William Goulding (Arbor Ventures): We’re a global fund, interested in SEA, Middle East and Israel, and the US.
19 Jan, 2021
Juan Arango is Executive Director of Keiretsu Forum Rockies at Keiretsu Forum Northwest. He builds Angel Groups. He is passionate about fueling emerging technology companies by helping them build and fund their new ventures, while providing professional angel investors tailored deal flow that fit targeted funding strategies. Juan sources a network of 55 chapters worldwide within the Keiretsu Forum angel group organization, 40+ angel groups within the Angel Syndication Network (ASN), and a growing number of brand name national accelerators to locate deals and syndicate for funding.
The idea behind the creation of Keiretsu Forum was that in the year 2000 Randy Williams, a big real estate investor in the Bay area in San Francisco was pitched left and right by people that had interesting companies, but he didn’t know what was good and what was bad and what to do with all of those. And his golf buddies decided they were going to make a group and start doing due diligence to find what deals they would invest would really be good. And that’s how it all started. And our logo shows 4 hands lifting each other up on the back of due diligence. We’ve been around since 2000, starting at the Bay Area, and now we have 55 chapters all over the world with over 3500 accredited angel investors. That was the inspiration: to work together to find good companies to invest in.
I’m the operator of the most successful region in the Keiretsu Forum network. Before doing this I was advising for early-stage startups and helping them come and present to angel investors. I was the first due diligence director for Keiretsu Forum Northwest and Keiretsu Forum Global, investing side-by-side with with the 300 investors that we have in our Northwest and Rockies regions for 6 years.
We look closely at about 100 startup per year, and me and my group invest in close to 80 of them. Last year we invested $54m in 83 companies, an average of $652,000, and a median of $250,000. There were a couple of companies that raised $6.5m from our group. In 2018 we invested in 78 companies.
We see everything, absolutely everything from every single type of industry since we have so many investors. We can do due diligence on whatever you throw at us. Speaking about very-very exciting companies that I’ve seen lately: one of them is a therapeutic, a pharma company. What they do is they have a couple of indications in 59 age-related diseases, and what their studies have shown is that the body accumulates senescent cells, which are cells that stop dividing, and if these cells are cleared away, the disease is lessened and life span is increased in the animal models they are the working with right now – they’ve done mice, canine and non-human primates. In essence, what these guys are doing is taking away dead cells to expand life span, which sounds absolutely crazy, because, you know, aging is not a disease, but they can go after 59 diseases that are age-related. That is an incredibly interesting company – Oisin Biotechnologies. On the Tech side, right now we’re working with the company called Oscilla Power – they take energy out of wave movements. Another interesting company is Steelhead Composites, which makes very light high-pressure vessels to storage hydrogen and fuels, selling them to NASA and to a whole bunch of other companies, like Tesla and Toyota. We see exciting companies every day!
We do everything. Right now on my desk I’m seeing about 6 new referrals per day. I receive it from community partners, from our members, from people that visit our website, from angel groups that are syndicating with us. We are a part of at least three syndication groups and we are starting a syndication group ourselves – right now we have 12 angel groups in the Keiretsu Forum syndication network. But also we go out and hunt. I go to trade shows, I go to presentations by other angel groups – it’s a constant search for quality deal flow.
We found that for our investors there is a sweet spot, so I will talk about 2 different types of inflow that I look at. For the Pacific Northwest and the Rockies we look at companies that, first of all, have a minimum $300,000 in revenue, that they are a little bit market proven, they had a chance to iterate a couple of times, and the market knows that they are there. Number two – they have to be very good at raising money from angel investors. It’s very difficult to raise money from an inexperienced group of angels on your first time. It’s very difficult to catch your teeth on an organization like Keiretsu Forum because our guys have been investing for 10-15-20 years and they know the rocks. So, to come and make it and be successful with us you have to know the rocks too, you need to have raised money from angels before. The third criterion is that they know our business model because we are a very large angel group, but globally we operate more as a production company and our job is to help companies to raise money. We do this professionally as well. So these are the three criteria for North America. I was mentioning that also I do deals inflow for Keiretsu Forum Japan, which has a very interesting agreement with Nomura bank. And Nomura bank is figuring out right now that they need to go out and look for companies for their clients to acquire, that it’s not only what comes to their door, but they are going to be playing a more and more proactive role – going out, hunting for technologies, hunting for companies that have $10m or more in revenue and look like something that the Japanese market might want to buy. This is our second group. If you want to sell your company, if it is valued at $150m or at $500m – we want to talk to you! It is very likely that we have a customer, a buyer for your company. So, startups who know how to speak to angels and have revenue – and companies ready to sell from $10m to $500m.
We do everything. We do LifeScience across every single area – Medical Devices, Pharma, Therapeutics, Diagnostics, Telemedicine. We also do Material Science. We also do Software, SaaS, and AI. We do Consumer Goods. We do Technology. Everything is alright as space exploration.
We usually see some ancillary products and technologies, like I’ve already mentioned. So, if you make components for the rockets or for the industry, we want to talk! But in direct space exploration programs, like a satellite network or going to Mars, the capital expenditure is very-very high, which is outside of angel investor territory, and the payoff is very-very far in the future, which also falls outside of angels. So, direct Space Exploration – no. Also, we don’t do Lifestyle businesses. If this is a restaurant chain or a new brand of gym, we probably won’t do it. If it’s capital intensive and there’s a lot of physical assets involved, we probably won’t do it either.
Under our model, due diligence starts once you come to our investor forums. Here, in the Pacific Northwest, we have a 6-day roadshow, where we introduce companies to about 300 potential investors, add right then and there companies recruit due diligence teams. We don’t appoint it, we don’t use students or resource providers – our due diligence teams are made up exclusively of investors that are deploying capital and are interested in the company that you’re representing. We’re going to coach you, to prepare you, we will bring you through 3 different welding processes, and when you make it to our forums you have to recruit the due diligence team. The due diligence is going to take about 4 to 6 weeks. We have a due diligence director which helps to move it along, but the process is driven by the entrepreneur one of our investors that takes the due diligence lead. We consider due diligence for an investor to be the way to know if this is a good deal or not. But for the entrepreneur, due diligence is a funding tool. You’re going through every single potential investor’s list of questions and objections, which, if you answer them and you go through them and you succeed and you ask him or her for money, they will be ready to write you a check. So, our team of 6 people, hired by an entrepreneur, goes through questions and answers and then writes a physical report, which is typically 50 to 100 pages long and describes in detail the reasons to invest and potential challenges. This document the entrepreneur takes at home to think or share with whoever he or she chooses. Our due diligence reports answer 70 to 80% of any question that any investors going to have, and many organizations leverage our due diligence reports and use them.
What our investors want and shoot for is 10x return in about 5 year period. In reality, what investors typically see, even our investors, is a 3x to 5x in 5 to 7 year period. But you got to shoot for a better result than that to produce that kind of result.
In our stage companies are looking to raise anywhere between $750k to about $5m, and their valuation range from $4m to about $100m. What we typically see that for the $750k to $5m companies are willing to share about 5% to 20%.
We’re going to be a little philosophical here, and I’ll explain in two parts – what my investors expect and what I think my investors should be expecting. My investors say that we invest in teams-teams-teams, because we want people who know how to build and grow companies, we need experience, we need a track record, people that we believe in and people that we can trust. My opinion is that an investor should only invest in companies that he or she is confident that will exit. The main thing that an angel investor is interested in is the exit. Because if you do not exit, your companies become zombies and 18 years later you’re still going to have your same portfolio, you’re not going to have more money – you’re going to have less money. If you don’t exit, you can’t put the money back, you can’t invest anymore. If you do not know how to exit, if you have never exited a company before, it’s going to be very difficult for you to exit a company – no matter how much you’re growing. What we need, what society needs, what an entrepreneur needs, what the open innovation model needs is exits. Think about it. If you don’t know how to exit and you’re not learning how to exit, you’re playing the wrong game. The only thing that makes the sustainable entrepreneurship, economic development, more jobs, a better society is companies that become mainstream, go IPO or acquired by somebody who can make their technology to be a mainstream, otherwise we’re just growing.
I would say both of them are in there for the execution or for the innovation. I’d rather work with an entrepreneur that is focused on selling his or her company for $50m or $100m and is not going to stay there waiting for the right time and don’t leave money on the table. Angel investing is about money balance, not chasing on unicorns. So, neither of those two.
Solo entrepreneurs need a team. Solo entrepreneurs are too early for us: they may have an idea, maybe a prototype. They need a team to push it forward. We don’t invest in solo entrepreneurs at all.
In a 7-minute pitch the first huge red flag is “If I only reach 2% of the market, this is going to be a multimillion-dollar company.” It indicates that the entrepreneur has no idea how to get that 2%. This is an aspirational model that is present in every single aspiring first-time entrepreneur. The second red flag: in a presentation, when you’re talking about year 1, year 2, and so on, I understand that those are your projections only – you don’t know when you start and you haven’t started your company yet. I’m not interested in projects – I’m interested in reality. The third red flag is that you’re using a part of the raised money to pay off your debt. As investors we’re not trying to cash anybody else, we need you to use our money to grow your company, to make it successful, to make it profitable. The last red flag would be waterfalls – when you have a safe note, and then a convertible note and a convertible note and a convertible and there is no equity round – we don’t want to get into that. Conversion of all these people that have been believing in your dream and you making them believe in another dream and another dream, and another dream – we don’t want to be one of those investors that you dragged along for the ride and then compensated. On the due diligence side: any type of criminal record is a No Go! Any outstanding debt. If you have very-very problematic investors that is going to be difficult to work with, that’s definitely a no go. And the biggest red flag is an entrepreneurial team that is difficult to work with. If it is difficult to work with a team before I gave them a check, after that it would be completely impossible.
I won’t tell you about mine, sorry. I do have a very interesting story from one premier angel group in Seattle. A gentleman came to present to their group and told them that he was going to sell coffee at $5. They laughed him out of the room. That company became Starbucks. For the last 6 years, I have never seen a company that we rejected and then regretted, but we had invested in companies that we really regretted that we had invested in.
We do everything. We do less consumer product goods that I would like. We at this time we do not touch cannabis – my investors are a little bit too conservative at this point. Maybe in a few years that would change, but we’re still riding the wave of deregulation, so they’re hesitant.
Oh yes! Angel groups across the US used to meet in person all the time, and we’ve gone completely virtual. People don’t have to travel 10 or 20 miles anymore – they can connect from all over the world. We’re seeing 40% to 50% increase in participation and the same increase in interest for our companies as our investors wanting to follow up. We are in the process of changing our format to fully online, we are learning, and, like any other entrepreneurial organization, it’s a fascinating problem – how do you get more investors in the virtual zoom room and how do you get them to invest more? What can we do for that to happen? We’re committed to helping companies raise more money.
It’s always an opportunity. Everything that happens is an opportunity! A down market is an opportunity for the people that are conservative and are waiting for a good time. Buy low – sell high. Things are lowest in a crisis. Microsoft, Apple, Uber came out of the crisis. I have a list of at least 20 or 30 brand name companies that came out of a crisis. This is an opportunity for both an Investor and an entrepreneur. There is no more waste.
I would say Microsoft definitely, Tesla definitely and Amazon.
I think I’m going to be doing this for a long time. This is exactly what I want to be doing, assuming bigger and bigger roles within groups and organizations that help companies to raise money and that buy and sell companies.
Learn how to exit. Develop meaningful relationships where people are very happy to work with you – and they will pick up your phone call. Consider people from your cap table to be your investment team. You can’t go out and raise money alone – you will lose. You need your investors to be your advocates and help you raise money.
Checkers – a fast and dirty game which is about technique, about being very efficient and finding the pattern.
Harley. I have two.