Renowned angel investor Audrey MacLean explored the nuances of angel investing with the audience at yesterday's Women's Angel Colloquium. MacLean, a founder of both Network Equipment Technologies and Adaptive, revealed that her role as private investor was an accidental byproduct of her career in the computer industry.
According to MacLean, no one wakes up and decides to be an angel investor. She was at Adaptive when a couple of companies that she knew invited her in to invest, and when they both did well, it established her as an angel investor. MacLean then fell into being an LP in several established venture funds, and doing more of her own angel investing.
MacLean has been on the Stanford teaching faculty for the past eleven years, and she loves it. You get to meet people who are rich in content ideas, but naive on how to pursue them. MacLean claims to be the only Stanford professor "that doesn't give a shit about ideas...There are plenty of ideas, but precious few opportunities...Good ideas and good intentions are not good enough."
Angels need to rigorously assess the opportunity, not the idea. Good ideas need the team, the opportunity, and the capital strategy to succeed. Those who invest well do it with a long term perspective. They make sure there's a clear alignment between the founding team and the company's long-term goals. Also, angels should understand enough about the opportunity so that they can put rigor into an assessment, know what it looks like at scale, and know what it takes to get there.
There are some common denominators across the many flavors of angel investing - alone as vs. in flocks, passive investor as vs. mentor capitalist, etc. MacLean also called out the archangels, those like Paul Allen or Vinod Khosla, who can invest a million now, five million later, and so on. MacLean reminded the entrepreneurs in the room that they can find both good and bad investors within any of the various ranks. Whichever side of the table you are on, you need to ensure that you're working with people who share the same values and philosophies as you do.
Effective angels, regardless of what category they are in, need to help teams assess their capital requirements across time, so that they can map milestones against their cash burn, and then map that against their fundraising rounds. MacLean compares this simple math to scuba diving. How much air is in the tank, how deep are you, and how much air does it take to get back up? Do you have some buffer built into your available air time, in case you get stuck along the way?
MacLean asserts that VCs are willing to wait until angels spend the time and money needed to figure out if something is going to work. So even in an angel group, angel investors need to do their own thinking. Do I know enough? Have I acocunted for the unknown variables well enough to start solving the problem? MacLean thinks that angels should stay within those areas where they have a good intuitive feel for what will work. If angels talk about problem-solving and markets, rather than about technology and product, then they'll understand the opportunity.
Another question that angels fail to ask: Is the market big enough? As MacLean stated, if you're in too small a space, then you'll lose the latitude needed to adjust for market change. And compelling "enough" means that there is a compelling reason for the customer to pay you for what you're selling. "It's drinking your own bath water" to think about compelling reasons to sell it to the customer instead.
Another interesting snippet from MacLean's talk: You always want to know who the leader of the team is. Who is the original inspiration for the idea? MacLean wants to know about the moment that the idea came together, and when the founders just knew that this was the right thing to do. Why did these people decide to commit their entire existence to fulfilling this vision? What are these people capable of? What are they inclined to do? Do they have realistic views about what's possible? MacLean needs to know that the CEO is going to take the company all the way during the phase where the company is being willed into existence, which can take five years or so.
MacLean highlighted the need for a culture where it's OK to disagree, and where it's OK to talk about your problems. But that's what a startup is like - one day you can be overcome with dread, and the next day you know that nothing can stop you. To live through it, everyone in the company needs to know that you are headed towards a target, and that there's a plan to get there.
There's nothing accidental about putting together a successful angel deal. The investment needs to be thought through as something more mature than it is today. MacLean suggests that angels think about an investment as a market opportunity with both reach and future financing rounds under its belt.
During the Q&A, MacLean revealed the more personal side of her journey into angel investing. One recurring theme was that math is the great equalizer for women. MacLean found that niche as a way to stand out as one of ten siblings, and joked that she grew up in a Darwinian envitonment, where "if you turned your head at the dinner table, you lost your meat!" Today, she worries about the next generation of women, who don't understand what the women of barely twenty years ago had to do to make more equal access happen.
MacLean also talked about the awards that she used to foster a culture of participation in all area of the company, tricks such as the "alligator award" handed out for spotting danger in the water even if it didn't relate to your job. She passionately avers that there's no difference between we and they, since in a startup no one will make it if you don't paddle together to avoid the falls.