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Seed Capital From Angel Investors: Brian Cohen, Vice Chairman, New York Angels (Part 6)

Posted on Wednesday, Dec 29th 2010

By guest authors Irina Patterson and Candice Arnold

Brian: They say in the angel business, the real problem companies are the ones that keep existing. They don’t go up; they don’t go down. They just stay in place.

That’s why it’s so important to look for companies that do have the opportunity for scalability. But there’s no real way to answer the question about how long an exit takes for us. It’s pretty much how the company performs.

If we invest wisely, as we do – as we learn to do – we see where the exit could be at the day of the investment. That might makes the exit more clear as an opportunity, but it doesn’t necessarily make the timing any more predictable.

Irina: At what stage of a business’s development do you usually prefer to invest?

Brian: Most of the time, it’s pre-revenue. It’s not a place where a lot of people like playing because companies rarely have proven traction.

Irina: What kind of TAM (total available market) are you looking for in your deals?

Brian: You’re asking if there’s some prescription of market size, as venture capitalists go, that they’re forced to do in terms of a metric of a possible return on their investment. I think angel investing has become less driven by that, as a signature of change among angels.

More and more angels that I see, are driven, in some way – and this is going to sound somewhat strange – to do good.

Some angels have enough money and see a great idea, and it’s a lifestyle business plus. In other words, it’s not just a lifestyle business; it has potential to become a bigger lifestyle business if that this person really could do a good job at it.

The multiple out of that is maybe 3x to 5x as a possible exit. If you’re an angel investor – just up until two years ago – you were still of the mentality that you had to only try to find 20x to 30x as your exit.

The reality now is that it’s really useful to try find a lot of these other companies whose markets aren’t as potentially big as that 20x to 30x would be. The success rate of looking for those 20x to 30x [companies] are extraordinarily low.

The opportunities are extraordinarily low. In many cases, if you forced a company to try and stay out there too long to try and get that kind of size, they end up failing more than a company that you can develop and support at a 3x to 5x or even a little bit more than that in a shorter exit time.

I’d say $100 million is a reasonable number. Anything under that, I think, would be unreasonable. In many of the cases, many big companies today may look at our angel investments as R&D that they can’t do themselves.

If you’re looking to sell a company under $100 million in sales, or about $100 million in sales – it usually doesn’t require board approval of a big company. It’s actually signed off by a division manager of a large company. So, it can actually happen sooner and faster, so the entrepreneur can be happier, the angel investor will be happier, and it’s a cleaner, simpler deal.

Irina: Is there some character traits of a founder that could clinch the deal?

Brian: Extraordinary brilliance across the board. I can’t make any other point. Over and over again, if you invest in brilliant, savvy people, you’re going to end up with a better outcome.

As they enter a marketplace, they can better assimilate and then iterate, based upon getting into the space. The idea may not be perfect, but they’ve done their homework; they understand the customer; they understand the market; they understand the dynamics; and they’re really smart.

Once they get in, we’ll have a better belief that they’re going to be able to move fast and change as the market conditions change. So, that’s the critical component. It’s the smart, savvy entrepreneurs who really know what they’re talking about, who really spend a lot of time with their potential customers.

This segment is part 6 in the series : Seed Capital From Angel Investors: Brian Cohen, Vice Chairman, New York Angels
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