Seattle angels on what they look for in entrepreneurs, and why startups fail

Gaylord Kellogg; Geoff Entress; Andy Liu and Seaton Gras

You’ve got to be able to run through walls, leverage connections and  focus on revenue — all while raising money.

Those were some of the tidbits of advice today at the World Financial Symposiums conference in downtown Seattle where three of Seattle’s leading angel investors — Andy Liu, Geoff Entress and Gaylord Kellogg — discussed what they look for in entrepreneurs and some of the warning signs of bad deals.

“The most successful (investments) have all  been about the team, and primarily how much fortitude does the entrepreneur have in terms of being able to push through tough times,” said Liu, an angel investor in about 40 startup companies.

Entress, who has backed about 100 companies to date, including about 50 active software and Internet companies in the Seattle area, agreed.

“It’s all about the team. That’s what I am investing in,” said Entress. “If I meet you and I don’t like you, I am not going to invest. I don’t care what the deal looks like.”

Entress said he appreciates when entrepreneurs share the “warts” of the business, being upfront about the problems and challenges they are facing.

“These are long-term relationships. I often categorize them as getting married,” said Entress, who sits on the boards of Big Fish, WhitePages and eight other companies. “You are going to be in this thing seven plus years, so you are in there for the long-term with this person … and you are going to be spending a lot of time with them every month for years. So, you want to be with people you really enjoy being with, and helping.”

Liu expanded on that notion, adding that he prefers an A team with C minus idea, to a C team with an A idea.

Kellogg, an early investor in Amazon.com, noted that Seattle is a “small town” where angels and VCs like to work alongside one another. That means entrepreneurs should do all they can to leverage those connections. Since the bar is high to raise angel financing, Liu added that entrepreneurs should “try to stand out just a little bit more than all of the other guys.”

To do this, he suggested that entrepreneurs should try to get an endorsement from someone that the angel already knows, prior to the meeting. “That gives you a leg up,” he said. “I would go out of my way to find out who this person is hanging out with.”

Seaton Gras, who runs Seattle’s SURF Incubator, noted that entrepreneurs should be focused and direct in their approach. He pointed out how one entrepreneur he worked with sent around a presentation deck with 52 slides — something he said no angel would ever have time to read.

In order to be credible with the angel investor, you need to be able to convey what you do in an efficient manner, said Gras.Don’t waste the angel’s time.

“They need the clarity to put a pitch together that is not going to waste the time of angel investors,” he said.

In terms of common mistakes that entrepreneurs make, Entress said that startups fail because they don’t communicate with their investors enough. But the most common issue is that they simply run out of money.

“There are bunch of reasons why they run out of money — number one is they spend it too fast. Oftentimes, I see that as a problem from a very experienced executive from a big company, and they have a tendency to spend money too fast. I’ve see the opposite too where they won’t spend any money. They are so cheap, they won’t spend money on things they should be spending it on. That’s a different problem, but it is not as bad as spending it too fast.”

Kellogg added that entrepreneurs also can burn too many cycles on raising money, rather than driving revenue. That, he said, can be the best way to attract investor interest.

Kellogg noted that entrepreneurs can get “hung up on the valuation” of the round rather than focusing on getting the deal completed. “In the long run, the valuation is not going to make that much of a difference, especially early on,” he said. “So, do what it takes to raise the round.”

Secondly, he noted that entrepreneurs sometimes just spend too much time raising money. “As soon as you get revenue traction, it is going to be so much easier to raise money,” he said. “Focus on the business, not on raising money.”

Follow-upThe wisdom of Tom Huseby: Advice and zingers from Seattle’s most quotable VC

Previously on GeekWireHootSuite’s Ryan Holmes, angel Geoff Entress launch new BC startup incubator Invoke Labs… BuddyTV founder Andy Liu’s 8 tips on raising cash: ‘Not all money is good money’

  • http://www.facebook.com/vqnguyen2 Viet Q. Nguyen

    These are some very key insights from the angels. Curious to see what their thoughts are on crowdfunding – do they consider it a way to vet prospective projects?

    • johnhcook

      Thanks. That’s a good question. Crowdfunding didn’t come up today, but it is certainly changing things up. Stay tuned. I’ll be posting more today from the conference — including the panel right now on VC.

  • Thomas R.

    I wish there was a Q&A a session because I’d really like to ask not what the Seattle angel investors are looking for but rather are they finding what they are looking for in Seattle? I’ve heard of Geoff Entress and Andy Liu doing investments, but who are the other angels? Even the other panelist, Gaylord Kellogg, only cites Amazon as his last successful investment…that was over a decade ago. There should be a distinction between active angels and inactive angels who haven’t made an investment in the past 5 years. Sometimes I wonder if Seattle angels see startup investing as more of a social club…

  • http://twitter.com/Seattle_Startup Seattle Startup

    John, I think you would do your readers a great service by compiling some data: namely, the IRR of the Angels (especially given http://techcrunch.com/2013/01/26/a-closer-look-at-the-quality-of-angel-returns-data/). Anyone can spew advice, but wouldn’t it be nice to know the success rate of those giving advice?

    • Thomas R.

      I like this suggestion. Mark Suster talks about investing in lines not dots. I think applying the same approach to investors who give advice would weed out those that got lucky and those that have a systematic successful approach to evaluating startups.

      • johnhcook

        I like the idea. Angels, however, are a private bunch and since the money is not tied to public pensions or endowments it is especially difficult to access, unless some angel just wants to provide it. That said, I think it would be super cool if the data was more accessible . Angels are by their definition nebulous.

        • Thomas R.

          Maybe we don’t have to get the absolute dollar amounts but rather find some other way to quantify successful angel investors. Perhaps something similar to the TechStars.org website (which is very transparent and I wish more VC’s were like) where they count startups that have failed, still going and have successfully exited.

          I also think there is something to be said about the frequency and location of investments. A well connected investor would be a greater asset to a startup founder than say a investor who does one investment every 2-3 years. I’ve also noticed a prevailing pattern of successful investors in the same startups, an “it” group if you will. Look at the top 25 startups of last year (in terms of seed money raised) and you’ll see a fair amount of overlap.

          I think I’ll work on a formula this weekend and post it later. Using a combination of AngelList’s API and Crunchbase, I believe it’s possible to identify successful active angel investors versus those that are only angel investors in name.

          • Thomas R.

            I think I’ll call it an investor scorecard.

            I have a hypothesis that in Seattle, although there are several people that consider themselves angel investors. The total average number of investments by those individuals is something like 2-3 investments over a 10 year period. I assume that it will plot out as a bell curve with people like Andy Liu and Geoff Entress as outliers with 40+ investments and most “angel” investors in the middle.

          • http://twitter.com/Seattle_Startup Seattle Startup

            Yes, this list, with self-reported or whatever data, would be great.

  • http://twitter.com/chrisamccoy Chris McCoy

    I buy this: “You’ve got to be able to run through walls”.

    I’d add “willing” to that.

    I buy this too: “So, do what it takes to raise the round.”

    I don’t buy much else though.