A founder’s guide to working with angel investors

Raising money the old fashioned way.

Angels investors can be a confusing bunch. They’re individuals, not professional investors. And individuals are, well, individual. They have different investment theses, different goals, and different styles. One might be a veteran entrepreneur with a deep portfolio who avidly surfs AngelList in search of new prospects while another might be a retired surgeon looking for a new hobby. Some only invest when their friends do and others are comfortable leading rounds and following on. Unlike venture capitalists, angels’ only fiduciary responsibility is to themselves.

But angels are also a crucial component of the startup ecosystem. They invest at the earliest stage of a company’s lifecycle, long before a typical institutional investor would take interest. For businesses that require outside financing, angels can be crucial and sometimes add substantial value beyond cash by making key introductions and giving critical advice. Having the right angel on board can make a world of difference. They provide the kindling for the bonfires entrepreneurs hope to ignite.

This makes working with angel investors a special challenge for founders. Finding, wooing, negotiating with, closing, communicating, setting expectations, extracting value and introductions, and building long term relationships with angels can be a fraught and opaque process, especially for first-time founders. I’ve tried to pull back the curtain on certain aspects of what it’s like here, here, and here. Others have gone much farther to improve transparency.

But a founder’s perspective on managing angel investors is sometimes hard to find. Entrepreneurs are often hesitant to share the details of early financings for fear of upsetting reticent investors. More importantly, entrepreneurs are busy building their businesses!

Once I started thinking about this, I couldn’t get the idea out of my head. So I set out to find a founder who could shed some light on these issues and share their perspective. There was one guy who I knew would be perfect. I’m an investor in his company and have watched him interact with investors since 2011. That guy is George Eiskamp.

George is the CEO of GroundMetrics, a startup based in San Diego that offers survey and monitoring services to the world’s biggest energy companies. Almost like an MRI for geology, their sensors take full field 3D images of the subsurface which operators use to find and manage natural resources.

George has raised nearly $10M from angel investors over multiple rounds. He’s set records for size and speed of close with the largest angel group in the US, the Tech Coast Angels. His investors are engaged, enthusiastic, and often participate in multiple raises. And he’s done all that for a startup that’s not in Silicon Valley and builds both hardware and software based on fundamentally new physics. Not a small feat, and one many founders could learn from.

After a few friendly nudges, George generously made time to share his personal experience and insights in this interview. Unlike many puff pieces floating around the internet, his answers go into extreme detail on every aspect of the process. That level of granularity is what’s so often missing from financing discussions, and is the ingredient that many entrepreneurs need most.

Without further ado, here’s George.

How did you raise GroundMetrics’ first round of angel financing? Can you walk through exactly what happened?

GroundMetrics is a spinout from an R&D company in San Diego called QFS. QFS specializes in doing advanced science projects for DARPA and other federal agencies. We incubated GroundMetrics inside QFS until outside capital was needed to fund the growth necessary to meet demand. The world’s largest oil company, Saudi Aramco, requested a demo in the Kingdom. To ensure success, we needed more capital than available with QFS budgets so we decided this would be a good time to spin out GroundMetrics and raise capital.

We were still very early so angel capital seemed like a better fit than venture capital. I believe the best way to raise capital for a new tech venture is with investors that understand the technology (in which case you probably need to convince them of the market opportunity) or visa-versa. Few people in the world really understand electromagnetic sensing so we figured we would need to raise capital from oil country i.e., Texas or Oklahoma.

My co-founder and I had raised capital before, but different ventures raise different questions so while we were gearing up to start engaging oil country investors I saw an advertisement about a Tech Coast Angels (TCA) “Meet The Angels” event. I believe this was the TCA’s first Meet The Angels event and at that time the event consisted of about a dozen angels spread around a banquet hall where entrepreneurs could pitch/talk to them. I figured that would be a good way to test drive our pitch and see the various questions and concerns the GroundMetrics venture might run into. I think the count was as follows — I talked to 9, 6 expressed interest, 3 of those 6 wanted follow-up meetings, and, of the 3 not interested, 2 said it was outside their wheelhouse and one seemed very opposed. I decided to reach out to the 3 that wanted follow-ups for more test driving and to ask if they thought this deal could get done in San Diego despite a lack of oil industry and electromagnetic expertise. They strongly encouraged me to enter the TCA’s formal screening process.

Initially, we didn’t make it through the pre-screen. The backchannel feedback was that our pitch was very refined and therefore since I didn’t say the pre-money valuation was flexible they assumed it wasn’t and they felt the valuation was too high and that it would fall flat at screening. I followed-up and told them that was flexible and we moved onto screening.

About 40 people showed up to the screening. I was told that’s about the most they tended to get back then. I pitched and then answered questions. Then I was invited to leave. The process includes a closed-door discussion to assess interest. Members are asked to raise hands if they’d like to participate and one must volunteer to be the deal lead — negotiate terms and lead due diligence. I was told by one of the TCAs that all 40 raised their hands expressing interest and that to be sure they asked if anyone didn’t raise their hand (nope, nobody didn’t raise their hand). Then instead of a deal lead with 3–4 people supporting due diligence they came up with 2 deal leads and 4 groups of 3–4 people in each group to support due diligence, a total of about 15 people.

At every meeting, pre-money was contested and I always said I would consider a lower valuation if they would make a solid case — “it’s too high” or “we just don’t do deals that high” were not solid enough arguments. In the end, not only did we do the deal at the proposed pre-money, but it set two records with the San Diego TCA:

  1. Fastest raise from term sheet to close.
  2. Most raised from the San Diego chapter at $1.2M.

That year, TCA only invested in about a dozen companies out of hundreds of applications and most companies needed to visit at least a few of the TCA’s five chapters. This deal went so fast that we never left San Diego and I heard that some of the other chapters were disappointed they didn’t get a shot to invest. In later raises, we went to Los Angeles and Orange County and had success with those chapters. Unfortunately, we never made it to Santa Barbara and their Inland Empire chapter.

GroundMetrics has broken the mold to raise multiple up-rounds from angel investors, how did that come about? Why did you elect to grow the company with angel money rather than going institutional?

I thought we were too early for venture capital or other institutional money. We weren’t ready for a big raise, so angels seemed like the obvious way to start. I knew of a few angel groups, notably the TCA and a few others in oil country. Angels are often pragmatic and patient while entrepreneurs work out the bugs, iterate toward product/market fit, and refine the business model. This pragmatism gave us the freedom to set up GroundMetrics for success.

How much angel money has GroundMetrics raised to date? From who? How have the later rounds been different than the first round?

Nearly $10M.

All from angels. The majority of the first round was the TCA. Each subsequent rounded consisted of about 50% existing investors +25% introduced by existing investors +25% via GroundMetrics networking and tapping other angel groups. The easiest money to raise (no money is easy to raise, but comparatively speaking) is from existing shareholders (if they are happy) and investors they bring into the mix. That was the big difference. Our shareholder base has remained excited about GroundMetrics so they come back, often multiple times, with a few having invested in every financing.

I never imagined we would be able to come so far with angel financing. We had opportunities to do institutional rounds, but our shareholders wanted to fill our needs themselves and they have been great to work with so we haven’t needed to go institutional.
 
 Where can founders find angel investors?

Good old fashioned networking. Look up angel groups online. Ask angels you find who they syndicate with or what other groups they know about. If you happen to know any venture investors, then ask them for angel group recommendations that might be a good fit.

 What are the tough questions that founders shouldn’t forget to ask?

How many other deals they have done? Over what time span? How recently? How many deals have they led if they might be a lead for you?

How much would they consider investing if they like what they see? Often, the people that ask the most questions and require the largest amount of time are the people who invest the least. Knowing their range early will help you determine how much effort to put into due diligence with them… but keep in mind social capital in addition to their range. For example, they may be influencers within their angel group, or may bring in lots of capital via others or may have meaningful industry, technical, or operational contacts that could help. Plus, remember to always treat people with the utmost respect. Even small amounts of capital are real money that someone worked hard to earn and he/she is now considering entrusting you with it.

Ask about control terms early if they could be a deal breaker. Some entrepreneurs are not bothered by control terms, but if you are, ask early because you don’t want to waste your time (or theirs). Find out why they want whatever control terms are desired to get insight into their perspective and motivations to help gauge alignment. The more aligned you are the less control terms actually matter.

What’s their philosophy on management? If you want to stay in your position (CEO, CTO, etc.) and you deliver/perform, will they be okay with you staying in that position? Or are you just filling the seat in the interim until they or the company can find or afford someone else? If they want to replace you, what are they looking for? Ask yourself how you feel about that. If you stay then ask questions about their performance expectations.

How can you get them to actually write a check?

Create a sense of urgency. One good way to do this is with deadlines. Once you have a critical mass expressing interest (maybe around 50% of what you need to fill your financing or for first closing) then set a first closing date and a second closing date. Give perks to those that invest by those dates, with more perks going to those who invest by the first and less for those who invest by the second (warrants are a common perk in this situation). How much less? Maybe half as much so it’s significant, but not so much that they drop because they’re upset they missed the first. How much for the first? Enough so that when reduced for the second it’s still meaningful for the second.

Determine the dates with the investors so they can meet the deadline. They might need time to move capital around and/or might want to look under the hood a bit more, etc. You want to make sure the first closing yields the minimum to close by the date selected.

How is the dynamic similar/different to professional investors or venture capitalists?

Angel investor is a vague term — anyone can be an angel. Let’s assume we’re dealing with “financially sophisticated” angels.

In many ways, the dynamic is very similar because they are financially savvy individuals familiar with best practices and want a certain return on their capital.

Angels tend to be more patient for an exit if the company is doing well, because they don’t have the same time pressures as fund managers that have timeline targets to satisfy their limited partners.

With angels, you’re herding cats. You’ll spend a lot more time taking temperatures and having the same type of conversation numerous times with different people. They sometimes don’t have a formal process so you might not know what you need to do or provide until it’s requested. Institutions and formal angel groups tend to have a structured process and talk more specifically about what their requirements are and what the timeline will look like.

How are your angel investors organized? How do you manage communications with them?

Some are grouped together in an LLC and some are individual.

They have board representation so we have quarterly board meetings that cover everything — financials, sales, sales pipeline, technology, IP, personnel, operations, risks, goals, etc.

We send out a monthly update with a P&L. It’s an email that’s typically about a page long, broken down in categories and bullets so it’s easy to skim and I try to include pictures — simply showing the crew working in the field gives insight to what field operations look like. This has been the best thing I have done in regards to shareholder satisfaction. I think they feel more respected and appreciated and it’s more fun for them because they get to enjoy the scenery of the ride and the drama of the challenges along with the victories. Some have asked me to provide a shareholders communications workshop for their portfolio companies — I hope to do that some day soon because it’s beneficial for everyone — shareholders, entrepreneurs, management, the company, etc.

We also send out annual financial statements and annual budget to shareholders.

I would suggest the above to others (commit to it at the beginning), because (i) it will increase their comfort in investing to begin with and (ii) it will force you to actually do it, which will be to your benefit.

It seems like a lot of work, and it is, but it has paid off in spades. At first it raises lots of questions, which was more time consuming than preparing the updates. After a few rounds (i) you get better at answering questions before they are asked so less questions come in and (ii) they get more comfortable with you and better understand what you’re saying so fewer questions come in. They spike again when new investors come in, but then trend back down in a similar manner.
 
What have you learned by not just raising angel money, but working with your angel investors for five years? If you could go back and give yourself one piece of advice on the day you started the company, what would you say?

The terms and precedent you set at the beginning will continue in perpetuity. At subsequent financings they will at best stay the same and may get worse… They certainly won’t get better. The only way preexisting terms will change is if a big money investor comes in and blows them up. Things might shift then, but they might not get better.

Would you raise capital via angels again?

Yes. I hope to work with these same angel investors on future ventures.

Do you plan to raise institutional capital?

At the right time and under the right circumstances, I’d consider it. Institutional capital is rocket fuel, so you better be ready to take off (e.g., product readiness, operational scalability, sales pipeline, business model proven with repeat sales, etc.). For future ventures, if I were to find a VC that does true seed deals, I would certainly consider working with them.

What other advice do you have for entrepreneurs trying to raise money?

Be honest and do what’s right. Follow the golden rule. Treat investors like you would want to be treated (put yourself in their shoes). Business, like life, is a repeat game and you’ll have to live with yourself forever.

Enjoy this interview? Then you’ll probably like my reading recommendations curating amazing books that explore the intersection of technology and culture.

Eliot Peper is the author of Cumulus, Neon Fever Dream, and The Uncommon Series. His books have been praised by Popular Science, Businessweek, TechCrunch, io9, and Ars Technica, and he has been a speaker at places like Google, Qualcomm, and Future in Review. When he’s not writing, he works with entrepreneurs and investors to build technology businesses.