Where Einstein Meets Edison

In-Depth On Angel Investing For Entrepreneurs

In-Depth On Angel Investing For Entrepreneurs

Jul 13, 2010

“Our angel investors have opened doors for us at extremely senior levels with people who are their personal friends – for instance, getting access to Steve Jobs, which is something I typically haven’t experienced with venture capitalists,” said Daniel Ross, CEO of Illume Software, on a recent panel of the Venture Summit East 2010.  The panel was aptly called “What Do Entrepreneurs Really Think About VCs?” and what followed from Mr. Ross was an insightful take on angel investors that every entrepreneur should hear.

Prior to Illume Software, a software company aiming to save teenage lives while driving, Mr. Ross was managing partner of Maxis Capital in Boston, a global private equity firm. He was also a member of CommonAngels and over the past decade as CEO led the turnaround of middle-market software and services companies. Mr. Ross played a major role as senior executive in building OpenMarket and taking it public for the most successful IPO on NASDAQ during 1996.

We couldn’t help but ask Mr. Ross for an in-depth interview to bring you his insights.

 

MITER: To kick this off, tell us about how you became an entrepreneur.

Daniel Ross: I became an entrepreneur out of the curiosity to fulfill a childhood dream of running a company.  I think I was ten years old when I thought about what it would be like to build a company, I actually have a note that I kept about those thoughts.  Later in life when I experienced the excellence of some of my bosses including Gary Eichhorn, who led OpenMarket, it inspired me to want to create my own successful company that could change how a market performed.  I joined a company called Manna, which made personalization software.  It was my curiosity and an interest in solving market challenges combined with an accumulation of skills developed at several companies that led me to become an entrepreneur.

 

MITER: Just to dig a little deeper on the skills you’ve talked about, which of these skills do you think have been most critical to you as an entrepreneur?

Daniel Ross: Understanding the voice of the customer.  More than anything else, being close to, appreciating and never losing sight of the customer’s needs and wants – not what you want to sell but what they want to buy, not how you want to sell but how they want to buy. Truly listening to their feedback and understanding who your customers are is the most important thing. A lot of folks get confused about building a better mousetrap and believe that the customers will come.  In reality, the most important thing is the customer, their needs and wants, and how you are going to delight them.

 

MITER: You’ve said before that for your current startup Illume Software you are attracting angel investment only, not VC.  What underlies this decision?

Daniel Ross: The experience of having worked successfully with many VCs over the years, having had both positive and challenging experiences, helps me to appreciate what they are looking for in an investment.  I understand that at Illume we are a mission-based operation, that we originated our offering out of the desire to save teenage lives, so the appeal to VCs – in terms of the amount of money we are looking for, which is only a few million dollars, the position we are in right now, being pre-revenue, and the motivation of our company which is mission-based – filters the list of VCs that you might work with. That’s from a VC perspective.

From our perspective, our notion is that we are looking for resources and connections to the marketplace that will propel our company forward. The angels that have already invested in our company have opened doors for us at extremely senior levels in target companies, with people who are their personal friends – for instance, getting access to the CEO of Travelers Insurance for dinner or getting access to the President of Verizon or getting access to Steve Jobs, all came from personal relationships with our angels, which is something I typically haven’t experienced with venture capitalists.  From our perspective, we are getting a lot of leverage from our angel relationships.

The second part of the angel benefit for us comes from the fact that as a fairly experienced CEO, the guidance required and received is limited to my requests for specific assistance. Finally, the time and due diligence necessary to raise additional funds is considerably less arduous with Angels.

 

MITER: It’s a very insightful and interesting that angels are better at opening doors for entrepreneurs.  What are their motivations that make angels better at relationship building for entrepreneurs?

Daniel Ross: I’ve run into two different classes of angels.  I was a member of Common Angels and worked with Hub Angels for a couple of years and have consulted with companies to find money from angels for other projects.  There are angels who are enormously skilled, talented, and experienced who have been extremely successful as entrepreneurs, made a lot of money, that want to share that benefit with the younger generation of entrepreneurs.  In their particular case, there is a lot of value in interactions with, and not just in connections of, some of these folks – John Landry or Daniel Weinreb, for instance – who have tremendous technical skill and market insight.

The second group of angels that I’ve worked with that is also extremely valuable is angels that are a little older and that want to give back to society and impact the world in a positive way.  I have a friend who spends a lot of time and money focusing on green energy.  He is not an engineer, but a financial person who is inspired by the potential impact of green energy.  I have another friend and angel investor who is very passionate about world hunger, he tries to find technologies to grow food more effectively.  He realistically no longer has the time or energy to run a company, but he is passionate about the topic and wants to do what he can to promote the initiative.

When I provided counseling for a genomics company last year, helping them find some angel money, it was about finding someone who was, like them, passionate about addressing childhood diabetes and childhood autism.  It was a personal connection between the investor and the solution. In the case of Illume, our own investors, who have been extremely successful but don’t necessarily have a particular tie to what we doing – mobile apps and location-based software – are simply very passionate about the notion of being able to save teenage lives and yet making a return on their investment.

So there are several classes of angels who can have direct connections to your business, different from  the financial connection and acumen, market insights and operational guidance that you may get with VCs.  I don’t know many VCs that can say that in literally two minutes they can dial up the CEO of Travelers or call Steve Jobs because he is a buddy. How we connected with Steve Jobs was, frankly, through Senator Daschle, who is an advisor on our board.  He made a quick phone call to Al Gore, who sits on Steve Jobs’ board.  I then had a quick email back and forth with Steve Jobs.  He still told me to pound sand and that he would not share information with me until it’s ready to be public, but at least we got access.

There is another situation where we are looking for some additional funding from a very wealthy investor and he happens to be the next-door neighbor of one of our advisors and investors, a gentleman named Fay Vincent.  Fay Vincent is the ex-commissionaire of baseball and was the vice-chairman of Coca Cola and the CEO of Columbia Pictures.  We are able to share on a personal level what we do at Illume with his personal network and find someone at a high level who may be interested in working with us.

 

MITER: When such important individuals get involved with your company as angel investors, do you feel beholden to them where you begin molding your company’s vision per their vision and give them a strong say in running your company?  Or, do such angels invest primarily under the premise of believing in entrepreneurs and allowing them to run their companies how they see fit?

Daniel Ross: It’s exactly the latter.  None of our angel investors have told us how to run the company.  We’ve only heard, “We believe in you, we know you’re the expert and have the passion to carry this forward.” There is a true release of that responsibility to the entrepreneur. My responsibility back to them is communication and of course building a successful company that will provide significant returns, both socially in saving lives and financially in profits. I spend a lot of time sharing with them the positive movement in the growth of the market, our competition, progress regarding our product and the response we’re getting from the market.  I do that more often than with VCs that I’ve had on boards, because it’s a personal connection and a personal interest from the Angels. It really has been a symbiotic relationship and it’s been a pleasure.

 

MITER: What advice do you have for entrepreneurs seeking angel funding, particularly for first-time entrepreneurs who haven’t raised angel funding before?

Daniel Ross: My advice is the maxim that everyone talks about – networking is key.  People trust people, so you have a much higher chance of getting angel support if you get a personal invitation or introduction to some form of a network.  This is not new information, but as a young entrepreneur it’s absolutely critical that you put yourself in a situation where you have a chance to meet folks, and in particular not in “threatening” environments when you’re asking for money, but where you are meeting prospective investors in situations where they see the quality of who you are and potentially the quality of what your passion is.

You should also go outside of your school network.  One of the areas I’ve personally found to be very satisfying is working with inner city kids to learn more about  their potential as entrepreneurs.  It turns out to also be a strong networking opportunity for the adult members, as many of them are angels or VCs.  What I’ve found from a lot of the nonprofit boards that I’ve been on is that there often are successful people that you share a common interest with who then go forward with potentially doing business together.

As another example, I’ve spent some time in the art world.  I created an alternative 19th Century American asset fund that allowed me to be a part of a network of wealthy people who have art collections, who have then included me in other business opportunities.

So networking is critical.  We have two children in their twenties, what I suggest to them and to their friends is to not be shy about leveraging your parents’ network or your parents’ friends’ network.  Open doors any way you can.  Once you’re in those doors, use your talent and capabilities to impress people.  The trick to finding angels is to find people who have relationships with those angels and take advantage of that. Put yourself into situations where people can see you, allowing everyone to appreciate that you are exceptional people with a passion that someone else will believe in and help you to get started.  Once you do open the door and get an opportunity, do everything you can to make the best of it.  Once the door is open, it’s really up to you to make it happen.