Gagne:

Yeah.

Andrew:

One of them completely flopped. The company lost a bunch of money on it, but 2 of them did moderately well. And so after a few years, I was like, okay, this is cool. How do I do more of this kind of thing? I wanted to learn about say it more about sales, more about finance, business leadership, and so decided to take a step in that direction, and went back to school to pursue an MBA.

I'm a 2 time Texas Aggie. I actually live in Aggieland. So

Todd Gagne:

Yep.

Andrew:

My wife and I decided to make it permanent a few years back and came back for the MBA and pretty much immediately got plugged into the startup ecosystem. I came in with eyes wide open for what does entrepreneurship look like and found myself serving at an angel group here attached to

Andrew:

university. That led me to discover this whole early stage world of angel investing, which I had no former context for. It's fascinating to me. And so for my MBA capstone project, I decided I would go interview a bunch of angels, angel network operators, and entrepreneurs who have raised capital from angel investors. So after I sat down with about 50 people and asked them all, what sucks about angel investing?

I came away with 2 main things. Number 1, running an angel network, like running the process, just really difficult. It's often volunteer or part time staff led, and it's a lot more work than people realize. The second thing that I heard was really difficult is the due diligence process at the angel stage. Most of it, if people are honest, is gut feel because there's so little hard data to analyze like you might have in a private equity or public market deal.

But there was still a demand from the average angel investor to make a informed decision, and they didn't wanna just throw their money away. And so these are 2 of the main pain points that I learned existed in the ecosystem. And so I looked around and was like, well, I'm not that smart, but I could probably help with these things. So raise my hand, started the company that I'm I'm now running called Pitchfact, focused on providing operations and due diligence as a service for communities of early stage investors. So instead of having to rely on the volunteers or part time staff or hiring and training and managing someone internally, we can provide all of that as a white labeled service to help a group really mature and serve their members and entrepreneurs more effectively.

So I've been doing that for the last couple of years. During that time, my company and I have looked at over a 1000 companies. We've produced almost 200 diligence reports during that period. And today, we are actively serving around a 170 individual angels across 7 different excuse me, across several different angel communities.

Todd Gagne:

So it's it's not the angel network that that that basically is your customer, it's the individual?

Andrew:

The individual is the end customer. Our

Todd Gagne:

like, the

Andrew:

person who pays us is the community itself. So the entity Yep. Yep. Yep. Itself would be the one that, you know, itself.

So the entity Yep. Yep. Yep. Itself would be the one that we would bill to.

Todd Gagne:

Okay. Gotcha. Well, it's pretty exciting. You know, I I I think I was telling you just before we got on that I've done a bunch of angel investment in the past. And I think, you you know, some of the the the issues that get raised, I totally empathize with.

Right? I I I we're in, a chapter called the Black Hills Angels, and, I'm a cochair, and we have these same problems in spades. Right? And so, it's just it's difficult. And and then I think the frustration for the entrepreneur on the other side is, you know, basically diligence isn't consistent.

It takes way longer than it should. I don't know what to expect. And then, you know, and it's it doesn't doesn't feel very professional to them. Whereas every day they're waking up to try to get their business done. And you're like, well, all these angels are basically going to do their day jobs and they're trying to pitch in and fill in the gaps where they can and get you an answer as quickly as they can.

So I could see how this is a really good niche and it fills a need that's pretty important.

Andrew:

And that's the exact problem that I heard from so many of these founders and quite frankly from the investors. Like everyone sees this pain and this inefficient diligence process is it just it creates friction for everybody. And so one of the dirty little secrets of angel investing that I have learned, and I this is an aside, but I think as a service provider in any space, you kind of become cynical pretty quickly because you are there because there's problems in the space and your whole job is to fix these problems. And so I've seen a lot of dirty laundry and how these communities are run. And one of the dirty little secrets that I think entrepreneurs maybe sense, but are rarely told is that due diligence and extended due diligence can often be a soft no.

Yep. Right. And investors kind of interested, but not con confident enough to actually commit, but they don't wanna offend and hurt an entrepreneur's feelings because they like the person. And so they'll drag on this diligence process as a way to soften the blow. And to your point, it's really not helpful.

Ad so one one of the most important things for an effective angel community is to have a clear, consistent ability to say no to an entrepreneur that's not a fit. That's not fun news to deliver. It's probably the worst part of the job, but it's one of the most important because you say no to 95% of the stuff applicants. This is just not a fit for one reason or another. And so I think the communities that have good clean processes for delivering the no in a way that is respectful and leaves the entrepreneur in a position where they might just come back in a couple of years when they're in a different position, those are the communities that are really well positioned to grow.

And once they fail to do that, develop a poor reputation, entrepreneurs stop calling, and it just spirals out of control.

Todd Gagne:

So, Andrew, why don't we do this? Like, if you're fine with this, why don't we almost take it from an entrepreneur and just go through the entire steps of the process. Right? I'll basically between the 2 of us, mostly if if founders are listening, mostly what they're interested in is saying, how does this process work? What can I expect from a general perspective?

And so, let's say I have a business and, you know, I'm getting to the point where I've done my beta, I've got a product, maybe I've got some people that are converting to a paying kind of customer. I'm running out of money. Right? I've I've paid my developers. I'm not taking a salary, and and I think there's a a large market opportunity.

Now, you know, like, this is a time, at least in my network, where, you know, you've gotten some traction, you've got some sort of go to market strategy that you're trying to go do, and now you're reaching out to these networks to get on their calendars. You're filling out applications, to, get an audience with them. And so, right, from that standpoint, then there's a culling process that happens and then you're just trying to get scheduled and get an opportunity to present. And so maybe go from there where it's like what are the key elements to presenting? Right?

Because most of these guys are getting maybe 30 minutes, and it's like spend 20 minutes explaining to it and you got 10 minutes of questions because we got another guy that's coming right behind you.

Andrew:

Yeah. You're exactly right. That's generally how the process works. If there's any entrepreneurs listening that are interested in really understanding how angel communities function, I've got I've got a whole ebook on this so we can go in a whole lot more depth. It's called the AngelOps ebook.

I'll we'll include a link in the show notes, I'm sure. Yep. But basically, it's a 5 step framework for understanding the deal sourcing vetting management process at the average angel community. During my early analysis of the space, I realized there wasn't a clean framework out there for understanding how these groups functioned. And so I was like, well, let's put one together, and I did.

So there's 5 basic steps. The first step that any angel community has to run is to source deals. So they've got to find you. You have to find out about them, and there has to be a connection that that's made. So sourcing deals is the first step.

The second step is evaluating deals. So after a deal has been sourced, the the community's first job is to assess if that deal could be a a fit for their community. That's typically done by some kind of a screening team or a committee, some leadership set that knows what the membership is most keen to invest in. They'll evaluate those opportunities to see if they're to fit. Assuming these

Todd Gagne:

clean are those generally? Like, how clean like, for us, we don't have enough deal flow, so I think we're pretty generic. I tend to like software companies because that's just my background. But do most of these, networks have a pretty clear, published, criteria of what they're looking for and what they think is the best fit?

Andrew:

It depends on the maturity level of the community. So what I've experienced is that I kind of think about angel communities in 3 stages. Sometimes they'll progress from stage 1 to stage 3. Sometimes they're happy with the stage that they're at, but it just depends on the community. So there's 3 basic stages.

The first is I'll call it the informal angel community. This is fairly loosely structured, relatively small, typically 30 or less members. They tend to be more opportunistic and open to a variety of things and have less of a specific structure in place. It sounds like your community might fall a little bit more into that category based on what you just shared. The second type is what I will call the maturing or scaling community.

This is kind of the teenage angel group that is looking around and they're like, okay. We have 50 members, a 100 members, and they wanna see more deals and now they're paying dues. And so there's this drive to formalize, kind of process things a little bit more consistently to be able to provide value to the community. And so they'll often bring in an operating team to help drive a lot of those roles, and that's where we tend to come into play a lot of the time. And then the 3rd type would be the mature or well developed investor community.

And this is several hundred members, highly rigid processes, but they'll invest massive dollars if they opt to go. And so one example would be, like, the Central Texas Angel Network. They're here in Austin. They're very well structured. They've got, I don't know, 6 pitch cycles through the year with a very strict workflow.

And they'll invest like $800 or a $1,000,000 as a community if they end up liking a deal, but it's a slog to get through the process. Sure. So that's the 3 types, and I think the level of clarity around what isn't is not a fit tends

Todd Gagne:

to

Andrew:

sharpen as you progress from level 1 to level 3.

Todd Gagne:

Okay. That's good. Well, I derailed you a little bit. I you were kinda going through your criteria. You were saying first was sourcing, the second one was kinda criteria, and then there was 2 more?

Andrew:

Yeah. So there's 5. There's 5 steps. Source, evaluate, engage, close, and monitor. That's the 5 steps.

Lots more in the book. Evaluate, is this a fit for our members? Engage is the really important step where an an entrepreneur is actually introduced to the bulk of the membership. They might have met a couple of members during the evaluation step, but they're generally not gonna be presented to the entire community. At the engage step is where an email is gonna go out with your pitch deck and your materials.

You're gonna be invited to give a pitch at an in person or virtual event, some combination thereof. And that's a really important step because at the very end of that step, the leadership of the community will assess, do we have interest? Like, are our members interested in this deal? Following that, you get into the closing step. So step 4 is, okay, we have some interest.

Let's say there's a $100 of interest from 4 different members. This is enough for us to put some more energy around this. This is where you tend to get into the deeper diligence. Hey. We still have these 10 questions.

Investors wanna get a little bit more clarity on a, b, c, and d. And then the community is gonna come around that entrepreneur and those interested investors to help facilitate resolving those issues as quickly and efficiently as possible to help each individual to make their decision. And maybe it would be helpful if I just step back and kind of define what makes an angel network different from a venture firm or Yeah. That'd be good. Either a syndicated or another type of investor.

Todd Gagne:

Yep. And then

Andrew:

I'll come back to the final step, which is monitor. So an angel network fundamentally is a marketplace. If you're interested in marketplaces, there's a great book called Platform Revolution that I read a few years ago, and I think it captures this really well because it focuses on the importance of the core interaction. Any marketplace's success is measured by the effectiveness with which the core interaction takes place. The core interaction in an angel network is a deal getting done.

Full stop, period. That's what it's all about is getting deals done because members join in order to see more deal flow, and then entrepreneurs apply in order to get funded. All the community elements, the camaraderie, the encouragement, the coach, all that is good, important, needed, and that's part of the secret sauce of what makes each community unique. But the core fundamental thing that Angel Group is trying to do is get these opportunities funded. The way that makes it unique from any other, mechanism is that the operational team around the Angel community actually has very little control of what the members ultimately choose to do because in a true vanilla I'll call it a vanilla angel network, members all make their own decisions.

There is no official fund or pool of capital that is being deployed by the leadership team or some management. It's literally we have 50 members and every single one of them has to make a decision about whether they like this company or not and if they wanna invest from their personal checkbook into this opportunity. Whereas in a venture fund, there is a pool of capital that has been raised from a number of limited partners who contribute to that fund and then have a general partner who is going to lead and make those decisions on behalf of all those other members without necessarily requiring them to make a specific election on whether or not they like that deal. Same same thing for a syndicate model. People get confused between a syndicate and an info group a lot.

A syndicate is similar, but what makes it different is that a deal typically is not shared with the membership until the syndicate lead has personally committed to invest. So let's say Andrew Andrew syndicate liked the deal. Hey, Todd. I committed to invest $50. We've got another

Todd Gagne:

We're piling up. Grand Yep.

Andrew:

Allocation. If you want in, let us know in the next 2 days. Otherwise, we're moving through. So that's a little bit different. There's, a place for a lot of different investors to plug in, but at a true angel network, there is no dollar commitment upfront.

Now I will say about 30 or 40% of angel communities do have some kind of fund mechanism attached. Yeah. We do. I was at the Angel Capital Association event back in April in Columbus of 2024, and that was the stat they shared. There was there's some kind of fund vehicle attached to 30, 40 percent of angel groups, but in my experience, those tend to look pretty different.

So, I tend to leave those out and kinda treat them in isolation. So that's what an angel group does. Angel networks as a structure are actually fairly recent. The term angel investor is attributed to a guy named Bill Wetzel, who coined the term in the eighties. He passed away in the late nineties, I think.

And he actually helped found the University of New Hampshire Center For Venture Research. They produce some great content every year. And coming back to that core interaction, I believe that the core interaction of an angel network is a deal getting done. And according to their research, the average angel community, their hit rate or yield rate, which basically is deals introduced to the network versus deals that get funded, is around 26, 27%. So takeaway there is if an angel group is doing better than 1 in 4 deals that pitch get funded, that's a really effective community.

So that is what an angel group does. That's the purpose. And so in the closing stage, coming back to Angel Ops, a network's job is to help the investors and that entrepreneur resolve information asymmetry to be able to make an investment decision or not and give a clear answer to that entrepreneur. Assuming an investment gets made

Todd Gagne:

and we move to the

Andrew:

final step, which is monitor, that's the one that most angels and, entrepreneurs tend to forget about, but it's really important. This is the quarterly updates, the annual updates of like, how's it going? We said when we invested that we were going to hit 5,000,000 ARR and do ABCD. Okay. Well, it's been 12 months.

Have we done it? Why not? Right. What's happening? And the reason this this stage is so, so, so, so important for everybody is this is what establishes the confidence to make follow on investments or not.

To follow on at the next company, if I'm a serial entrepreneur, my first thing failed, but I sent great updates and involved my investors, I'm probably not gonna have that hard of a time raising a second fund or a second round as long as I have have done well and done right by my investors. So often we see entrepreneurs just go silent, outright lie. Like, I I hate to say that, but it's super true. And I get it. There's a ton of pressure on these entrepreneurs.

They feel like they failed their investors, but the monitoring stage is super important for these investor communities and for entrepreneurs to be aware. So that's the that's the 5 basic steps. The flavor for how that actually materializes tends to look pretty different community to community, but those are the the five core steps that every community has to go through.

Todd Gagne:

Yeah. How has this changed? You know, we were talking before we got on just about the environment for Angel Network, or Angel Investing, you know, when interest rates were 0 versus what it is today. And so I'm kinda curious if you've got any, just feedback or color on how that landscape has changed, whether it's looking for traction, valuation, you know, just what's the criteria and how maybe has that changed, from a kind of a zerp environment to today?

Andrew:

Angel investors are generally very intelligent. And what I mean by that is that an angel investor is what's called an SEC accredited investor. So to invest in private companies, you must have a certain net worth or, there's a few other ways that you can Yep. That you can qualify. Generally, the majority of angel investors are entrepreneurs who've had an exit themselves.

They're successful business executives. The Angel Capital Association puts out an annual report called the Angel Funders Report or something similar. And in it, they detail the general makeup of, like, what's the average angel. And I think it's, like, 50% or or more of the average angel investor are actually the performer or active entrepreneur themselves. Yep.

So these are very smart people that understand the ecosystem and they have a lot of places they can put their money. They have a lot of places that they can put their money. And so just like any other investor, the average angel is directly affected by macro trends. Right? They're watching their 401 ks.

They're watching their personal investments, they're watching their real estate portfolio, like they're watching a whole portfolio and they're typically carving out 1 to 5, maybe 10% at the most of their invested capital towards this highly risky asset class. And And they're doing that for a variety of reasons. The 2 most common reasons that I see are, number 1, it's fun. Like, I'm a successful entrepreneur, and I wanna get back to the ecosystem. I wanna walk with some of these other younger entrepreneurs and help them.

There's kind of this juice to the ecosystem that's just really fun, and it's exciting to be a part of. It's fun to talk about at dinner parties. The other reason is it's just the same reason you go to Vegas. It's an opportunity to make a lot of money. You're probably not going to, but you might, you just might, and that's really compelling for people.

So all of that said, when your overall portfolio is lower, you tend to go to Vegas a little bit less often or maybe more often

Todd Gagne:

depending on your, philosophy.

Andrew:

But what I mean by all of that and why I share this this background is that macro trends have a direct impact on the angels approach to capital allocation. That 1 to 5% might get smaller over time depending on what happens with the rest of my portfolio. In 2020, 21, that time frame, the venture market and the early stage angel space was very active. I mean, it was go, go, go. Everything was exciting.

There was so much happening during that season. And so diligence tended to be less important than speed. It was more it was more valuable to get in on a hot deal than it was to take the extra week to do some analysis and be confident about being in. So you see a lot of angels just kind of coattailing on other trusted lead investors. Sure.

Today, you still see that. But over the last few years, the exits in the venture ecosystem have gone way down. I was just reading some recent pitch book data that was talking about how exits have just been weighed actually, no. It was, Angel Capital Association data. And so investors aren't seeing liquidity.

One of the big trade offs of angel investing is that this is not like buying Microsoft. Right? Buying individual stocks is risky. Totally. There's a bunch of science portfolio theory around that.

But buying a private investment into a small company is very different because if I don't like how Microsoft's doing or I have some need elsewhere in my portfolio, I can turn around and sell that tomorrow. Liquidity is traded on public market. Angel Investments, 9 times out of 10, you're not gonna be able to touch this capital for, like, 5 years plus.

Todd Gagne:

Yep.

Andrew:

K? So these are long term, very illiquid investments. The only way you get your money back generally is if there's an exit, so the company sells to another acquirer or goes public, or if there's some kind of secondary transaction where, let's say a new investor comes in and wants to buy out all the earlier investors, you might have the opportunity for a smaller exit. But you give that $25 to this young company, and you might never see it again. Yep.

You can't just decide that I want that cash back the next week like you could if it was Microsoft. So So all of these risks together, I have seen become more forefront for the average investor. And over the last couple of years, I would say that, diligence and dollar size has gone down. Like, the general trend that I'm seeing is smaller dollar amounts and wider deployment in order to minimize risk. So, I recently interviewed, an individual who helps run Sidecar Angels named Alden Zeka.

I think it's episode 15 of my podcast, and he talked about how over the last decade since he began his angel investing journey, his average check size has come down significantly, and he now deploys into more companies in order to spread out his risk and increase the chances of getting in on a deal that's gonna go to the moon. Because this is all portfolio it's all portfolio management, and it's all about a, it's it's not a it's not a normal return. It's a kind of algorithmic Yeah. Return. Yeah.

It's power power law where if you miss out on the one deal that goes to the moon, you've just missed the chance to return your whole portfolio. Yep. So that's a few thoughts for you on some recent trends and and angel behavior.

Todd Gagne:

Okay. Well, that's good. I think that's super helpful context. Thinking like, like, I'm a founder and you're saying, what are the most, practical steps or that that basically a founder can do to be attractive to these investors? What do they look for?

And, you know, this is hard. Right? Because there's not a lot of track record. There's not a lot of customer, you know, penetration or, you know, go to market is probably still early. And so, you know, there's a bunch of things that that we look for.

But I'm curious from your standpoint, what do you think, as a founder who's presenting to these folks, what's like the what are the key elements, to really promote? Because those are either differentiations or helps them make good decisions quickly.

Andrew:

A little bit of a maybe a hot take on this. I think most entrepreneurs shouldn't raise capital from angels, and they shouldn't raise capital from venture. Some should, but most should not because there are a lot of other capital sources available for building companies. And I think many entrepreneurs fail to distinguish between this is a small business or this is a venture backed startup. And what I what I think about as differentiating between those 2 is that a small business generally is there's great small businesses out there.

I'm not this isn't saying one is better or worse, but there's too many things that differentiate. One is that there's a capacity for scale that is dramatically centered in the venture backed, highly scalable opportunity, where if this is a winner, it could go to the moon. This could become an Uber or an Airbnb or any other major company. So there has to be this highly scalable element. And then number 2, management has to have an exit objective.

In a small business, that might not be the case. This could be something that wants to be in the family for a long, long time. So the the number one thing that I think a lot of entrepreneurs fail to understand is, oh, I'm running a small business, and that's good. I shouldn't go raise money from angels. I shouldn't go raise money from venture.

I should go get a loan or, find some other way to finance this. That's great. Just understanding that difference. Because if an angel sees a small business pitch, they're out and it's a waste of everyone's time. The second thought is that the best way to get funded by an angel is to find the right angel.

And what I mean by that is different investors invest in different things. Angels, like I talked about earlier, tend to have a passion for giving back to this ecosystem, and they'll generally have some kind of nuanced expertise. They wanna be able to leverage that. Like, they're not just trying to provide dollars and go sit on the sideline. Over and over and over and over and over again, I talk with investors about the importance of being smart money versus dumb money.

Dumb money is, here's $25, good luck. Smart money is, here's $25. If you need to meet anybody in the nuclear energy space, let me know because I have 47 years of experience in this space, and I wanna help you be successful. And, oh, by the way, if you wanna meet on a semi regular basis, I literally invested in your company, and so I wanna see you be successful. That's smart money.

That's helpful. So finding the investors who are excited about your space, excited about what you're doing, and that you can find a way to invite in and to leverage, that's huge. Getting a little bit more tactical in let's say you're about to go pitch. Right? You you got invited to pitch or you're aspiring to present at an angel community.

Talk about your traction. Like, number one thing is talk about your traction. I don't care if you don't have revenue. Find the traction you do have. Hey.

We've done a 170 customer discovery interviews. 98 of them said this, and so we're building this exact feature to service these. Like, that's traction. Show show me what you have done that proves there is market demand. Show me the data.

Right? I don't care about your TAM. I don't care about your estimates. I care about what you've actually done. And then the second thing is convince me why you're the team that's going to be able to go bring this to the market.

Because at the angel stage, it really is all about the team. There's a ton there's an eternal debate about would you rather have a great market with an average team or a great team with an average market? 9 out of 10 angels, they won't invest in this. They like you and unless they believe in you. Yep.

And so making a point to spend the majority of your presentation talking about what's the problem, what's the traction that you've actually secured, and why are you the people that are gonna be able to go crush this thing? That's probably the best space to focus your time and attention on during a pitch. And then follow-up. Like, it is a relationship business just like every other business, and these investors, not a 10 of them, one invest in this, they like you. Most angels aren't doing this as a career.

The ones that do tend to ultimately end up leading syndicates or working as solo GPs. Most angels are doing this part time because they just wanna help. And so taking the time to build a relationship and just sit down and have coffee, well worth the effort.

Todd Gagne:

Yeah. And I would say even before you actually pitch. Right? Go find out who these people are. Start telling them the story so that, you know, it's a warm introduction when you actually get in there.

Because 20 minutes is, you know, 30 minutes is tough to get any sort of connection. And then the diligence process, there's a diligence team that's probably doing this. But, you know, like, how much time you're getting with those guys to build a relationship is pretty hard. And so maybe I I would kind of, conflate some of these where, like, talking about the traction story and building relationship, the earlier you can do that and use them almost as a mentor, not only to get in, but then be an advocate for you in the process, I think is really key.

Andrew:

The the best time to start building relationships is before you need capital. So if you're an entrepreneur right now building something, great. Go talk to Venture. Go talk to the angels. Go get your face out there.

Build relationships. Find people that care about what you're doing, and ask them for advice. And do that again and again and again and again and again. And in 6 months or 12 months or 24 months, when you're in a position where you feel like you can actually put $500 to use to scale your business, you have a very easy set of first phone calls. It's a lot of work.

It takes a lot of time to do that. I I get it. But, man, is it worth it in the long run to accelerate your funding journey? You're always fundraising. You're always fundraising whether you actually need cash today or not.

Todd Gagne:

So another one that I think, a lot of entrepreneurs, slip up on is just financial acumen. I mean, I think, you know, they get through, they understand the product, they understand the space okay. But then, you know, you ask 2 or 3 questions from a financial standpoint. They throw up some, you know, spreadsheet and you ask 2 or 3 questions just poking behind the numbers. And a lot of times they don't have it to back it up.

I don't know if that's a, you know, something you've seen kind of more as a trend, but I do think that they're underprepared a lot of cases for the financial diligence. And maybe the last thing I'd say in this is you gotta know your audience. Right? These are people that have done well, but they could be doctors, lawyers, dentists. Right?

And so they're maybe not know the technology or the space you play in, but what they do know is some sort of P and L. Right? They can understand kind of profit loss. They can understand a lot of just base assumptions about how business works. And so I think a lot of times they're at a disadvantage and unprepared, at least in my experience.

Andrew:

I would agree, but that doesn't actually concern me too much. What I mean by that is, let's say I had 10 points of resources as an entrepreneur, and I could allocate those to leaning into my strengths or shoring up my weaknesses. Let's say I'm really bad at finance. I don't know anything about all of that, but I'm really good at product, and I'm a great engineer. Okay.

If I'm that entrepreneur, I'm gonna put 9 points into leaning into my strength and specializing in what's really excellent about me. I'm gonna take one point and put it to learning the basics so that I can get up on a stage and have a basic conversation about here's our top line revenue, here's our gross margin, here's our net income. Like, you need to understand the basics. But beyond that, hire somebody. Like, that is an outsourceable skill.

There are millions of people that love finance. You can hire a bookkeeper for very little. You can bring on fractional CTO at a very low cost and address a lot of those needs in that way. I would rather see an entrepreneur double click on what they're great at.

Todd Gagne:

Yeah. So I I'm gonna push back a little bit, and maybe we're not we're not talking apples to apples. I think sometimes, you know, you challenge them on a customer acquisition cost or, you're talking about lifetime value. And, you know, like, some of these things are not outsourcable things. You know, you can basically build something and then you can chase a customer, chase a customer, and basically the lifetime value doesn't pay for the investment you've made from a marketing perspective and you're gonna have a problem.

Right? And so I I understand the fundamentals that you're talking about and I don't disagree with a fractional CFO, But I think a lot of times, at least in my world, which is mostly SaaS, software stuff, like, there's some basic understandings of, like, how do I get my customer? What's it cost me to get to this customer? When does it become profitable? That are finance related.

But if you don't understand that stuff in a in well enough to take my check and do something constructive with it versus just light this thing on fire and then basically come back to me and said, hey. It didn't work the way I thought. Like, that is a concern.

Andrew:

Yeah. I see what you're saying. You're talking about financial projections, use of funds, the assumptions that are underlying the growth path forward.

Todd Gagne:

I

Andrew:

totally agree. That needs to be well thought through. I think the important point that you're touching on is that the timing of when you go raise capital is super important. Like an entrepreneur should not be raising capital when they're like 2 months, they have 2 months of cash left and do or die. Like that is not a good sign.

I'm as an investor, I look at that and I'm like, I'm out because I like, I might like you, but I don't want to commit my $25 if I'm not confident that you're going to be able to go get the other 4.75 within the next 30 days, because if you don't do that, you're screwed. Like that's a problem. Timing matters. Being thoughtful about the fundraise matters and what the use of funds will be matters. If I'm raising half a $1,000,000 and I'm going to put all of it into marketing, I better have a really good reason for that because I need to be able to show my investors what that's gonna drive.

The assumptions that you're talking about need to be very clearly thought out and well defended. And more importantly, I think what I have found is helpful for entrepreneurs to have a clear sense for and to communicate to their investors very clearly is here's the future that we expect for our fundraising journey. This $500,000 round that we're raising over the next 6 months is gonna allow us to achieve milestone 1, 2, and 3, which we have done our research and found that series a investors in this space expect to see these milestones. And so this money round is gonna get us to those milestones, which is gonna then allow us to go successfully raise from series a investors and so on and so forth. Having that well thought out and well researched, again, back to previous point about relationships being built, that's the kind of information you get from those, having that lined out and clear and having well thought through assumptions in place, super important.

And we evaluate for that in in our analysis as we help run these communities. It's like, hey. Does this person have a plan for this capital, or do they just need 500 k because they're looking at their P and L for the first time in 3 months, and they've realized that there's a lot of negatives on there, and, we're not gonna be able to make payroll in 2 months if we don't get some cash. That's a problem.

Todd Gagne:

So I I this is more of a hypothesis on my side. I guess I've been seeing more and more of this. I think, you know, going back to some of your other comments about, venture financing, I I'm seeing more kind of nichey little vertical software companies that basically say, hey, maybe I'm fine taking a million to 3,000,000 and then taking no more money at all and basically getting out 50 to 150,000,000. Right? Where versus,

Andrew:

you

Todd Gagne:

know, you have other ones that get out the same space, but then they find, you know, they have to go raise another 23, $25,000,000, because they think they can continue to go. And so I guess one of it is is I think, being more capital efficient, and then doing less rounds is actually more beneficial to the end, founder. I've been involved in a couple of deals where, you know, the founders are common shareholders. You get 2 or 3 rounds in. They got liquidation preference.

They're, you know, they're they're the last ones in line. And if that liquidation preference doesn't get met, they walk away with nothing. And so, they're better off raising smaller dollar amounts, getting out in, let's say, 50 to 150,000,000 somewhere in that ballpark. And it's a much better return for them versus even if they got to 500,000 with additional rounds of capital. I don't know if that's a trend line or if, it you know, just to happen some of the stuff that I've been looking at is more aligned towards that.

Andrew:

I don't know that I have enough insight on that to say specifically whether or not, that's a trend. I think in this environment where exits, IPOs are depressed

Todd Gagne:

Yep.

Andrew:

I think that could be related in that founders are opting to get out early in order to show exit, return to their investors, and move on to the next project. I think in an environment where it's more IPO friendly, people perhaps feel there's more opportunity to hit it big and, hey, let's go. But a lot of it comes down to, I think, the entrepreneurs' preferences and strategy at the end of the day. They're the ones that are gonna make a lot of these final decisions. Them or the majority shareholders in the business.

Todd Gagne:

Yeah. It's just hard. I think they go into it a little bit blind going, I want this high valuation. I want more money. And sometimes you don't understand, the ramifications.

You think it's gonna grow forever, and then something happens. Right? And so then all of a sudden, you know, you got a liquidation preference. You're running out of cash. You're in minority owners trying to force you to to do something.

And so there's just a lot of situations where you don't control, your kind of destiny nearly as much as you thought you did. And so maybe that's more an awareness of it. So let's kind of pivot a little bit.

Andrew:

Hey. Hey, Todd. Can I can I make one other comment? Yeah. You you said valuation, and that reminded me something I wanna share.

I think one of the quickest ways to make an investor walk away from your deal is to get your valuation wrong. Entrepreneurs do not understand start up valuation typically for their 1st round or so. Start up valuation is far more qualitative than it is quantitative. I don't care how much research you've done. If it's using independent quantitative data sources, it's not right because the resource that you need to do when you're valuing your company is, okay.

1st, where do I plan to raise from? Am I gonna be raising in Silicon Valley? Am I raising in the Midwest? Am I raising on the East Coast? Then go talk to 10 active angels in that space and say, hey, for a company at my stage with this level of revenue, this kind of validation, this kind of progress, what and raising this amount, what kind of valuation would you feel is realistic for this vehicle?

That's the research that needs to be done. And then come to the table with something that is in the realm of normal. Because the fastest way to get an investor to walk away is to walk into the room and say, I'm raising $1,000,000 at a $30,000,000 pre money valuation. And they're gonna go, why are we talking to this guy? I don't care about the business or the I don't care about anything else because I'm gonna see that first and go, yeah, this guy has no idea what

Todd Gagne:

he's doing.

Andrew:

He's out. And so the key is to come in, start a conversation in a reasonable range, and you will find that reasonable range when you talk to these investors. Valuation is very much regional. Like I said, it's based on where you're raising from. Price on the West Coast versus mid Midwest, totally different for the same level of traction.

And it tends to be based on several kind of key qualitative features. Have you built and sold a company before? How much revenue traction do you have? How much have you raised before for this funding round? Things like that.

What's the industry that you're in? What kind of IP do you have? Things like that tend to drive valuation in the mind of investor, and it's negotiation.

Todd Gagne:

Sure.

Andrew:

It's a it's a negotiation.

Todd Gagne:

Yep. No. I think it's good. I think that's a good point, especially realizing that, like, in different regions in the United States, the exact same business could be valued in different spots. I know that's hard for entrepreneurs to hear.

And, again, you know, you don't wanna give up equity, so you always make it larger. And that's where the negotiation comes in. Right? So they're trying to get a deal, and you're trying to basically give up as least equity as possible. And, you know, the smart ones realize it's a negotiation.

A lot of people you see are just rigid. Here's my number. And, you know, in some cases, it's a walk away. It's not even interesting.

Andrew:

It is. The the the higher value in the majority of cases is to give away a painful amount of the company, but to get the cash in the bank, which is gonna allow you to go build the business and create a bigger pie. There's this thing in economics. It's like, okay, do you want a 100% of a teeny tiny pie

Todd Gagne:

Yep.

Andrew:

That might actually get thrown in the in the trash, or do you want a smaller percentage of a much bigger pie? Well, if you look at the numbers, some of the most successful entrepreneurs in history have, like, teeny tiny slices of these ridiculous pies. Like, go look up what's the percentage of ownership that Elon Musk has in Tesla or Bezos has in Amazon. They're small. They're not large.

They have sold away most of their businesses, and yet they're some of the most wealthy people in the entire universe. There's a great episode from founder the founders podcast, David Senra. Yep. It's the episode on Les Schwab Tire Company. Yeah.

That's a good one. Insights that he had was by making every store owner. I think it was like a 50%, like even ownership in the business. He gave away half the ownership straight out of the gate, and that created the opportunity for tremendous wealth creation. And so the the ability to understand and see the value in sharing the wealth is a key to being successful as an entrepreneur raising capital.

Todd Gagne:

Yeah. Because incentives are aligned. Right? I mean, you know, and especially in the Les Schwab case. So okay.

Well, let's let's pivot a little bit to kind of what are the instruments to actually get these deals done. Right? You know, entrepreneurs come talk to us about safe agreements. They they you know? And so maybe talk to me about, like, what you're seeing as far as, like, how to get the deal done and the structure of these deals.

Andrew:

There's 3 types of deals that I see getting done. Anything outside of that is weird, and you don't wanna be weird, especially at the pre seed and seed stage. Because if it's weird, VC looking at your next round is gonna go, I I don't wanna mess that's that's too much air. We've got 37 other opportunities. Nice to meet you guys.

Have a good life. Like that I I I interviewed Larry Warnock who led Ring Ventures for a number of years. 30 plus years. I'm getting the numbers wrong. Lot of years of venture experience, and he explains that.

I think that's episode, 16 or 17, of my podcast. So just don't be weird. That's the point. There's 3 things,

Todd Gagne:

3

Andrew:

ways to raise that aren't weird in the eyes of the average angel. Number 1 is a safe note. This is the simplest, most well accepted by folks on the West Coast. A lot of the more sophisticated investors are happy with safe notes. That's a simple agreement for future equity.

It's basically a prom it's like an IOU of, like, here's $50. When you go raise your next priced equity round, my investment is going to convert to equity and actually be worth something at the point. So it's actually a pretty risky bet for the average angel, but it's very simple and it makes life easy for entrepreneurs. Lawyers get it, saves a lot of cash. The second method is a convertible debt note or a convertible promissory note.

This is very similar. The only add on is that there's typically an interest that is accrued against the invested amount for a given period. Typically, it's 2 years, and it actually sits a little bit higher on the cap table because it's treated as a debt instrument. And so it works the same way when there's a price round that converts to equity, and there's some other optionality baked in there. But that's common, well understood, and easy for angels to digest.

And then 3rd way is a price equity round. This is a we're raising a $1,000,000 for 10% of our company, so you can do the math and figure out what all that means. That's a little bit more expensive. There's some more legal ease involved, and all of your outstanding convertibles, which would include safes and CDNs, would convert in that instance, typically at a preference or a discount to the current price. That's the 3 methods that I see.

Anything other than that is weird. Don't do it. Don't mess with warrants. Don't mess with the there's another one called a KISS note. Keep it simple.

Todd Gagne:

Yep.

Andrew:

Stupid. I forget the actual, like, name, what it means, but it's similar. Don't worry about that. Yeah. It's gotta be one of those three things or

Todd Gagne:

What's the distribution of those 3? Like, what do you see deals being done in your region?

Andrew:

Depends regional. Yeah. That's a very reasonable question. West Coast love safes. They're all about safes.

A lot of investors really like safes because they're simple. I'm noticing in the middle region of the US, a lot of people tend to like convertible notes. Yep. I understand there's kind of been this eternal battle between which one is better. Convertible notes tend to be a little bit more investor friendly.

So in a, call it a buyer's market, there tends to be a little bit of a drift towards convertible instruments because there's more preferences for the investor, whereas Safe Note tend to be more founder friendly. I think the middle section of the country tends to lean a little bit more towards convertible notes, and then price rounds are always good. But I would say don't do a price round too early because, like I said, it's gonna be a lot more expensive. You introduce more governance requirements, which are often hurtful for an entrepreneur when brought in too soon because now you have other shareholders that need to be kept up to speed. You can have board meetings, all of that.

Whereas as a very small company, you you might have some of that, but it's a lot lighter when you've just raised a couple of safes, and, you can kinda kick that down the road a little bit, which tends to help for that early validation phase.

Todd Gagne:

Okay. Well, how about last question here is, somebody who's basically in this process today, what sort of encouragement or words of wisdom would you give them, as they're kind of going through this journey? So they're hearing this, they're in the middle of the throes of this, and they're just struggling. Right? They're looking at their bank account.

It's dwindling. They're not having success. I just had an entrepreneur that probably she talked to, what'd she tell me, like, 50, different angels, and, you know, probably got, 10 people to present to. And, you know, nobody bit right away. And so she was coming back going, holy crap.

Like, this is gonna take me longer than I thought. But what would you advise them? What what would you, words of encouragement would you give them?

Andrew:

It's really hard. It's really, really hard, especially if you're first time, you know, you're learning this, and that's okay. You will face the doldrums of what am I doing? Is this the right decision? And I don't know the answer to that.

Yeah. But moving through this season will be what shapes and forms you as an entrepreneur. The way that you respond to these pressures are gonna be defining for you. It is not wrong to shut down something that's not working and pivot. Like, that is not a failure.

Investors understand that, and they would rather they would rather hear back from you and take the loss this year than they would let have you go off the reservation and have this capital outlay sitting there. So I would encourage you to be honest with yourself, be honest with your investors, invite them in to whatever you're struggling with. If you don't have investors yet, go find some traction. Go find some people that believe in you. Go find some mentors, advisors.

What I typically tell entrepreneurs to do that are just getting started is to spend most of their time and energy getting the right advisory team around them because

Todd Gagne:

they don't

Andrew:

even know what they don't know. And finding 2 to 5 people that have been there and done that is gonna save you years, years of headache and heartache. But it's just hard. You do it alright, still might fail. There's a million reasons that an investment opportunity could fall apart, but the work that you're doing matters.

And there are ways for you to move through this season in a way that you'll be proud of and you'll look back on and be appreciative of. So keep hustling. It's not gonna be an easy road.

Todd Gagne:

Yeah. And I think kind of embedded in what you're saying too is just keep telling the story. Even if they're saying, yeah, maybe not right now, building that relationship because it may take time. But, like, the more times they get to know you, the better your relationship, the more you show traction and execution, the easier that decision becomes to make when you talk to him again. So I I Totally.

It's it's a lot of work, but, I do think that's a big part of of, you know, getting to a yes.

Andrew:

And and, like, as an as an operator of multiple Android Communities, a no right a no is always not yet. A no is never permanent. So come back in 6 months and say, hey. You told us no 6 months ago. Well, since then, here's what we've done.

Would you guys be interested in having a conversation? Yeah. Let's take another look. What maybe we missed something before. Just surviving is a big deal.

So if you can survive long enough

Todd Gagne:

And just hustle. Yep.

Andrew:

That's great.

Todd Gagne:

That is good. Well, good, Andrew. I think we're gonna wrap it up here, but I appreciate you taking the time to share your insight. I think this is good. I mean, you gave us a little bit of of kind of the structure and how these things run.

You gave us some kind of areas that people look at. And then, you know, I think there's a lot of actionable kind of items in here for an entrepreneur to really leverage going forward as as they look at the Angel Network and their journey. So thank you very much.

Andrew:

You bet. I'm glad to be here. Thanks for the opportunity. I look forward to staying in touch.

Todd Gagne:

Okay. Sounds good. Thanks.