Angel and Accelerator Funding: Continuing the Conversation

In late 2020, OUP hosted a webinar on Angel and Accelerator Funding for University Startups. We reconnected with two of the panelists, Ashok Kamal, Executive Director of Tech Coast Angels, and Jun Axup, Chief Science Officer and Partner of IndieBio, to continue the conversation about angel and accelerator funding in addition to answering some follow-up participant questions. The panelists’ statements below have been edited for clarity and length.

What do you see as the top three skills and/or characteristics a scientist needs to become an entrepreneur?

Jun: The top skill for me is what people call the “growth mindset.” The second skill is communication. As scientists we love to geek out about our science, but that can be more detail than needed. Scientists need to understand who they are talking to and be able to speak to all levels. The way that you talk to a corporate partner or a resource vendor is going to be different than talking to investors. The third skill is not being afraid to hustle and knock-on people’s doors. Always be curious.

What does IndieBio do to help develop scientists to become entrepreneurs?

Jun: Our program focuses on 5 pillars: science, business, leadership, fundraising, and communication. The first and most important goal is to work towards proving or derisking the novel technology. But technology is not enough — the technology must be turned into a product that provides value to customers. Founders need to understand who their customers are and how to reach them in a sustainable business model. Then, as the company begins to grow, we help these founders become leaders, both in their fields and in establishing company culture. Lastly, we teach the founders how to fundraise by effectively communicating their story.

How does Tech Coast Angels (TCA) attract companies to pitch? Do you have to take this step, or do companies reach out?

Ashok: At the end of the day, a large percentage of our investments are direct referrals, but we have invested in companies that have cold contacted. When a company is referred, their process is often accelerated because there may be context to the relationship. If the company is coming in cold, you need to take the time to get to know them from scratch. At the end of the day, it is all about the companies’ traction, credibility, and performance. If a referral comes in that does not meet this criteria, it does not matter if you find out that criteria faster — you still are not going to make the investment.

How often are members of TCA sitting on boards or serving as advisors to the startups they invest in?

Ashok: The majority of our investments have members who are either voting board members, board observers, formal advisors or at least, mentors to the company. It varies across companies. If we feel there are individuals in the companies’ orbit that are a better fit to be board members or advisors, we always encourage the company to build the best independent board that they can. Only when it is value additive for TCA members to take on those roles, we certainly welcome those opportunities.

What do good pre-seed and seed investors do for the company?

Ashok: They put a meaningful amount of money into the company. That is what you do first and foremost for startups in order to be a good seed stage investor. If that is a given, it is also helpful to be available in advisory roles, aid with sourcing talent, and assist in answering questions that come up through the course of the startup’s operations. The other major function of earlier stage investors is helping to raise the next round of financing if that is the capital strategy for the company.

What are some of the advantages of working with an accelerator?

Jun: The biggest advantage is the network of founders and mentors. You are around twelve other companies every day, so you get to see their successes and trials and learn from each other. An analogy I like to use is getting your PhD. In a PhD program, you have this nebulous five to seven years where it is unknown whether you will be able to publish, but the structure around the program has de-mystified it. You get to interact with other students, mentors, and committee members. Going to an accelerator is like that. Every founder is on a similar journey and going into untapped territory, so we want to help guide founders to not make the simple mistakes. Our mentors and alumni network share their learnings and resources.

What do you see as the size differences for pre-seed and seed rounds in different industry areas?

Ashok: We primarily invest in what most people would call Seed, Seed+, and even Series A companies, but not as many pre-seed companies. The big reason for that is there is an entire stratum of the startup ecosystem that focuses on pre-seed, pre-revenue, pre-launch companies which help startups develop those initial KPIs to then go and raise more institutional seed funds from groups like TCA. In terms of the dollar difference, we focus on approximately $500K investments. A lot of pre-seed companies are raising approximately $50–100K.

Any tips on approaching and pitching to angels and accelerators?

Jun: There are countless problems of the world. Some are obvious, like climate change, and others not so much. We like to see teams that have a deep understanding of the problem they are trying to solve and have novel technology to address it. Applicants need to articulate the technological differences that allow them to solve this problem and align it with a business case.

Ashok: The amazing characteristic of academic startups is that they are grounded in novel, disruptive research that is sometimes years in the making at the university level. The downside is the gap between the commercialization opportunity and the science. The more that an academic spinout can demonstrate real market demand and sales capacity, that is what will differentiate them among their peers. In pitching, you need to connect those mental dots into a line that investors can see and understand how this company is going to eventually make money.

Can you share any thoughts on how entrepreneurs can find the right investors/accelerator that matches their company?

Jun: Start by finding similar companies in your sector and then figure out who invested in them. Make sure you do not go to the VC that invested in your direct competitor, because usually VC firms will not invest in two companies that are direct competitors. You can start finding this information on Crunchbase and using the internet to investigate what VC firms are interested in your field. We also recommend talking to other founders who have worked with those accelerators/investors.

Ashok: A good starting point is an association for accelerators called the Global Accelerator Network (GAN). They have a searchable database of programs that span geographies, verticals, and stages.

What are your groups doing to increase diversity among startup founders, as well as your startup ecosystems overall?

Jun: We highly value and celebrate diversity, because it leads to more creativity and addresses problems at the global scale. At least 40% of our companies have one female founder, and our founders represent over 37 countries. We are always looking to increase those numbers. Our founders also bring this ethos into growing their teams and being role models in their home ecosystems.

Ashok: Diversity is a competitive advantage at this point for the investors that recognize there are greater opportunities if you are able to see the world through a diverse lens. Research is clear that investors tend to invest in people that they can see themselves in. With that being the case, it is critical that the membership at a venture firm is representative of the startups that you trying to invest in. Therefore, we focus largely on increasing the diversity within the TCA membership. We also try to have a culture that is inclusive to everyone beyond just the membership. I think if you are able to mix that structure with a culture that is proactive, welcoming, and excited about diversity, the results start to show.

What are some resources and methods for academic founders for their first pre-money valuation?

Jun: Ultimately, you should not be so focused on the numerical value but understand what you can deliver in ~18 months for the next round. You need to find the Goldilocks’ amount. If you end up valuing your company way too high and with too much money, it could be harder to get to your Series A or Series B, because investors will expect you to accomplish a lot more. If it is not enough money, you cannot make your goals or have to raise a down round. A good guide is to budget out what you will need as realistically as you can and then add 50% for buffer.

Ashok: Valuation is part art, part science. At the early stage, it is more art than science. Comparables are a good way to triangulate into some sort of enterprise value. You can look at companies that are in a similar space. It may be difficult, because very novel technologies often do not have apple-to-apple comparables. You can try to find companies that are farther along and hope that investors can extrapolate from what your company is doing to what three other companies with a known value are. At the end of the day, valuation is a market function. If you really want a simple answer, the value of your company is what an investor is willing to pay you for it.

Have angels and accelerators shifted their focus or timelines under the cloud of COVID-19? Has our new virtual world helped your programs?

Jun: The virtual world has changed the way we run our program and our day-to-day work. We definitely suffer from not seeing people in person and communicating more frequently, but the program itself translated well into the virtual setting. The back-to-back Zoom calls are more efficient and convenient to meet with people globally but can also be draining. We have decreased the formal aspects of our program to make sure people don’t get Zoom fatigue and can have more focus time. We’ve also shifted our communication training to be reflective of the Zoom world.

Ashok: The benefits have been more engagement from members, an equal amount of investment activity to our prior record levels and being able to meet with companies in a wider geographic scope.

In general, the benefits of virtual business are clear in terms of the time, convenience, and cost that can be saved. To not acknowledge that would be like when dating went online to websites and apps, people who stuck to their philosophy of meeting people at bars or birthday parties were limiting their prospects. That principle will apply to investors too. If you are limiting yourself to companies that you can meet in person right off the bat, you may be missing the investing love of your life who happens to be in Wisconsin. We want to be casting a large net, but we also look forward to building relationships in person as well.

Do you actively search for companies not in funding “hot spots”, especially now during the pandemic when meetings/programs are virtual? Have you funded companies outside the major tech hubs?

Jun: Yes, we have companies from all areas of the US and internationally. There is amazing science coming out of institutions all over, including non-hot spots. We want to see the creation of new hot spots, so we give talks about entrepreneurship at various universities to seed the idea to their graduate students. We’ve also seen that when our alumni finish our program, they take those learnings to strengthen entrepreneurship in those ecosystems. Scientists often don’t seem themselves founding a company, so as there are more and more role models, I believe the idea will become a viable career option for all graduate students.

Ashok: Yes, the challenge becomes how do we find those other companies or how do they find us? The onus needs to be on the company to find the investors that are not in their ecosystem. It should not be a buckshot approach. The companies themselves have to be more mindful and deliberate in researching and reaching out to investors if they are not finding the support in their local ecosystem. The post-COVID world should make it easier for you to bridge the gap geographically that may have limited your perspective or the receptiveness of the investors outside of town.

We would like to thank Jun and Ashok for taking additional time out of their busy schedules to be interviewed for this piece. If you would like to connect with Jun or Ashok, they can be contacted at jun.axup@sosv.com and ashok@techcoastangels.com respectively.