Editor’s note: Welcome to Angel Spotlight, a new feature on GeekWire that shines a light on the important work of angel investors in the Pacific Northwest. For the most part, angels like to fly under the radar. But everyone knows they play a critical role in fortifying the walls of the startup ecosystem, not only funneling dollars to new companies but also offering key business insights. We’ve repeatedly heard that the Northwest lacks a critical mass of angel investors, and these mini-profiles are designed to raise the profile of the angel investing community. Thanks for reading.
Eric Michelman got his start in technology at Apple before its initial public offering in 1980, enjoying the ride along the way. He later created his own software company, selling it to Borland, before landing at Microsoft where he worked on products like MSN and Excel (he’s most famous for inventing the mouse scroll wheel).
Now, the University of California-Berkeley and MIT-trained computer scientist spends most of his time looking for hot deals in the Pacific Northwest. “I’ve always been entrepreneurial and interested in startups, so this seems pretty natural for me,” said Michelman of his role as an angel investor.
We caught up with Michelman for this edition of Angel Spotlight. Enjoy!
What excites you about investing in startups? “1. It’s super interesting – there’s an amazing number of niches in the world that you’d never imagine, people doing things that you’ve never thought about. They have problems that you’d never realize, and these startups have innovative solutions to those problems.
2. It’s a great way to keep up on everything going on in the world of tech, and other areas…. Startups cover a lot of ground, especially in technology. And they teach it to you. When you’re considering a company and evaluating their business, you learn about their technology. It’s like having personal tutors for leading edge tech.
3. You can make a lot of money. When it works, the returns are quite good. Moreover, when you invest in a company you have really smart, really motivated people — the entrepreneurs — working their asses off to get you a good return. It’s amazing how hard these people work (and yes I used to be one of them) all in the interest of making the company you invested in successful. It’s great to watch.
4. Great people. The angel groups, like Alliance of Angels, are full of smart, successful people who are a pleasure to work with.”
Not so Great Things About Angel Investing: “1. You can lose money. Obviously not all investments work out. The idea is to make it up with the winners since the most you can lose is 1x your investment, while winners can pay off many times your investment.
2. It takes a long time to discover if you’re good at it. Typically, it takes at least a few years for companies to become successful enough to exit, so when you start with angel investing, you’re going to be making investments for a while before you have much gauge of how good your judgment is.”
What role do you look to take with the companies you invest in? “As an angel investor you’re generally a passive investor. I’m on one board, along with a few non-profit boards, and am an informal advisor to others, but I’ve also turned down a couple of board seats. Joining a board, if you want to do it well, requires a real time commitment. To consider it, I look for a company in an area that I have something to add, a business that I’d be excited about getting involved with, as well as a CEO that I’d have a good working relationship with. Generally, though, as an angel investor, you make your investment and hope for the best.”
What was your biggest win, and what made it a success? “Most of my investments have been in the past three years, which is generally too early for exits. But here’s one exit and two promising ones: Crowd Compass: Mobile conference apps: I invested in 2011 and it recently got acquired, just nine months later. It’s a great example of nailing a new technology/approach that big established players will need to acquire.
Novinium: Electric cable rejuvenation: This was my first investment in 2006 and they are doing very well. These guys had been in the industry a long time so they know it very well and came up with superior technology.
Valant Medical Systems: EMR for mental health practices: I invested in 2010, and am on their board. It is still in the growth/burn phase, but excellent reception and sales are ramping strongly. The founders lead a large successful mental health practice in Seattle, so they live, breathe it, and can totally connect with customers, coupled with a very strong developer co-founder. It’s also a good niche, with its own requirements that opens up opportunity away from the large generic EMR vendors.”
What went wrong in your toughest investment and what did you learn from it? “Companies that require a lot of capital are difficult. In angel raises you don’t get the many millions that VC raises can offer. So if it’s an industrial company with a high burn rate, even if they raise what they initially need, there’s little margin for error. And things always go wrong in some ways. You always need more money than planned. Other lesson: Don’t invest in something you don’t understand. One of my first and biggest investments had a number of really smart, well respected guys out of Microsoft investing in it. I didn’t really understand how or where (the product) would be used, but I figured there’s an awful lot of IQ piled in here, so I should join in. It was a mistake. Apparently the potential customers didn’t understand it either.”
Business idol: “Jeff Bezos. He does so many innovative things right that it’s astonishing.”
Valuations: Hot or not? “They’re medium now. Prior to 2008, they were definitely higher. In 2009 and 2010 they were lower, and there were some real bargains. Now, Goldilocks. There’s also what we call the California effect…. Valuations are higher there. If companies are raising money there too, their expectations seem high to us. But that’s primarily for the gazillion social/mobile/local startups – that seems to be what the Bay Area (and many other areas) are focusing on now. (With) other startups, it’s not so much difference in valuations, even in tech. One thing worth noting is that angel investing is primarily local.”
What sector/technologies are you most excited about investing in right now? “I’m pretty agnostic. If a company is solving a real problem for customers who have money and will pay for that solution, then it’s an interesting business and investment. I’m happy with singles and doubles. I’m not out looking for the next Facebook. Having said that, I think there’s an art in picking companies who are ahead of their industry with must-have functionality and therefore who will be prime acquisition candidates. That’s something I wish I were better at. But, I will say, the area I’m avoiding now is the social/mobile/local startups. There are an unbelievable number of startups going after this now and they are slicing the market opportunity thinner and thinner and thinner. It’s hard to see how many of them expect to build a business; apparently they’re just buying a lottery ticket hoping to be acquired.”
What’s your biggest pitch pet peeve? “Blustery confidence. Most entrepreneurs are pretty straightforward. They’re enthusiastic and optimistic of course, but generally they don’t BS. Occassionally you hear one who’s glibly putting on a sales job and those you want to avoid.”
How do you find deals? “I think the best way is simply to join one of the angel groups. They screen deals and bring the better ones to present to the membership. Seattle angel groups include Alliance of Angels, Northwest Energy Angels, Keiretsu Forum, Zino Society, and probably others that I’m missing. There are also a number of startup showcases during the year. If you become an active investor, people will start to seek you out. But, the fact is, you can spend an unbounded amount of time looking at startups. There’s no shortage of companies looking for funding, and the amount of due diligence you do can also be pretty unbounded depending on your personality and philosophy. All of which is to say, finding deals to look at isn’t really an issue, it’s more how filter them.”
What’s the one piece of advice you’d give angel investors who may be thinking about getting their wings? “Well the standard advice is to spread your investments, not to put too much in one place. It is good advice. My biggest investment was the industrial company I mentioned earlier. It was one of my first investments and Mike Crill — who was acting as their CFO — actually called me and told me not to put so much in. It turned out to be good advice, but I didn’t listen.”
Angel Spotlight is a new feature on GeekWire in which we highlight angel investors from the Pacific Northwest. For those who’d like to nominate your favorite angel, please email me at [email protected] A special thanks to Yi-Jian Ngo at the Alliance of Angels for helping to make this new feature possible.