This Angel Investor Proves You Can Have Fun and Do Good
My conversation with Matt Dunbar
I always like to start with our guests telling our readers a little bit about their personal story of what made them decide to become an investor. Obviously you had some experience that I’d love to have you discuss, including completing your Stanford MBA. It’s very impressive. Did you know when you went to Stanford that that’s what your end goal was or did you have a little pivot there in your career?
I did not. So just a brief overview of my background. I’m a native South Carolinian, grew up here, was an engineer by training. Actually my career started as a chemical engineer with Eastman Chemical Company in North East Tennessee. I did that for a few years and decided I didn’t want to be an engineer for the rest of my life. I was more intrigued with some of the business challenges I saw inside the company, so I decided it was a good time in my life in my late 20’s to have an adventure and get a great education. I must have the only South Carolinian that applied that year and they let me in somehow.
I doubt that!
Obviously that was really a life changing experience. One of the things I got from Stanford was just exposure to ideas and careers and businesses I had no concept of previously including, for the most part, this idea of entrepreneurship. I had some notion of that, but I had worked for a big company and so it was really my first exposure to this whole idea of entrepreneurship. I was there from ‘03 to ‘05, so we we’re still in the aftermath of the bust.
I think Facebook was founded while I was in school. So this more recent wave of entrepreneurship and all the great progress that’s been made about lean startups and all the software we have today was really just in its infancy at that point. I don’t think there was quite as much buzz around entrepreneurship on campus then as there probably is now, but it did open my eyes to that world.
The other thing it opened my eyes to, I also didn’t know anything about things like investment banking or consulting. Frankly I was really impressed with my classmates that came out of that world in terms of their skill sets around their ability to analyze data, their ability to synthesize that and communicate it really well. I was really impressed with that skill set. So, I decided I wanted to pick up some of those skills.
I did go the consulting track after school, and move to the Southeast. California was great. I had a great experience there, but my family and my roots are back in the Southeast. I miss going to football games, so I wanted to move back to the Southeast.
I landed in Atlanta with the Boston Consulting Group and, again, picked up some of those skills that I was intrigued by, but mostly working for big companies. Most of our clients were Fortune 500s, a great experience, I learned a lot, but I still had an itch from my exposure at Stanford to the startup world. An itch to be more involved in entrepreneurial businesses and younger hybrid businesses rather than just the large established businesses that I had previously been involved with in my career.
That itch, it needs to be scratched, doesn’t it?
You can ignore it for a while and some people either have it or they don’t and you’re obviously exposed to a lot of different kinds of people working in big Fortune 500 companies. Some people, it never occurs to them, they have no interest in it, and sometimes there’s people like you who are like entrepreneurs, where you’re working in a company, but you have the desire to eventually start your own company. I’m always fascinated to about hear that itch. It’s an interesting way to describe it.
Yeah, it evolved for me. Again, it was something I didn’t have a concept of when I started my career, but the more I got exposure, the more I was intrigued by it. The other thing I think I observed over time as a chemical engineer, you are trained to think in sort of a linear way, which I think lends itself to being in a large organization and sort of moving from point to A to B to C. Actually my time at Stanford, I came across some research on that, by a lady at the Darden School named Saras Sarasvathy, who has working on “Effectual Thinking” (Effectual Entrepreneurship). It turns out the engineer way of thinking and logical linear steps isn’t necessarily the best way to think about a startup, because nothing is linear and nothing is known and everything is ambiguous. So it was some what of a challenging transition for me, but I was intrigued by it and wanted to learn how to think in more of a effectual way, as she describes it, where you are faced with uncertainty and ambiguity and you can try to create order from that chaos. I was intrigued from trying to learn that as opposed to a more well-defined scenario in an established organization.
I like that phrase, create order from chaos. That’s a great line. It also speaks to what I talk about with a lot of my clients who also have engineering backgrounds. You talk about it in terms of logical linear thinking, for me I just refer to it as our left brain. The interesting thing is, you do have to learn a new skill set to become right brain story telling. Because when you pitch somebody, people buy emotionally and back it up with logic. Tell us a little bit more about your own journey from that left brain to right brain.
I had received some exposure to that world when I was in business school and frankly this is one of those serendipitous things you can’t predict. It just so happened, I spent some time at BCG. I have been on the road traveling, picked up some skills I wanted and then life happens, I got married. My wife is from Oklahoma and she moved out to Atlanta where she didn’t know anybody and I was gone all the time and we were in our early 30’s and wanted to start a family. I always wanted to come back to South Carolina and try to contribute something here and so we just felt like it was the right time to make a move out of the big city in Atlanta and move back to closure to my roots in upstate South Carolina.
So I just started networking, a sort of classical networking story, trying to leverage some contacts out here, and didn’t have any concept of this idea of organized angel groups. I knew about angel investing, but I didn’t know really about organized angel groups.
I was fortunate and blessed, sort of serendipitously I bumped into some guys that were interested in starting an angel group in Greenville, South Carolina at the time I was looking to move to Greenville. They needed somebody to run it. There aren’t many venture capitalists running around South Carolina or folks who had a lot of experience in the space who it just so happened that the timing worked out where they needed somebody.
I was really interested in this space and getting involved. Long story short, I came on board in April of 2008, to start this angel investor group called the Upstate Carolina Angel Network. Of course, we didn’t know what was coming just a few months later in terms of the overall economy. It’s probably good that we didn’t know or we might not have made the change we did, but really, it was just serendipitous that I bumped into these guys and couldn’t have predicted that this was what I’d do. The timing was right and I was really excited about the opportunity to take a step into the entrepreneur world that had intrigued me for some time.
Being serendipitous reminds me of the definition of luck being when opportunity meets preparation.
And clearly the opportunity presented itself. But you had been so prepared for that from your schooling and your exposure and that itch that you had inside to make that happen.
I just read something about how important timing is to whether a startup succeeds, and some people are even saying that’s more important than the idea or the team. They were giving the example of Uber or Airbnb. The reason that’s so timely now is people are looking for ways to be economical or have additional income. What are your thoughts on timing in general?
I think it’s critical and it’s certainty one of those things that’s really difficult to control, but there’s been a lot written about, some of the fastest growing startups we see today that are attracting a lot of funding are really very similar ideas and concepts to businesses that went bust in the dot com bust. Largely because the infrastructure was not in place.
We didn’t have mobile phones. We didn’t have ease access to on-demand type communications like that where you can have such a powerful device in your hand to get real-time access and real-time sharing. So, business concepts that made sense at the time, didn’t have the right infrastructure to make a viable business, whereas today that infrastructure is there.
Certainty I think timing is critical and certainty we see that even in our markets where we’re not likely to see the next Uber. But we do see the companies we’re involved with that certainty need to catch and ride the waves, so to speak, of technological adoption and consolation. If you miss that way on one side of another, you might miss an opportunity.
There’s some great research we lean on when we’re thinking about our returns and exit strategies that Basil Peters put together. He’s got a great blog and some resources on early exits. He’s making the case that a lot of times angel investors in particular can ride it over the top, so to speak, with the startup, and timing gets away from you and you didn’t strike when the market opportunity was there.
He talks about these waves of consolidation when certain technologies sort of get bought up in a wave, by strategics, and if you miss that wave, you may have really missed the chance to generate returns. What you have to do as an angel investor is stay in the game, obviously, and so timing I think is critical, for sure.
You know, it’s interesting, you’re talking about this fear of missing out, which is what all that social media stuff is about. They watch other people’s post on Facebook for example and nobody wants to feel like they’re missing out on cool events and/or cool investments. Let me ask you a little bit about your particular angel network.
Are you trying to convince people who are in your network that invest that this is a better investment than the stock market, that it’s more risky, less risky, or better returns? Can you give us a flavor of how someone becomes an investor in your angel network?
Great question and here’s how we think about it and talk about it in our market. What we envision ourselves doing is really making a market or a more efficient market, early stage capital, where historically where we have not had a very robust market. You don’t think South Carolina when you think hot venture market, yet with the advances in what we know and in the lower cost of infrastructure to run companies now, we’ve got some really talented folks here that can build successful companies on the backs of that lower cost infrastructure with a lean mindset in place. We can have really successful outcomes both for entrepreneurs and investors that really make a difference in a market that hasn’t historically had a lot of that kind of activity.
We talk to our investors about trying to make a market where we’re bringing together investors who have capital and expertise with entrepreneurs who are leveraging what they’re learning to create compelling new opportunities. We want to reduce the friction in that market to bring those parties together and try to find viable startup opportunities for investors. Then help those entrepreneurs be successful by paying the capital and expertise that our members bring to the table in helping them grow. So when we’re talking to our investors, we certainty lay out the fact that this is an extraordinarily risky asset class, so you really need to think about this as a small percentage of your overall investment portfolio.
You need to think about being very diversified within this portfolio, because we certainty can’t predict which of the two percentages of our portfolio companies are really going to drive the returns of our portfolio. You need to bring a disciplined, diversified, patient approach to this, because this is also not liquid, so you can’t just pull this out of the market any time you want. You’re locked up for, in our case, three to five year exit strategies in most cases. So we talk about all those dynamics while recruiting investors.
I love that. Disciplined, diversified, and patient. Those are the three key criterion that it takes to be a good member of your angel network or anyone’s, I assume. Then exit strategies, you said three to five years. So, that’s really key for our readers to know and take away, that the investors are looking for some kind of exit strategy in three to five years. Would you mind sharing with us what the typical investment is from your angel network?
So we’re relatively agnostic about industry, because we have a diverse set of members who come from a lot of different backgrounds. We can bring to bear different expertise and leverage that network to evaluate a lot of different things. However, we don’t have just enormous amounts of capital laying around here, so we do need pretty capital efficient startups. That does tend to lend itself to things like software and some plays in life science, more typically on the digital health side. We’re a manufacturing economy here, so we like to look at startups that enable more efficient manufacturing processes, whether it’s sensors or materials or analytics and instrumentation, those things can fit well.
So we’re looking for capital efficiency or scalability where we think there’s a viable market for, nice exit for this company, in three to five years on the backs of a couple rounds of angel investment. We do from time to time go raise larger venture money, but that’s just a more difficult proposition in our market, because there’s relatively little venture capital here. These are individual angels investing their own money, so they can’t be as patient as an an institutional investor or an LP in a fund, because this is money that they’re trying to either generate for their retirement or to leave behind to their family, and so we can’t afford a 10 or 15 year hold strategy.
We often don’t anticipate venture funding behind our deals, so in that case we’re looking at that sort of scalability. Can we get it to several million in revenue on the backs of a couple of rounds of angel funding and then is there a viable exit strategy in that three to five year range. If all those pieces come together and obviously we like the team and we think the market is there and the technology works, then that’s what’s likely to get a check from our folks.
On average, we’re investing, out of our group, a couple of hundred thousand dollars at a time, but in the last year we’ve created a statewide network of angel investors to aggregate more capital around our companies. Again, in the absence of other easy access capital, we’re trying to draw in more investors from around the state and increasingly, there’s an appetite for this kind of investor among folks who are here or moving here and so now we’ve got six angel groups across the state that we co-invest with. So we hope to be in a position where we can efficiently aggregate half a million to a million to fund these companies on a quicker timeline without having to go too far away to syndicate the rest of the round.
Well, what’s interesting about that is the scalability factor and also what’s unique, from what I’m understanding, is you’re looking for an exit strategy in three to five years. It doesn’t necessarily require series A round from a big venture capital. The exit strategy could come from your couple of rounds from the angels. Sometimes the big VCs are looking for a ten time return on their investment, they want that unicorn. What kind of return are your investors looking for?
We’ll often think about it in terms of rates of return, so again, we’re not a fund, we have the luxury to think more in terms of IRR than ROI, because we don’t have the pressure, necessarily, to say hey, we’ve got to return three times this fund in order to raise our next fund. Part of what we’re doing is making that market and people care about seeing this economic growth in our market, so while our primary objective is financial, we also talk about having fun and doing good.
Our folks understand that if we want long term job growth in our state, it turns out that all net job growth comes from startups, so they understand that there’s a broader reason to do this. It’s not that that allows us to relax our financial hurdles, but we’re doing it for more reasons than just a pure, healthy, ROI-driven mandate that a venture fund has. All that said, we still have to make money to do this. We have to make good money to do this, so our first stated objective is, we like to do deals we believe can generate a 50% rate of return.
So, if you turn that into an ROI, that’s about four times your money in three years or ten times your money in five years. So, if you can hit those metrics then that’s really what we’re looking for and we’ve had several examples of generating those kinds of returns.
I love that criteria. In three years, we like to see a 4X return in investment and in five years, a 10X return on investment. Since 2008 until now, you must have some amazing success stories. Are there any that you can share with us?
Sure. Our very first exit was a company that actually moved to South Carolina with the help of some incentives through a program we have here. We actually passed on their angel round a time or two. We thought the price was a little bit out of reach for us, but the company got into a position where they had some serious acquisition interest. They did have a venture fund in the deal and basically the fund was out of money and they needed some money on the balance sheet going into the acquisition discussions, just to make sure they had leverage there, and so we were able to get a very nice liquidation preference on a convertible note.
We don’t typically like convertible notes, that’s a longer conversation. I can talk about that a little bit more if you like, but we don’t typically like notes except in a situation like this. We had a pretty high confidence that there was a real acquisition discussion on the way and so in about four months between the time we invested and the time the acquisition closed, we made about 3.5 times our money, which when you do the math on that, is about a 2800% rate of return.
Yes, I’ll say.
So, if we can find those kinds of deals, we’ll do them as often as we can, but that’s pretty rare. That was our first exit and our best rate of return exit date. Last year we had a company that we had invested in a couple of times that was bought by a European company in the medical diagnostic space. It’s a company that’s a great local story, on paper that deal is worth about 11 times what we invested. We’re still in the lock up phase.
We still have a few months and it’s publicly traded by a European company that bought it, so it will ultimately depend on what the stock is trading at when our lock up is over, but that will probably be our largest ROI investment return today. We’ve had several other exits that are nice and several others that have hit 40–50% rate of return on our money.
How exciting. Let me ask you two questions. Do you ever fund a startup that’s pre-revenue in the angel world? In your world?
We do, we do, but we would like to be really, really close to revenue if we’re not already there, so we will only invest, in most cases, when we have pretty clear line of sight to being in the market and generating revenue and we’ve talked to customers, so we really talk about being investors at the go to market stage, so you might be in the market and generating a little revenue, but you might be just shy of that and we have a strong enough validation from our due diligence at the markets there and some revenues ready to come in, so that you can start burning customer cash instead of having to rely on investor cash. Again, because we can’t necessarily count on easy access to a lot of follow up capital.
Sure. Given the podcast is called The Successful Pitch, I would love to hear what you think a successful pitch is and tell our readers what they should do when they come pitch someone like you.
Sure. I talk about this a good bit in various venues. I teach a course in the MBA program at Clemson here in downtown Greenville and so this is a big topic of discussion in that class and if I had to distill it down to sort of one quick phrase and I can expound on that, is that when you get in front of investors, your key objective is to build credibility.
But wait…there’s more!
Subscribe to The Successful Pitch via iTunes.
To learn more, watch my Get Funded Fast video.
As a funding strategist, John Livesay helps CEOs craft a compelling pitch which engages investors in a way that inspires them to join a startup’s team.
After a successful 20-year career in media sales with Conde Nast where he worked across all 22 brands in their corporate division [GQ, Vanity Fair, Wired, W and Vogue] and created integrated programs for clients such as Lexus, Hyundai and Guess, John won salesperson of the year in 2012 across the entire company.
Follow John on Twitter at @john_livesay. We welcome your comments.