Member Insights from ACA Summit – Best Ways to Build Your Portfolio and More

By Graeme Thickins, ACA PR Team

Following on from Part 1 of our recap on the 2017 ACA Summit in San Francisco, we have more great insights to pass along from the event. The following is a summary of notes gathered by members of another angel group that attended the event.

Summit Insights from Victoria Barnard and Aviva Ajmera, Women’s Capital Connection

Explore different return structures aimed at returning cash to angels more quickly: cash payments out of revenues, can be debt that converts to common stock when payback is reached, can be an “evergreen dividend,” tradable automated term sheets, exchangeable shares.

Portfolios need between 12 and 48 investments to reduce the risk of receiving no return. 12 investments=75% probability of 2.6x return, 24=90%, 48=95%.

Increase your portfolio size by investing as a limited partner in angel funds, accelerator/incubator funds, or micro-VC funds.

Use industry expertise more strategically to improve probability of success. Many large angel networks screen deals through committees of industry experts.

Use research-based techniques to improve deal decision making and deal flow criteria:

  • Only invest in teams (no solo founders) and only invest in diverse teams.
  • Reduce unconscious bias in decision making with “blind” pitches.
  • Reduce “herd mentality” by reserving skepticism for written feedback and due diligence only.

Many startups fail to thrive because they don’t build a sustainable sales process or a sustainable infrastructure. 

  • Restructure your pitch and due diligence templates to include three primary processes: product engine, sales engine, and supporting company engine.
  • Create “swat teams” in your angel group to help portfolio companies with their scale-up process challenges.

Improve post investment interaction: 

  • Angels who interact 2 times a month or more with portfolio companies achieve a 3.7x return compared to passive investors who achieve a 1.3x return.
  • There is some research that company success correlates with the quantity and quality of the angel group business contacts.

Add new valuation/terms to the due diligence and negotiation process:

  • Valuation: calculate the exit dollar amount needed to give your investment a 10x return assuming 50% dilution along the way.
  • Valuation: require the entrepreneur to convince you they can exit for more than $20 million and that your dilution would not exceed 50%.
  • Terms: never invest in a convertible debt deal without a cap.
  • Include “reverse vesting” in the deal terms as an incentive for the entrepreneur to stay or reduce the risk that they leave the company with all their shares and a board seat.

Some informal discussion of longer times to exit: the VC Draper family blamed longer VC exit times on Sarbanes–Oxley clogging up the IPO market. ARI’s Returns Study in 2016 cited the average time to all exits (positive or negative as 7 years, while Dave Berkus reports the average time to positive exit in his portfolio is 11 years (161 investments over 30 years).

There was some discussion of revenue-share or other deal structures that return cash to angels sooner. These are mostly applied to businesses where a large exit is difficult to see, but whom are seeking funding.

There’s a growing focus on research (of many kinds) to improve investment success.

A great deal of discussion at the Summit about “impact investing.”

Many more advanced angels are experimenting with combinations of multiple investing models: angel networks, angel funds or micro funds, multi-country investing, artificial intelligence. Very few use geography as a criterion.

Investment Themes:

Declining cost curves:

  • Computing
  • Energy storage: lithium-ion battery technology
  • Gene sequencing and resulting personalized medicine

Increasing computing power:

  • Artificial intelligence
  • Internet of things
  • Sensors

Memorable Quotes:

Tim Draper: “Lack of focus is the biggest challenge entrepreneurs face.” and “The two best questions most investors forget to ask: What could go right? What if this really did work, what would it mean then?”

Peter Jungen: “The world is full of great ideas. What the world lacks is great execution.”

Bill Payne: “There’s a correlation between the valuation of startups and real estate. Valuations of both are higher in certain regions: Silicon Valley, Boston, Washington DC.” and “There are plenty of deals around without having to participate in a down round.”

Bill Reichert (Garage Technology Ventures): “As an entrepreneur you want a machine underneath you so you can go out and change the world.”

That’s Part 2 of our summary of insights from the 2017 ACA Summit. Be sure not to miss the ACA Summit in Boston in 2018!