Inside look at the Angel Funding Process

I posted the letter I sent to my team after my first angel investor meeting on SetJam’s corporate blog.  [Edit: Since that blog no longer exists, I've posted the content below:]

All,

So I thought I’d share the details of the funding meeting I had today–the good, the bad, and the ugly.  First some context.

This all started when I realized that I really shouldn’t put any more money into SetJam.  I’d already put in twice as much as I had planned, and I remembered (from playing poker in Vegas!) that one of the biggest mistakes players make is to forget the concept of “sunken costs”.  This economic principle says that even if you have a million dollars invested in something, if it is cheaper to throw that thing away and do something else entirely, you should do so.

It’s very hard for humans to do this.  Coders will continue to code in a direction they know is wrong, just because they’ve already put SO much time into it they can’t bear to throw it away.  Designers do this, so do investors.  I realized that I was susceptible to this with SetJam, so I made the decision that if I couldn’t get outside money in, it probably wasn’t worth the investment.

I went to the Chairman of the New York Angels to get advice as to the proper path forward.  I thought the rational choice was to try to raise enough money to validate SetJam to the next round of financing.  This is the $100k I wrote about earlier.  I also convinced him we should get together a small group of angels we both know, try to get them interested, and hope that a few of them would contribute $25k.  He agreed.

We decided the best time would be after the regular monthly meeting for the New York Angels.  2 days before that meeting though, one of the normal presenters had to drop out.  We both decided that it made sense to go ahead and take their spot and present to the whole group.  That meeting was this morning.

The first thing I noticed when I arrived is that the New York Angels were FAR fewer than they used to be.  It used to be a group of 75–I saw maybe 30 people there.  It was pretty clear that the economic disaster of the past year had taken its toll.  There was lots of talk about recruitingnew members and for existing members to remember that they were there to actually write checks occasionally.  Not a very auspicious beginning.

Typically the process works like this.  5 companies present, and are then asked to leave the room.  The angels talk about problems with each of them.  Interested investors then raise their hands, the names are collected, and if there is enough interest a “due diligence” session takes place a couple of weeks later, where the investors ask the “hard” questions and hopefully you get a few to invest.  Actually getting the investment done often takes months.

As you know, we don’t really have that kind of time, and I really didn’t want to be tied up raising money right now.  Not to mention, at this stage, we may very well have a hard time answering the “hard” questions.  I did a different kind of presentation.  I tried to sell them on “us” instead of “it”.  “It”, SetJam, is a little hard to sell right now.  “Us”, SetJam is something I can really believe in.

I really tried hard to sell us.  It was more like a old country revival meeting than an investor presentation.  I ended the presentation by saying that David and I were going to be doing an “impromptu” due diligence session after the meeting and that anyone interested should join us.  I said we wanted to close things up then and there, so people should come ready to invest.

I was the last company to present, and we were all ushered out of the room.  During that time, all of us entrepreneur kind of hang out talking, not really sure what we are waiting for.  After about 45 minutes, angels started filtering out of the room.  It’s an awkward time because you’re not sure what to do besides watch them come out.

After a few minutes, David, the Chairman of the New York Angels, poked his head out and asked me to come back into the room.  This is very unusual.  Of course, you can always fantasize that everyone was so blown away by your presentation that the only problem is that you need more investment.  I’ve learned that fantasies are just that though.

Sometimes they aren’t though.  As I walked in, there were still about 12 angels in the room milling about.  David said that the $100k would be no problem, but that everyone agreed I need to raise more money.  This is a very good thing to walk into.

After conferring with about 5 of the angels though, it was clear that though everyone thought SetJam should raise more money, that raising more money would meaning spending three months trying to pull a round together.  Then someone had a rather unprecedented idea.  Since there were about 15 angels who were interested, why not have everyone commit $5-10k on the spot with NO due diligence, and then deal with the bigger round later.

Everyone thought that was just a swell idea.  One of the angels just started calling around to the other angels in the room–”Bob, you willing to commit $5k on the spot for SetJam?”  “Phil, how about you?”  One by one all of the angels agreed.  The angel who’d led the rally collected names and amounts.  The total was somewhere around $100k, but David felt that there was more money around from people who had left already.  He agreed to tally this all up and to cap it at $200k for now.

A few take aways:

  1. There were no “checks”, so it’s possible everyone will regain their sanity once they get home and we will raise nothing.
  2. We likely will raise our $100k and possibly more.
  3. We now have about 10-20 very wealthy and very connected people who are (or soon will be) financially involved with SetJam.

The biggest takeaway is this though:  This team earned that investment.  If it weren’t for everyone working on SetJam because they care about working with great people to build something of real value more than just taking home a paycheck, this would never happen.  People believe in that kind of commitment and are willing to back it.  You all are the reason we’re going to get a chance to make SetJam into something real.  Congratulations!

Next step… making SetJam great!  Now how are we going to do that?

rj

Ryan Janssen
CEO, SetJam

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