Yesterday I video-skyped with the CEO of an intriguing Startup. They were recommended to me by one of their investors on AngelList. They had going for them a) a big addressable market; b) an area which clearly will break out, but with no clear leader; c) two vocal and well-known angel backers, both of who screen more potential deals than anyone else I know, but both only investing in maybe 10 a year; d) other influential investors; e) an advisory board featuring a world-expert (who advises the Obama administration on a closely-related topic and is also investing in the company); and a seed round which already has $300k of commitments for a $500k round. And a ton of excellent press coverage for a company that just started selling in November. You can’t get much more social proof than this.
Then add the fact that the deal was a convertible with a 25% discount on a $2mm cap, the company had launched a few experiments and booked real, albeit small, revenues, had worked out its e-commerce platform, was focusing in on sales metrics, and was running on a burn rate of only 8k a month, as the founders evidently were drawing no salary. And the cherry on top was that this very much for-profit company was also raising awareness and doing some good for an important social purpose. What’s not to love about this situation? But I’m going to pass on this deal with so many things going for it. Am I nuts?
Half the reason is me, and half of the reason was my talk with the founder. While to date I’ve had great luck with AngelList (investing in CardMunch—see my blogposts here and here, and UpNext via this source), I think increasingly going forward I’m going to invest in teams I get to know a lot more closely from mentorship involvement via TechStars Boston and MassChallenge. So that makes me much more picky about investing via AngelList or the traditional angel-group presentations where there is less interaction on the due diligence.
But the bigger reason was my interview with the CEO. I come armed to these encounters looking to disqualify a company, as I’ve often already discovered what’s to love about the company from the first round. So I generally am testing for weaknesses, as opposed to looking for a reason to justify buying. And the CEO couldn’t give me a simple, clear elevator pitch. Adding to my confusion was that I came in a little confused about his distribution model—his paper presentation had shown several different routes. It took me at least 5 minutes to figure out what he was doing, and I was prepped for the talk. Now, for a company that is all about execution—this isn’t a patentable idea—if the CEO isn’t the top sales person/advocate, it faces a big challenge, whether in attracting good people, customers, or future investors. Maybe I just got him on a bad day, or he got me on one.
Lastly, I don’t know how I can help this company in any meaningful way. The others investing are smarter, better connected, and more in touch with the company. I haven’t used their product (though I’ll check it out), but there’s just not a connection for me.
I considered calling up one of the investors, who is the head of a large and prestigious EastCoast angel group, and seeing what that angel knew that I had missed. But in the end I just said no, deciding to go with my gut and just close the book, to mix metaphors.
I wish the company the best, and made some recommendations as to who might be good investors to close out the round. But I still passed. What would you have done? Would you have given the CEO another chance to pitch you? Checked in with the other angels investing?