The Pros and Cons of Angel Syndicates
Tatyana Gray interviews Nick Moran
Before we jump into this week’s interview, I hope you all had a chance to check out my interview with Adam Quinton. We were talking about the importance of diversity, not just diversification, to get better returns on your angel investments. Adam cited some statistics that show companies with diverse founding teams meaning women founders or co-founders often provide better returns to the investors. So, if you’re interested in getting great returns, check out interview number six with Adam Quinton.
And now, let me tell you about today’s guest. Nick Moran is the general partner of New Stack Ventures. It’s a venture syndicate and angel group focused on early stage tech companies, but more importantly, Nick is the founder and host of The Full Ratchet podcast in which he interviews angel investors and venture capitalists. If you’re learning angel investing in college, then my podcast would be angel investing 101 and Nick’s podcast would be angel investing 201, a little bit more advanced, but I recommend you check it out and listen to it alongside with this podcast and now without further ado, here is Nick.
Hi Nick, how are you?
Very good Tatyana. Thanks for having me on.
Well, thank you for being here. It’s a pleasure and you’re not just a fellow angel investor, you’re actually a fellow podcaster and we’ll talk about your podcast in a minute, but first I loved to hear your story about becoming an angel investor. What were you doing before angel investing and how did you first learn about angel investing?
I worked for a large conglomerate and did a number of functions for them, but spent a good portion of my career doing M&A. We were looking for acquisition targets, mostly established assets, which are large companies we’re looking for 30-100 million market cap companies, but during that time we also had an open innovation charter, which was a focus on early stage compelling disruptive technologies that would have the ability to become established assets and could become an acquirable asset.I found myself much more drawn to this open innovation category mostly because the questions were around growth, channel, expansion, and new opportunity whereas most of the acquisition efforts for the larger assets were about cost reduction, consolidation, and restructuring, so not the most fun conversations to have. I’ve always been much more naturally drawn to the growth side of things, so that’s where I had the most fun working with a lot of companies. In some cases we would take debt options or equity options with these young companies and get ourselves in partnerships with them, licensing agreements or royalties such that if they did grow and have a successful outcome, we would be a partner of choice for them.
After doing that, I wanted to get involved more as a practitioner in early stage stuff. So, I took a role for about three years as a chief innovator of breakthrough technologies for our water analytics division. I was charged with raising the capital, and we raised over $10m of capital internally for this project and developed an IOT product for the water analysis space. The business model for this project was a razor blade business model, so we developed an instrument and we would try and sell that instrument. Then the instrument used consumables to do chemistry tests on water and so the consumables functioned as that razor blade which created a nice healthy revenue stream for the product and then we were able to incorporate as SaaS software offering into that product as well as another ongoing revenue stream to handle the data analysis side of things.
After I had that painful experience of raising capital, selling a very disruptive and different technology to a organization that was a little change-resistant (not really focused on organic innovation, much more focused on inorganic growth), I knew I wanted to get involved in this on the investment side for myself. So, that’s when I left this big company umbrella. Fortunately I had a good financial outcome with them and I was able to become an angel investor looking for disruptive technologies in the core science and core tech space, so that’s how I got my start.
Well, that’s an awesome story Nick and I like to ask this question for all of the guests just because I want our readers to really understand that people from very diverse backgrounds can become angel investors and for you it seems like a lot of your background is from M&A - which stands for merges and acquisitions - and also on the financial side. We had quite a few people here before on the show who came from a completely entrepreneurial side, which you have a little bit of as well. I think it’s always great to share that, so thank you.
So now you’ve decided that you wanted to be an angel investor; was there a particular event, group you joined or class you took that was the catalyst to you actually writing that first check? It is a little bit of a scary moment, I think.
Yeah, it is. We all get involved in this, because you hear about some opportunity that is really exciting and that’s how a lot of angels get involved. They hear from a friend or an acquaintance in town that there’s a start-up that’s raising capital and my situation was similar to that, but I had gone into this as a full time investor, so for me it wasn’t really a hobby. I’ve been doing this full time for about two and a half years now.
I guess you felt like you had enough education from your prior work history that you went full time into angel investing. So, going into it as a full time angel investor, I had gone through the learning curve of evaluating early stage companies with my previous employer. We have a very rigorous evaluation set and diligence process, which wasn’t immediately transportable to angel investing, but about 80–90% was very applicable.
Fortunately it was a good set for me to start on. It really helped me to evaluate a lot of these early stage start-ups and feel good about the risk profile and the return profile and know where to spend my time. The evaluation criteria that I currently use and we currently have to filter out angel investment doesn’t really tell us what to invest in or what not to invest in, but the things that are satisfying 95% of our criteria tell us where to focus.
We’re able to weed out the vast majority of deal flow that comes across our desks because they just don’t meet the hurdles. The risk way out weighs the return. So, it’s those opportunities that are exceeding 95% of our hurdles. That’s where we double down and spend a lot of time and figure out what they’re doing and if an investment is a possibility.
I think it’s great that you have that background from your prior career and some of us have something relevant. I was a lawyer so I did a little bit of M&A and did a lot of corporate work, so there is a little bit of help from my background as well, but certainly that should not deter anybody if the don’t have that background because there’s lots of opportunities to learn. I think it is one of the hallmarks of all angel investors that as a group we’re very interested in continuing to learn and my podcast and your podcast fit into this really well. I am coming more from the angel investing 101 perspective. I think what you’re doing with your podcast is a little bit more advanced like angel investing 201 or 301, so I would like to learn what prompted you to start your podcast and also the name. How did you come up with the name for your podcast?
That’s a good question. The reason I started the podcast was mostly due to my lack of knowledge. I was getting into it and even though I was coming from a base of knowledge in M&A, like I said, it didn’t perfectly translate to the angel investing space and certainly when you’re structured in deals, negotiating deals, dealing with term sheets, convertible notes and start-up diligence, it’s a whole different field and it’s a whole different ball of wax.
There was a lot for me to learn. I read a couple of books, but you can only get so much practical advice from the book. It’s clearly not a two-way conversation and I’m a very curious person, I ask a lot of questions. So, the best learning experiences that I had were meeting with folks that had a track record of star-tup investing whether they be seed venture capitalists or angel investors.
I had the idea that I could start recording these conversations instead of just doing them over coffee and taking notes. Not only would I have a record of what we discussed and could review it, but I could also share it with other folks that were in my situation. So, that ended up becoming a really good tool for me, to meet a lot of really experienced, really knowledgeable folks. It became a good format for me to meet them and connect with other angel investors around the country, and most importantly it was my crash course in angel investing.
Taking it one step at a time whether we’re talking due diligence or whether we’re talking angel investing 101 to your point or the stages of fund raising, are all concepts that I had a lot to learn on and the podcast ended up becoming a good format for it.
I’m not sure how I found your podcast, but I found it a while back and I really enjoyed listening to it. So, I appreciate what you’re doing. The podcast is called The Full Ratchet and I’m curious about the name. Tell us more about that.
I didn’t want to call it Venture Capital podcast or Angel Investing podcast. I wanted it to be a brand, I wanted it to be memorable and I wanted it to be an industry term. If you’re in this industry, there are certain terms that are thrown around left and right that other people outside of the industry might not really know and I wanted it to be relatable for insiders. I wanted entrepreneurs and inspiring angels and investors to see it and to think, ‘oh, this is about start-up fund raising and start-up investing’.
I got to a short list of various terms and if you look at my icon for the podcast you’ll see I threw in basically all the terms. I had a list of almost 300 different industry terms and I just put them into my icon for The Full Ratchet. It came down to a couple of finalists. I think my two finalists were The Syndicate and The Full Ratchet and this was before syndicates were really a big thing on AngelList, which is kind of funny, but The Full Ratchet is an industry term that’s not very entrepreneur-friendly, which was funny. I weighed that. I said, ‘you know, I don’t want to diss the scene like this investor predatory podcast, but people don’t see it that way’. It’s just a good buzzword and a good industry term and it’s pretty memorable. So, I took a vote with some friends and my investor friends really liked The Full Ratchet and so that’s what I rolled with.
That’s great. I really like it. I really like that you took a turn in the industry and I guess as you were talking I thought, ‘well, what if I didn’t call my podcast Angel Investing podcast?’ I would probably call it something like Dry Powder, which is probably a term that many of our readers are not familiar with, but it basically means cash to spend when you’re investing, because I love skiing and I love powder.
Oh, that’s cool. Is that the name or is the name Angel Investing podcast?
The name is just Angel Investing podcast. But as you were talking, I thought if ‘Dry Powder’ might be a cool play on my love of skiing as well as angel investing.
I like it, I like it.
But anyway, Nick, when I listen to your podcast, it’s a little bit more advanced than what I’m trying to do. Who are your listeners? Who are the people in the community that you’re building with your podcast?
I’ve pulled my listener base a couple of times and I’ve got some analysts on it, but the analysts only tell you so much. I would say about 65% are investors and that could mean they’re angel investors. There’s a lot of venture capitalists that listen to the program. There’s institutional investors, LPs that listen to the program and I want them all in that 65% group and then 35% I would call either entrepreneurs, wantpreneurs, or students.
So, these could be people that are just passionate about the start-up ecosystem that want to learn more about how all of this works. They could be entrepreneurs that want to learn more about how the fundraising process works, so that they are well-informed going into their seed round or their series A round and it could be students. I’ve had 7 MBA or post-MBA students that have reached out to me to thank me because they got jobs in the venture capital industry.
Wow, that’s awesome.
I look at these kid’s profiles and these are brilliant, young individuals so I told them this has nothing to do with my podcast, but apparently they feel like it gave them the confidence in the interviews to talk the talk. So, every time I hear from one, I really appreciate it and it becomes another great network connection for me. It’s very helpful to know people all over the country that are doing start-up investing whether they’re intro analysts or whether they’re general partners.
Again, I love your podcast and I think all of my readers should definitely become your listeners, because my goal is to be a little bit earlier in the education stage, I guess, and that’s how I started too. I heard some statistics and talking to entrepreneurs, there is a lot of talk how there’s not enough capital for our start-ups. Looking at the statistics in the United States, there’s almost 9 million people who are accredited investors and basically they make enough money, either $200 a year as a single person or $300 a year as a family, and only 3% are doing angel investing or start-up investing, so there is this huge disconnect of people who could be doing it. That’s where I was in a way inspired to come in and try to educate the people, the 9 million that are not doing it.
The 97% that are not doing it yet - get them educated, get them inspired and then maybe I can pass them to you once they got a little bit more education and you can be the next step. I just read your newsletter about diversity and how there is not enough diversity in the angel investing world or the VC - venture capital - world and I certainly agree with that and I guess I see that as part of my mission. It’s not necessarily to bring more diversity, but to bring more people into angel investing.
Absolutely. I really like what you’re doing and I’ll be happy to send people your way Tatyana.
Well, thanks Nick. You’ve mentioned the potential name The Syndicate and you also said something about AngelList syndicate, and on a previous episode we talked about AngelList and using it to develop deal flow. Readers who are interested in that can check out AngelList and use it for deal flow. I love AngelList. It’s a great tool and actually syndicates on AngelList are a really big deal right now. Nick, I would like for you to talk about starting in the angel investing 101 way and can you tell us about the syndicates in general? What are syndicates? Who is in syndicates, what are the syndicates doing?
I don’t know how much you’ve talked about angel groups in the past, but I’ll do a quick primer on how they work. We have probably six different angel groups in Chicago and most of these groups are 30-100 people and these are all angel investors of varied backgrounds, and the way they work is the leader of the angel group that recruits the members gets them organized, and that leader of the angel group will get deal flow, so he’ll get start-up pitch decks from a variety of places. Most of these angel group leaders are pretty well established in the industry, so they have a lot of connections and they get a lot of pitch decks.
The leader will sift through these pitch decks. He’ll find the ones that he thinks are the most promising and then he’ll proceed to do a series of 2–3 meetings with his angel group members. Usually the first one is a small meeting, so maybe it’s 15 members and they review five different start-ups. They’ll have the founders of the start-ups get in front of the room and pitch to the group. After the initial meeting, they wind down that number maybe to two or three and they take them to the next round, so then these two or three founders are going to pitch to the bigger group. Then at the third round usually you have people in that big group saying ‘yes, I would invest in this, this is a great company and here’s how much I would invest’.
The traditional issues with the standard angel groups is that this process usually takes 3–6 months from the first time the entrepreneur sends the pitch deck to the group leader until a deal actually gets closed. You can get a sense for an entrepreneur that’s capital constrained that wants to do a relatively fast fund raising round, it’s going to take 3 months to half a year to close a round with an angel group and they really don’t know if they’re going to close the round. They could get to the third stage and they could be voted out.
They could spend a lot of time with the group and it could not work out or even if they get a yes, maybe they were hoping for a $500,000 seed round and that angel group only gets commitments to the tune of $100,000. Maybe there’s only two members that want to invest and maybe those two members invest $50 grand each. So, it’s hard to predict how much they’re going to raise. It’s hard to predict if they’re going to raise and the amount of time is pretty long.
Here comes the evolution of angel syndicates and the way angel syndicates work: they’re also an angel group, it just exists on an online platform. So, all the angels are affiliated with the group leader i.e. the syndicate leader on AngelList or other platforms. Now what’s happened is the leaders do all the work on the front end, all the sourcing of the deals, all the evaluation of the deals, all the diligence; and ultimately the leaders of the group decide if they want to propose it as a real investment. In this case the leaders are going to put an anchor investment down in the company, which is different than a lot of angel groups as well. So, this conceivably gets completed in 2–3–4 weeks.
I’m a syndicate leader now. My angel group on AngelList is about 50 angels and so my partner and I will source deals, select the best one -the one we think has the highest potential and is the most compelling. We do all the evaluation and due diligence, negotiate the terms, get a reasonable evaluation on the deal and when it’s all ready to go, make it available to our group. People can opt in or they can choose to pass, so it’s just a faster, more efficient, cleaner way of getting these deals done, because they can happen quicker and everything is pretty transparent through the platform. All the docs are readily available, and the other major benefit I would say to syndicates versus the traditional model is diversification.
If you’re part of an angel group, usually you’re making investments in the $50,000 range, although the minimums for some angel groups might be as low as $10,000 per investment. With a syndicate, the minimums are much lower, so you’ll often find minimums around $2,500. It’s a good way to get started in angel investing, because you can make more investments at lower numbers to start out and not put all your money at risk before you really have a good handle on how this asset class works. There’s good diversification benefits, good speed benefits, but essentially it is an angel group. It’s just a faster time to the deal completion.
But wait…there’s more!
This post has been adapted from the Angel Investing with Tatyana Gray podcast. Listen to this recent episode for more great information from Nick Moran!
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About Tatyana
When Tatyana learned that out of almost 9 million accredited investors in the United states only 300,000 (about 3%) were active angel investors, she made it her mission to attract, educate, and inspire the next wave of angel investors in this country.
As a new angel investor herself, Tatyana loves to learn the craft of investing in startups from experienced angel investors. It was only natural to share this process with a broader audience via her Angel Investing podcast.
Follow Tatyana on Twitter at @tatgrayid. We welcome your comments.