Need Investors? MIT's Innovation Series Shows You the Way

Wondering what's the current state of venture capital and angel investors in the Boston area? Read on.

Here are notes from the MIT Enterprise Forum of Cambridge's recent Innovation Series event "The View From All Sides: What It Takes and Means to Secure Funding in Today's Economy."

But first, the panel:

Shawn Broderick: Executive Director, TechStars Boston (similar to Y Combinator) and Founder/CEO, TrustPlus

Rob Go: Venture Capitalist, Spark Capital / Start @ Spark

Rich Miner: Managing Partner, Google Ventures

David Friend: Angel Investor and Serial Entrepreneur; Chairman, CEO and Co-founder, Carbonite

Lee Hower (the forum moderator): Co-founder, LinkedIn; Venture Capitalist, Point Judith Capital

So if you need advice on how to pursue investment, this recap is for you.

Questions/topics:

You can now start a software-based company for under $100,000, so they are capital efficient...

David Friend: You need money to grow.  From there, you need self-growth or a plan to take to a VC to turn $10 million into $30 million. You need to sell that plan.

It takes money to grow your brand.

Rob Go:  Difficult to invest in a kid or unproven entrepreneur. They need to show product acumen, have a prototype to create leverage.

Shawn Broderick:  (piggy-backing on Go's point) Mock up your idea. Don't just have an idea, show something.

Rich Miner:  It's all about risk, how much are you -- the VC/angel -- willing to risk?

There's a growing number of very small funds who will write small checks for less than $250,000.

How does the current macroenvironment impact VCs and angels? Who is active in funding now?

Go:  (from the point of view of a VC) Invest in companies that are very early and capital efficient, so because the economy is slow, you can support it.

Broderick:  Hard division between the "hardcore" angel and casual angel. The bar has been raised, whereby it is very difficult to reach the hardcore VC in the current economy.

Essentially, there is less money now.  However, as the economy improves, people will get back in the game and more money will be available.

Miner:  I agree, but there is money now. You just need to know where to look.

Friend:  I have friends in the Boston Harbor Angels group, and attendance has been up recently.

It is a good time to pursue money because there is less competition for it.

Broderick: The opportunity cost of starting a company is low right now.  There is nothing to lose if you've already been fired.

How do you invest in companies and on the flip side, who should you choose to get money from?

Friend:  As an angel investor, you go into the deal giving $500,000 and you figure the company will raise $2 million independently of your investment.  So the question arises: Do you keep investing in them if they run out of cash?  Also, when do you stop? 

You can end up investing way more money than you originally planned and this happens to a lot of angels.

"Follow-on investors" (VCs) are very picky right now.  For them to invest, the risks need to be all but alleviated before they will give money.

Miner:  Look for "good money" because you can't fire the person investing in you, but you can fire your co-founder, marketing guy, etc.  Your relationship with the investor is extremely important.

Due to this, you want to research them, look at their track record, interview them!

Go:  VCs and angels invest in the person too, almost more so than the idea itself.

Broderick: You don't want to get an investor who doesn't know the environment you are in, think about who you invest in or get investment from.

What can be done to foster investment in Boston?

Friend:  Look for entrepreneurs who are established and not currently consumed in their own thing -- not stretched, running five different projects, etc. They have time to invest. 

Next, you want to find entrepreneurs who are looking to invest in a company, and to do this, you must seek them out.

When looking at angels, you want someone who has done it before.  However, you do not want them to be too antsy so they don't overstep their bounds and try to take on a more active (and intrusive) leadership role.

Miner:  A good idea can make up for lack of experience, but it has to be a great idea. As stated before, you often invest in the person and the team.

Broderick: There is plenty of capital in Boston; "super angels."  The community needs to be more open, more accessible, more vocal, and connected.

I am curious to see what Boston will look like three to four years from now.

Go:  Right, just look for role models.

What to do when talking to investors.

Broderick: I always tell entrepreneurs to "do something with your duck."  What I mean is to show progress.  You need to do something, don't just talk about it.

You are here for your team, not often your idea. Often times, [you're here] in spite of your idea. Surround yourself with good, smart people you trust and can depend on.

Go:  Be ambitious and bold about people you want to be about your company!

You need to bring something to the table, and so do your team members.

Miner:  Look at CEO's and at local start-ups that are doing things that you want to be doing, then cold call them.

Also, check out VCs who have invested in companies like yours or do things similar to what you do, then call the firm or company.

You may want to check out local angels and "common" angles (angel investment groups in Boston).

Friend:  Have the mentality of always wanting to learn. If you get to sit down with someone, ask for advice and see where it leads; do not force anything.

For angels, it is more of a hobby. VCs want to make money. 

If I meet with someone, I tell them to "bring the ad."  When you talk to an angel, be respectful of their time.  Also, I tell them to write the ad for their product. Make it easy to explain in two minutes, then you know you are succinct and you know your product; it's an easy sell.

Lee Hower:  Don't assume the investors are as well versed in the field as you are.

Go to the "60,000 foot level, then take a step back;" just take a big step back to see if someone who has no idea what you are selling can understand it.

Can you go over some of the different capital structures and what are typical milestones?

Miner:  (in talking about seed investment) Put a price on the value of the company.  This is similar to Series A -- most common type of investment.

Convertible note: This is without pricing the company.  What you put in turns into equity when it becomes valued later on.

It is better to get a value for the company.

Go:  Have concrete milestones, make it pertinent to the project and the company.

Friend:  Take the deal that gives you money. (everyone laughs)

What I mean is that you must keep in mind future capital needs.  You may have two offers, but with different valuations.  If you raise $10 million in first round funding because your company is valued at $100 million, good job: you got 10% in cash.  So what, if you need to raise money later on, it will be much harder. 

Related links:

• MIT Enterprise Forum of Cambridge

• MIT Entrepreneurship Center