Angel Investing in the Entrepreneurial Ecosystem

[Seeking out and actively nurturing the next generation of entrepreneurs that are creating the technology that will change our world for the better is the passion of a unique group of investors called angels. An angel investor provides founders and early-stage entrepreneurs with capital investment, but also the investment of time in guiding and mentoring them to success in the marketplace. There are layers of complexity and risk that go into determining whether or not to pursue an investment in a startup company.

To better understand the role and process that angel investors provide in a community’s entrepreneurial ecosystem, I was happy to be introduced to Steven MacDonald who is a serial entrepreneur turned angel investor through his Tampa-based MacDonald Ventures and a General Partner and Investment Committee member in Tampa-based Florida Funders –?a hybrid firm between a venture capital fund and an investor network. We started with definitions and clarifications on angel investing versus venture capital and then asked questions to better understand Steve’s investment process and views on the support needed by early-stage entrepreneurs in a community ecosystem. ]

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Hortz: How would you define what specifically is an angel investor?

MacDonald: An angel investor is typically someone who invests in the earlier stages of a business. My particular focus is between pre-seed and seed, not as much series A and onward. This would be a company that has their management team in place. They have a first version of their minimum viable product (MVP). They have identified their target market, might have a few customers, and may be pre-revenue or very, very early in the revenue life cycle of the company. That would be a place where an angel investor would most likely get involved.

A venture capital firm is looking for a company that is a little bit more advanced than that. And that is where the demarcation tends to be. It is gray, of course, but that is typically where the difference is usually drawn. The check size also tends to be a little bigger than I typically write for an earlier stage company. In working with Florida Funders which is a venture fund, I will take an active role in some of their investments, but I focus on earlier stage startups. So, we work as referral sources for each other mainly. It's a kind of yin and yang working relationship.

Hortz: Who are angel investors exactly? Are they all previous serial entrepreneurs like yourself who successfully exited from building a startup or are there other components of people who are angel investors?

MacDonald: I would say that all of the angel investors I know are people who have been entrepreneurs or have worked as C-level people in successful early-stage companies. They are people like me who have had success as an entrepreneur, who exited companies, and have the money and startup experience where we can impart that knowledge and help mentor these younger entrepreneurs.

I do also know people that had very high positions at large companies like Facebook and Salesforce that definitely made enough money along the way that they can roll the dice on investing in very young companies. They have seen a lot of really early-stage companies just by virtue of the kinds of companies that they work for and also have a strong network of other angel investors or venture capitalists. You know, it is that kind of community. We share information, we share contacts, we share introductions.

Those are the two major components - wealthy investors and serial entrepreneurs - that have the experience and the money to invest in and mentor these early-stage companies. So those are angel investors. Then venture capital is when you are starting to get to larger companies. They have a whole other set of dynamics that have to be looked at.

Hortz: Can you share your view on what are the challenges for both angel and venture capital investors right now?

MacDonald: I think the further out you get on the spectrum of later stage companies, these are companies that are usually trying to raise a series B, series C, or series D round. These are companies that are much more mature. They are at over $100 million dollars of revenue or over $500 million of valuation. Those companies are facing a real challenge right now. It is harder for them to get growth capital right now just because the cost of money has become so high. The company valuations for a long time have been extremely high. Many of those companies, let us say, raised $100 million at ?a valuation of $2 billion two years ago. If they need money now, they are most likely going to take a 50% haircut on the value of the business or more, unless it is a real superstar. So, the later stage companies are having a hard time raising money and sustaining the valuations or market cap that they had in their last round. A company that might have received a $20 million valuation a year ago is probably more in the $7M to $10M range.

So, for the investor, that is good because you get twice as much equity for the same amount of dollars now than you would have a year ago. But there is still an opportunity for those early-stage companies to come in and raise the money that they need to get started.

Hortz: But both areas lack cheap money and their valuations are being reduced right now. Is it still easier for smaller companies because they are not looking for huge amounts of investment at their stage?

MacDonald: Yes, absolutely, but if somebody is coming to us now asking for the same deal parameters of the past few years, we kind of look at them - you know, the world has changed. I think you have to segment angel investors into the two camps of the professional angel investors and the wealthy investor angels.

The latter non-professional angels that like to dip their toe in the water are what some call the “dumb money”. So, for startups willing to make enough phone calls and have the right connections, they can probably recruit some of that money. But for the professional angel investor, we look at those business opportunities and assess them based on this huge technological revolution this year versus last year. If they are embracing that, they really just do not need the number of people to do what they needed even a year ago. So, deal parameters should be falling.

Hortz: What is your investment approach with McDonald Ventures and how has your investment strategy been evolving?

MacDonald: Well, what you should know is that I had a company that I sold in 2017 and I started Angel investing early before I exited my last company. I was interested in getting more involved in the early-stage tech community. I started investing and it was more of a spray-and-pray investment attitude. I would write lots of little checks to many different companies doing things that interested me. But it is really hard to know, like back when there was MySpace and Facebook, you did not know which one was going to break out. So, I invested in all three or four startups in a space that you can find and hope that one of them takes off.

I have been an angel investor now for the last seven or eight years. I think am hopefully getting a little smarter. My strategy is now writing fewer but bigger checks. I take a little bit more active role with the companies that I like. I sit on the board. I make a lot of phone calls promoting and introducing them to the right people in my networks. I get involved in their strategy meetings. There is more risk, but there are fewer companies that I am investing in.

Hortz: What particular areas or themes are you looking at currently?

MacDonald: Well, what I have always been drawn to is business process automation. You know, how can you do something better, faster, smarter, and more efficiently, with less money? That is like my wheelhouse; using technology to reduce costs, improve customer experience, and how companies are doing that.

And the other area that I am fairly deeply involved in is cannabis. There Is a company kush.com where I am acting as the chairman and we are on the technical side of this emerging industry. We are like the back office and logistics of the industry - How do we get products to market more efficiently, more intelligently, and with better customer confidence?

Hortz: What are your criteria for investing in specific startup companies? Are there key variables you look for?

MacDonald: It always starts with the founder. It is the founders I primarily invest in. They have to be passionate, aggressive, and have a no-lose attitude, but they also have to be coachable. They are typically young and I have some gray hair. There is a bit of wisdom I accrued along the way that I can impart, but people have to be willing to listen. So, the founder is the number one thing.

Meeting that, what stage is the startup at? Do they have a minimum viable product, an MVP? Do they have customers yet? What stage are their customers at? If a customer is just saying I am interested, send me some more information, that is not something we will look at. It has to be that they are at least fairly far down the road on the customer journey that they may not have signed the customer, but that it is far enough along that I can do a reference check with a pro, with a prospect, to see what the prospect thinks of the company. And if they are generating revenue, that is great.

And probably the third criteria is that they are in a large and expanding market. They cannot just be solving one problem today. They have to be solving a problem that can grow into a much, much larger opportunity set.

Hortz: What are the lessons you have learned as a serial entrepreneur in building your own startup companies that you apply in working with and coaching younger companies? How do you coach them?

MacDonald: Having accurate tools and the mechanisms to ask the right questions is probably the broadest lesson that I can impart to young companies. Having said that, you also have to be able to answer those questions. And in technology, the only way to answer those questions is through your data. You have to have clean data. You need to have a single source of truth and it has to be consistent. Part of asking the right questions is to know what you are measuring.

What are your key performance indicators? Are the key performance indicators strong enough? And are they the right ones that you should be setting goals around? That is what we call objectives and key results; transforming those KPIs into an objective that we can measure. How consistently are we measuring those things? What is our process for measuring their success? That is like the basics you have to know.

You have to have a keen eye on cash flow. You have to be process-oriented in everything that you are doing. And if you do not have process, your go-to-market strategy is not important. Even hiring people is a process for trying to evaluate and find the right people.

?A lot of times, especially in early-stage companies, we just have not built out those processes yet. And the earlier those companies adopt those processes, the stronger they will be. The way I describe it is that processes are kind of like compound interest. The faster you become good at something, the more you compound the result of that. If it takes me six months to learn a process - when I could have learned it in one month - then I lost six months of compound interest on the learnings of that process. In my opinion, your processes are vital.

Hortz: You have spent a great of time, money, and energy helping the Tampa Bay entrepreneurial ecosystem by being supportive of entrepreneurs, as well as having seen other ecosystems across the country and the world. Any thoughts on how to best build an entrepreneurial climate in a sustainable fashion? What do you think an ecosystem needs to really be able to thrive?

MacDonald: Having been in the Tampa Bay ecosystem for 25 years, also going into Silicon Valley, and now living for a year in Florence Italy, it really seems to boil down to one thing, and that is the evangelists for the local communities. Here in Florence, you had the Medici. So that was the main thing. It starts off with the really smart, successful entrepreneurs in those areas and they inspire and attract the next generation of entrepreneurs, artists, or creatives that build the greater ecosystem.

I think as a young entrepreneur looking for a path, a place to go, one of the first questions I would ask is who are the other entrepreneurs that have been wildly successful? Where are they and what are they doing now? So, Tampa Bay as an example, 25 years ago there was not much of an ecosystem there, but there were several of us who were successful entrepreneurs and we all became friends. Together we built what we called the Tampa Bay Technology Foundation.

We then gathered all of the other entrepreneurs that were doing what we were doing, and we created momentum around the concept of Tampa being a great community of resourceful entrepreneurs and accessible smart people here. We wanted to evangelically attract more talent and ideas. It took us maybe seven or eight years ago, but we really starting to get some traction with that. So, overall, it was like a 15-to-20-year process where we felt like, oh, it's really working now.

I see that here now too in Florence. Even though this was the center of the Renaissance, the local startup community here has its struggles because they do not have a lot of current evangelists. There's a couple and they are doing what they can, but it is a struggle.

So, I want to encourage entrepreneurs everywhere that have had success and ask themselves - well, what am I going to do now? - to give back to their community ecosystems. Help create something that lasts beyond your own personal success and experiences. It is a great opportunity to help, to mentor, to motivate the next generation of phenomenal founders. What kind of infrastructure can you help provide for them? That is where you help create a multiplier effect for the ecosystem.

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