Financing Tips from Angel and VC Investors

The FundingPost.com Angel Investor and Early-Stage VC Event in Washington, DC today drew a full house of 125+ entrepreneurs and investors to the K Street law offices of Bingham McCutchen. Participants heard elevator pitches from 15 entrepreneurs, ranging from a day-spa that features exotic destination themes, to a genetics lab seeking funds for a joint venture in China. But the main attraction was a panel of early-stage investors who offered advice for start-ups on getting a young business funded.

Here are some of the lessons offered by the panel …

– 2010 is a better year for start-up investment than 2009. Lenard Marcus, investment manager of the Edison Venture Fund, says this is “no time for the venture community to sit on the sidelines.” Marcus adds there is much more activity this year, although it is not yet back to the pre-downturn levels. Dave Troy of Baltimore Angels says this year, “It is more possible to get companies off the ground.”

– The world of finance may be global, but an angel investor will probably be local. Angel investors — those that offer funding after the initial seed capital — will likely come from your own community. David Freschman, a principal of Innovation Capital Advisors and a founder of the ARC Angel Fund, said angel investors cluster in communities driven by the technologies developed in those communities. Silicon Valley in California is probably the most well known of these clusters, but Freschman observes how New York City investors specialize in new media and electronic commerce, while Washington, DC angels are funding IT security and health IT start-ups.

– Anyone can offer money, but an early-stage investor should be like a partner. Todd Klein, founder of Legend Ventures noted that the average length of a marriage in the United States is 31 months, while the typical venture capital investment lasts 6 1/2 years.  Thus, Klein says, entrepreneurs need to do their due diligence in selecting an investor. Richard Smith, chairman of Media4Equity, said start-ups shouldn’t want an investor, they should want a smart investor — someone who brings “strategic advantages” to the partnership, which he defined as someone who is connected in ways the company’s principals aren’t. For example, Smith says, if the the company’s key people are engineers and operational managers, the angel investor should bring sales and follow-on investing connections.

– You don’t need as much investment capital today as you did before. John Frankel, founder of IT Asset Management, explains that start-ups can do much more today with less money than 10 years ago. In the Internet boom years, says Frankel, start-up teams numbered eight to 10. Today, start-ups are more likely to have a staff of two or three people. One of the reasons is the ability to “outsource complexity” as Frankel calls it. Also, the cost of hardware, which used to soak up a lot of capital, has dropped sharply in the last decade.

– Investors don’t like doing business with total strangers. Potential clients can call a venture investor cold, but like most panelists, Prashanth (P.V.) Boccasman of Novak, Biddle Venture Partners gives priority to what he calls “warm contacts:” people the investors already know. Boccasman suggests that companies recruit their bankers, auditors, or lawyers who may know investors to make those contacts. David Freschman adds that LinkedIn is a powerful tool that can complement warm contacts.

Photo: borman818/Flickr