How to Raise Angel Funding in DFW

Mike Ivey is the cofounder of Modern Message. His company recently announced that they just closed a $300,000 funding round raised entirely from North Texas Angels. This is part 1 of a 2 part series detailing what they did wrong.

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Fundraising can be a soul-crushing, character-revealing, time-wasting rollercoaster of fun (and yes, it can actually be fun) that will test you physically, mentally, and most of all emotionally.

And that’s if you’re successful…

I know this because my company, Modern Message, despite doing almost everything wrong, just announced that we closed our first round of funding. In fact we were oversubscribed. How did we do it? Well for starters, it took 4 months & 90 meetings to get to 10 yes’s.

But that’s only half the story.  What follows is an incomplete list of everything we did wrong, written in the hopes that it might help any other founders out there on your journey. Stay tuned for part two, where I’ll try to remember the few things that we accidentally did right.

 

Get a Lead Investor

Raising less money does not mean it will close faster. In fact, the opposite is typically true. The most effective weapon against this reality is the presence of a stellar and aggressive lead investor. Unfortunately, the size of my Rolodex was small and I knew only a handful of people that could actually be classified as “active angel investors.” Therefore I knew the chances were remote that these individuals would actually invest and even worse that they would lead the round.

Strikes 1 & 2.

To overcome this, I took the Mark Suster “Lines Not Dots” strategy and approached the few investors that I did know 6 months before we were ready and said:

“We’re not ready yet, but if you like where we are in 6 months, I’d like you to invest.” 

They all said, “Sure”.

Over the next six months I kept them updated on our progress and was sure to send an email anytime we had a notable “win.” By late-January we were seeing significant market adoption and determined that the timing was finally right. I prepped our deck, reached out to these individuals, and clearly walked them through how we were going to combine our market knowledge / passion with their money to make all of us a lot more money.

The upside? Before we even announced we were fund-raising, we had half the round closed. The downside? We still lacked a lead investor and our personal networks were tapped.

Takeaways: 

  1. Get a lead investor.
  2. Get to know investors well before you need their money.
  3. Be upfront and purposeful. Ask if they’ll invest once you reach x, y, or z milestone.

Meetings Do Not Equal Momentum

When you’re raising money it’s easy to get excited about every meeting. Now, celebrating any victory (however small) can be critical to keeping your sanity during this process, but without qualifying investors on the front-end, you are setting yourself up for failure.

Why? Well, remember how excited you were after meeting that guy at the LaunchDFW Startup Happy Hour who said he was interested in investing? Or your b-school buddy who introduced you to someone that “loves tech investments”?

Yeah, they’re wasting your time.

The simple truth is that if you have a good enough story (more on that in part two) you should be able to get almost anyone excited. However, you will quickly realize that there are an infinite number of reasons NOT to invest in an early stage deal and these reasons tend to not manifest themselves until it comes time to actually write the check.

Like any good salesman, your job is to qualify who these people are early and often so that you don’t waste each other’s time.

Boy did I learn this the hard way.

Takeaways:

  1. Develop a system for screening investors. This is critical.
  2. Be honest about where you are in your life cycle. In fact, be blunt!
  3. Treat a soft “yes” like a “no” until their money is in your bank account.

Relying on Angel Groups

Do not, I repeat, do not start your round with an angel group.  Now, this is probably the most controversial point I’ll make since we ended up raising a significant percentage of our round from angels.  But, I had to include it because working with these groups can come at a steep cost (in addition to their “pay-to-pitch” business model).

First, none of the groups have a formal diligence process for smaller rounds. One group actually scoffed when they heard we were raising less than $1M.  That means you’ll end up pitching 2-3x at the group level only to then have dozens of meetings with the individual angels. In a world where time equals money, this is very expensive.

Let me reiterate: get a lead investor!

Secondly, none of them are focused beyond “tech” as a general theme, so you may find yourself in some very unusual situations where you are presenting alongside companies in completely different verticals.

Here’s a true story.  After making it to one angel groups’ big event I found myself on stage following two companies presentations: one that was raising $2M to reinvent heart surgery with a half dozen heart surgeons there for support and another that had already raised $5M for an improved dental implant. I was there, by myself, raising $300k for an internet software company focused on the apartment industry!

Yeah, I thought it was funny too.

So at this point, you’re probably wondering, “How did these jokers actually raise money?” That’s a great question, and one that I will attempt to answer in part two.

  • Show Comments

  • bradleyjoyce

    Great insights Mike, thanks for sharing!!

  • Chris Sundberg

    “…working with these groups can come at a steep cost (in addition to their “pay-to-pitch” business model).”

    It baffles me that we still allow this to continue. I’ve always been against the pay-to-pitch model. I understand the purpose – the angel groups only want companies who are “serious.” However, it seems a little crazy to ask a startup to pay you in order to raise money. I’ve had this discussion with several angels (many who are in these very groups) and they seemed to more or less agree with me. It should be the group’s responsibility to do a little due diligence and vet the startups prior to letting them pitch. I understand their time is valuable, but so is mine and everyone else’s.

  • bradleyjoyce

    I think it’s less about the “fee” (usually you can get this waived by building relationships with the right people) and more about the sheer amount of time spent dealing with these groups. Generally it goes something like.

    (1) Get to the gatekeeper, build relationship, get fee waived
    (2) Get selected to pitch at one of their (usually quarterly) events

    (3) Get enough interest from group members to either (a) come back for a more intimate pitch event OR (b) start in on their due diligence process
    (4) Repeat step 3 numerous times, provide lots of documents, wait on angels to check you out. Have multiple meetings with individual angels, trying to get them all to commit, etc, etc.
    (5) Get a number of soft commitments (ie, once you have $X I’ll put my money in, or once you have PersonY I’ll throw in, etc etc)
    (6) Finally get someone to write the first check and then start collecting on the rest
    (7) Close the round

  • Ryan Roberts

    I usually advise to have 2 separate game plans. The $250k seed round plan and the “what would we do if you cut us a check for $1M” plan. The funny thing is, the pre-money valuations tend to scale with the amount of money you end up raising.

  • Ryan Roberts

    If there is a fee, it should be minimal (< $100) with a majority of it going towards benefits you would be receiving (lunch, facility rental, etc.). Anything more than that and you are paying for their post-squash game lunch and valet money to park their jaguar.

  • Mike

    So true although the latter is most often contingent upon actually getting in front of institutional money, having solid revenue traction, or building some sort of product based company.

    Seems like for software, the angel group guys get really hung up on the IP issue.

  • Nolan Clemmons

    Great Post! Looking Forward to Part 2!

  • Mike

    FYI – the average pitch fee for angel groups in Texas is $250. CTAN is the highest w/ 3 rounds at $250 per round (we did not pursue CTAN for this reason).

  • Mike

    I’ll talk more about this in part 2, but essentially you’re doomed to fail if you start your round with angel groups for these very reasons.

  • Mike

    np!

  • Mike

    Yes, these fees keep bad companies from applying but if that were 100% of the story, couldn’t these fees be returned after getting accepted? Or so I thought…

    You have to realize that for the bigger groups, NTAN, CTAN, BAN, Cowtown, these fees also pay their staff salaries. DAN may or may not have a fee, Kevin Vela is our lawyer and he gave us a great intro at no cost. Other than his hourly rate :)…

    It’s a double edge sword though b/c on the one hand, it behooves you to have someone else running these guys down (Kevin Costello at Baylor for example helped us out tremendously), but on the other hand paying $250 x’s 4 just to get a meeting is extremely steep for most young companies.

    The reality though is that most angels in Texas (that I met) go to one of these groups for their deal flow, not Angel List. If you need their money, get ready to play the game!

  • Ryan Roberts

    It’s a terrible filter. By charging that much, they are sabotaging their group by reducing their chances of finding good startups. You can be a ‘good startup’ and not want to drop $250 per round. The problem is the angel group’s business model.

  • Mike

    No disagreement here!

  • Kevin Vela

    I’ll take exception to that Mike…

    DAN never charges to pitch.

    What made it easy(ish – it’s never easy) for MM is that they had that lead. Pitching Angels has become so competitive these days that if you can’t find that lead, or raise a significant friends and family round on your own, then the Angels will think that you’re not ready.

  • Mike

    Kevin,
    You know we love you! Wasn’t sure what the situation was for all startups though at DAN. Sorry if it seemed I was trying to lump you in with the rest…

    Nothing but great things to say!

  • Darlene Ryan

    Cowtown Angels does have a $250 fee to cover our time that the TECH Fort Worth staff spends coaching a company prior to their pitches, and we usually put in some significant time doing that. Also, we encourage a company to call us first so we can tell them whether we think theirs is the kind of deal that our angels might be interested in, before they invest the $250. The fee is waived altogether for TECH Fort Worth clients and for companies syndicated statewide through the Alliance of Texas Angel Networks. We really do try to provide value for that $250 by spending time with the company and feedback that we hope will be valuable even if the angels don’t invest in them. I think the more successful strategy for someone starting with angel networks is to get one of them interested in them so that the lead investor in that group becomes the champion Mike mentions — i.e. the lead investor — and helps to attract the rest of the money from their own and other angel groups. Either way, I agree with his strategy to find a lead investor early on, whether inside or outside an angel group.

  • Matt Fruge

    Great post! Looking forward to part 2.

  • Scott Ticer

    Mike, insightful post, but I’d suggest you steer clear of absolutes. Not all angel “groups” are alike. Lone Star Angels doesn’t charge you a fee to pitch, and we just don’t buy into the pay-to-play model. And if you go that pay-to-play route, I’d strongly suggest you have a lead investor who is championing your cause, first, and take Bradley Joyce’s great suggestion of getting them to waive any fees.

    But that’s not say there is a perfect angel model. CTAN may charge, but it’s the most active group in Texas now, and, one of the most active groups in the country in terms of deals done and dollars invested. They do get deals done, herd the cats, and have some impressive successful exits. Get a sponsor into that network, an angel who leads you into their kingdom, and you might just have a pony.

    Sorry you didn’t reach out to us at Lone Star Angels. We don’t charge, never have, and give you a forum to pitch to some of the most active and smartest money in Dallas. We even usually buy you dinner. We don’t meet enough to host every startup. We are subjective as can be about who does pitch. And we are far from perfect! No, we can’t herd the cats into an investment, but more than 75% of the folks who have pitched to us have gone on to successfully raise money.

    Looking forward to post No. 2.

  • Scott Ticer

    Actually, the angels I know with the deepest pockets and most successful track records in Dallas don’t “go” to the local pay-to-play groups for deal flow. That’s why an alternative model like Lone Star Angels…invitation-only to angels and startups…is important.

  • Mike

    Hey Darlene,
    Definitely enjoyed meeting you and Jorge at Cowtown. I think you guys are on to something and it’s great to see angel activity all over the metroplex!

    Hopefully I’ll run into you both more often around town!

  • Scott Ticer

    And my oversight for not mentioning Dallas Angel Networks. I don’t know the folks there, but I think they share the idea that a fee to pitch to an angel group is a mighty expensive hunting license!

  • Mike

    Scott,
    Always appreciate counter examples. My objective here was only to try and help others looking to raise funding by highlighting my own experiences. Should a better path present itself, by all means shout it from the rafters!

    By the way, I don’t think we’ve actually met but I’ve heard your name quite a bit. Would love to know more about Lone Star Angels if you have a moment –> mike (at) modernmsg.com.

  • Scott Ticer

    Mike, as I said above, it was an insightful post, and I want reiterate my belief your thoughts will help others sort out how to raise funding here. After earning my startup stripes in Silicon Valley, raising money there and in Dallas, I’ve got to say we need more insight on our funding challenges here in the state, and in Dallas, in particular. The lack of funding, and the difficulty in raising it at the seed and very early stages, is the single biggest obstacle we face in getting the Metroplex back to its former position as one of the hottest spots in the nation for startups.

  • Arlo Gilbert

    Mike,

    I am a member of one of the “large angel groups” and in fact helped you to get to the “big meeting”. A few points of clarity:

    1) If you pitch to an angel group while meeting their basic criteria and don’t get capital, it’s because of you, your product, your valuation or your presentation. These groups have people with deep pockets who are eager to invest and do so actively.

    2) I can’t speak for other angel groups, but ours while we do charge a very nominal fee is hardly a for profit entity with a “business model”. Groups pitching pay a nominal fee this all goes to cover the cost of administering a group, having meetings, supplying free diet cokes and renting meeting space, it also helps to weed out those who aren’t serious and won’t invest the time in the pitch.

    3) You are absolutely wrong that none of the groups have a formal due diligence process. Some angel groups (including mine) have a very rigorous well defined due diligence process. Whether the round is small or big, if there is more than one person interested in investing then the due diligence process is in place.

    I think your article was well written and well meaning but you made a lot of “factual” misstatements and do a disservice to others seeking capital if they take them at face value. Angel groups are absolutely fantastic sources for rounds of your size.

    My 2 cents? Just because you experienced something or believe something does not make it true. Jenny on the block might not want to kiss you, but that doesn’t mean she doesn’t like to kiss 🙂

    Arlo

  • Arlo Gilbert

    Since when is $250 a lot of money for raising capital?

    How much would it cost you to travel to Austin for example to pitch Austin ventures, stay in a holiday inn, buy a few meals and pay for wifi?

    My back of the napkin calculations for two people would be as follows:

    Gas – $150
    Holiday Inn – $110 a night
    3 cheap meals for 2 people – $60.00
    Total: $320

    If you use a professional “fund raiser” you’ll end up paying a minimum of 2-3% of your total raise.

    If you go to your bank and apply for a loan (SBA or not) you’ll pay origination fees, application fees, underwriting fees and closing costs (not to mention interest).

    $250 is cheap.

  • Ryan Roberts

    $250 is a lot to pitch EACH group if you are a bootstrapped startup.

    From what I know, AV will meet you up here first before you have to take a trip down to Austin.

    And who really uses a ‘professional fund raiser’, or should I say unregistered broker-dealer?

    Bank loan?

  • Mike

    Arlo,
    All valid points, but I think you might have missed my point. The “cost” is the investment of time. The fee is nominal and almost unworthy of discussion.

    You’re absolutely right though, just because 9/10 Jenny’s don’t want to kiss you doesn’t mean they don’t kiss. That’s just a fact everyone must face. But persevering long enough to find the 1 or 2 that do, that’s the name of the game!

    Anything that helps young companies navigate the local funding environment is value add in my book. Thanks for lending your voice to the debate!

  • Mike

    Unless you’re lucky / awesome / well-connected or a combination of all 3 you’ll end up pitching to a few different groups. These groups take awhile so it’s not a bad idea to get to know a few while you’re out pounding the pavement.

    Assuming that’s true, here’s the math from the groups I’m aware of:

    NTAN: $500 (reduced for smaller raises)
    Cowtown: $250
    Baylor: $250 to apply + $250 if selected to pitch + 1% of proceeds
    CTAN: $250 x’s 3 rounds

    Texoma Angels: gas to Wichita Falls

    Yes you can get some of these fees waived, but when you factor in commute time, event attendance, etc… it can get expensive.

  • Mike

    “The lack of funding, and the difficulty in raising it at the seed and very early stages, is the single biggest obstacle we face in getting the Metroplex back to its former position as one of the hottest spots in the nation for startups.”

    well said!

  • Eric Harter

    Thanks for the info, love to hear what other people are doing, I think it is like most things, not every model fits each situation, keep plugging away and learning, I have had Scott advise me after a pitch and after another meeting and still have not got invited into pitch to his group because maybe he does not think we are ready yet and I have taken the route of, hey get readier and maybe next time he will bite.

    I also paid the $250 to a supposedly matched group for me, and I was even sent in by guys who knew I would not connect or get money, they wanted me to go thru the process. It is some painful growth but it will make us appreciate it more when it happens.

Comments are closed.

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