Angel Investing Crowd Funding Finance Regulation Start Up


Or, why should Venture Capitalists have all the fun?

The new dawn of SPACs is here. These shell companies, as they are called, first raise money to the tune of hundreds of millions of dollars from institutional investors. The Founders of the SPAC also invest their own money. Then, they IPO the shell company and list the shares at $10/share. Retail investors can now buy shares of the SPAC in the open market. The SPAC keeps its funds in a trust until it can find a company to invest that money in and effect a merge. The SPAC has two years to do the merger. If it fails to merge, money is returned to all investors with interest. The merged company gets a new stock ticker and resumes trading. The original team that created the SPAC has to do some work to identify the target company and consummate the merger. It could get a sizable (median of 2-5%) in the merged entity. 

PIPE financing may also be done if the merged company needs to raise more money during the merging process or shortly thereafter. Big funders can provide PIPE financing in return for shares of the merged company. 

I am not a SPAC mechanics expert, but that’s a rough picture.

How can this impact the current VC and institutional model of financing of startup companies? A growing and successful startup usually raises a series of rounds from VCs and institutional investors while still remaining private. During this time, the success of the startup is often visible to the general public. Or for the curious, Crunchbase or Pitchbook tells the story. Retail investors, however, can’t buy shares of this startup until it goes public in some fashion.

The SPAC vehicle has the potential to accelerate the stage at which retail investors get to own shares of a startup company. We are talking possibly Series B/C/D stages that a company is suitable to be SPAC’kled allowing retail investors to invest in the majority of growth phase of the company. 

This allows retail investors to invest in an index of startup companies, diversifying risk. However, one should be cautious. SPACs are investing in moon shots and the target companies are not making revenue for decades. So, after getting de SPAC’kled (post merger), one could see big drops as investors get clarity on valuation and growth prospects. 

The first issue is that retail investors do not know beforehand the target company. They may know the target sector from the SPAC prospectus, but not much else. However, the SPAC gives voting rights and redemption rights to it’s investors once the target is announced. This allows the retail investor to get out if they don’t like the deal. There is a backstop redemption clause of $10/share in theory. As of this writing, I don’t know how well that is going to work

The second issue is the rigor of due diligence conducted by the SPAC. One goal of SPACs is to reduce burden on startup founders and companies and accelerate going public by limiting the need to disclose exhaustive information. As a retail investor in the SPAC, it is likely the case that you will not find details like you do in the S-1. So you have to trust the SPAC promoters that they are doing quality diligence and valuing the company fairly. 

By creating a lock up period for SPAC promoters to sell the merged company shares, it’s possible to reduce the motivation for them to flip. Some SPAC promoters are playing nice and adding lock up periods in their prospectus.

If SPACs work with good intent and are regulated efficiently, retail investors can stand to benefit. For VCs, it can act both ways. They could liquidate their “cash suckers” via the SPAC and breathe a sigh of relief. On the other hand, they don’t want to see their strongest performers go public before they can double down. They may still do that, but their control goes away.

Angel Investing Angellist Due Diligence Fund Raising

Angel Investing experience

I started Angel Investing about 4 years ago.  I guessed it would be a good time to write up some thoughts on my experience so far. 4 years is about half way to get a meaningful return, so this post is not yet about returns in angel investing. Others have written volumes about that strategy.

I invest in two ways. 1) direct cash investment 2) Investing my time and expertise  with startup companies in return for equity via my company Carabiner.IO

I have invested in 15 companies so far. 3 have exited (sold/folded), 2-3 are on life support and rest are in various stages of growth.

My investments have predominantly been in B2B companies. Best performer so far has been a non software company 🙂

I don’t enter deals alone. I am a member of the AoA and TAGs, two leading Angel groups in Seattle. I have also invested in one deal in an AngelList syndicate. In my AngelList investment, I did the least amount of diligence 🙁

I spend at least 10-15 hours on due diligence. I see no definite correlation between number of due diligence hours and success. In some cases, the more due diligence I did,  the more I found it difficult to step out as I had mentally committed to the deal, despite some yellow flags.

Some takeaways:-

  1. If the CEO hesitates to let you talk to customers, get out. By customers, I include broadly folks that are using the product or have expressed serious intent to use the product via customer discovery.
  2. If the deal is moving too fast for YOUR comfort, don’t get sucked in. Most companies will need to raise money in the future and it’s likely a better deal is around the corner. This is also called “FOMO” (fear of missing out).
  3. Try to have a conversation with as many members of the company as possible. Most interaction is with the CEO and they are usually on their best behavior during fund raising 🙂 .  I ignored warning signs in a company with CEO/CTO interaction.
  4. Divide and conquer. In deals that I lead, I try to get folks that are interested be responsible for specific aspects of evaluation.
  5. Developing a template oriented approach to evaluation has helped.

While Angel Investing is certainly risky, I have enjoyed my experience of interacting with a diverse set of people while doing so.