SOOMLA’s most recent seed round was one of the biggest angel rounds in Israel in terms of number of investors. While the Silicon Valley is known for big angel rounds, Israel seed stage investments were traditionally smaller and had less participants.
Identifying potential problems ahead of time
There is a fair bit of advice you can get about investors and deal structure from many people who have been through this path. Most of the advice I received is that big angel rounds can be a huge pain and I should avoid them all together. Here are some of the reasons, people mentioned.
20 cooks in the kitchen – too many opinions
One of the common concerns for entrepreneurs about having many angels is that each one of them has experience in managing companies or operations and they would each have their own opinion about how things should be. I know of at least one company that was literally paralyzed as a result of the CEO having to please everyone.
Risk of a rotten apple – one bad investor can spoil everything
Imagine having an offer to sell the company, 19 investors are ready to do it but one of them shows you a special term in the contract that basically gives him a veto right over the sell. The guy suddenly founds himself with a lot of leverage and can mandate different things in the deal and possibly spoil it for everyone.
Preventing future VC rounds
Venture capital firms and angels often don’t mix well. They usually have different investment goals and horizons and unlike angels, VCs are used to calling the shots and focusing on their own goals.
It’s hard to keep everyone in the loop
Obviously you want to keep as many people as possible in the loop so you can get value from them. However, having a weekly or even a monthly meeting with each one of your investors can become a huge time suck. If you add to that, that you will get 3 intros per month from each one of them, it can easily become a full time job.
Getting the most from your angels
With so many potential problems you might be hesitant about doing an angel round all together. However, angel investors have many benefits as well. This is not the goal of this post so I’ll just go though a few of them quickly:
- Angels are more visionary and are more likely to invest in something disruptive at an early stage
- Investors that have experience as entrepreneurs and CEOs can guide you and give valuable advice
- Private investors are usually ok with smaller outcomes which drastically increases your chances of having an outcome at all
Unlocking this added value and avoiding the problems requires an effective way to manage them.
Round structure – give defensive rights but no control provisions
This one is easier said than done since many investors will argue that they need to have control over future financing, sell of the company and sometimes even expenses. This can work with one angel but certainly not with 20. We were very strict about this from day one even at the expense of valuation.
Vet each one of your investors by calling his portfolio companies
This is a good practice with any type of major business relationship: hiring, partnerships and investments. Investors are engagements that are hard to break later on so you should invest in due diligence on them.
Grouping investors with proxies
Think about it as a tiered approach for managing investors. 16 of our investors signed a proxy to one of the other 4. This way, if you want to sell the company and one of your investors is currently in 6 months trip in Nepal, you can still do it. It also creates a structure of tiers.
Update major investors and give them the tools to update others
This one took us a bit of time to figure out but eventually we developed a system where the board members get a direct update during the board meetings and then each one of them sends the presentation to all the investors proxied to him. This way, the comments and questions are done with the other board members. There are 2 main benefits, your board members become more engaged and spend more time thinking about your business and at the same time your hands are more free to run your company.
Hope this resources helps more of you to pull off big angel round. It’s a great alternative to VC funding and as you know the more options the lower the risk.