The only model that matters: Founders First

Screen Shot 2013-02-22 at 8.55.58 AMThere are a lot of models that people throw around for how to build a strong startup community. There are a handful of types of players in each community, so there are many permutations of “who gets what” and how resources are moved around.

It gets complicated, fast.

So there is a model that I subscribe to. It can be a little myopic, it can be a little bit pigheaded, but it is always effective. It is the one metric that matters for startup communities and it is why we back the things we back and why we take exception to the things we do.

In Halifax there has been a recent discussion about a local angel group and their funding model, which we do not believe is founder friendly. Hopefully this post will clarify for some people as to why we see things in such a black and white contrast.

There is a litmus test that can get to the heart of many issues:

  • Does this help founders create more companies?
  • Does this help founders build better companies?

You need a Yes on either one of those, otherwise the effort isn’t worth it.

OK, there are more than just founders in the ecosystem, I know. The truth is however that Founders are the only ones who rely on everyone else in the ecosystem to be successful. Nobody else is so ecosystem dependant. Service providers can always find work elsewhere, investors can always squirrel their money in to safer places.

It is founders and founders only are the assemblers, allocators and creators of resources that make successful startups. It is those successful startups which are the only things that demonstrate the success of the community.

In early 2008 we started talking about how Startups Will Save Venture Capital in Canada. I believe that post and the thesis behind it has stood the test of time:

My thesis is simple: Startups just aren’t getting started in Canada nearly as often as they should. This isn’t about education levels, creativity or even for a lack of cash floating around this country. This is about ambition.

This is about hustle.

Most entrepreneurs have heard that things aren’t great for VCs right now. LPs are shaky, some funds are crashing, others are just throwing their hands up, and for a lot of startups it seems like no matter how many people you pitch, you aren’t getting anywhere. I tried to put some hard number behind that, and they paint a scary picture.

This goes two ways, and nobody wants to sit around while we all whine and moan that nobody can get funded. It’s time to build companies that are worth something.

We need to focus on building our local startup communities more than ever. Local communities are important because they are far easier for local Angels and Entrepreneurs to connect to, and they also act as a great filter to help find people who need national and international exposure.

(Read the rest . . .)

David Crow started this thinking in 2005/2006 when he built the thesis that Community is the framework. That approach has brought incredible success to many startup communities. Founders are the anchor of community. Every year or so we publish the Hot Shit List and we focus on profiling founders who are taking pushing our communities to the next level.

In an community it is the ability of founders to succeed through diligence, hard work and creative thinking that determines success. All encumbrances to founder success must be removed to achieve a sustainable model for growth.

There is no half way, there is no “maybe” there is no “but…” there are just founders. Founders who are picking investors, lawyers, accountants, marketers, developers, product managers, customers and markets. It is founders who develop vision and create early product.

It is only the founders who are tracking their cash, calculating runway and determining what is going to make their startup successful.

So the next time someone tells you that anyone or anything matters then tell them that you will not water down a founders-first approach. Not because someone else needs a little something, not for any reason.

Remember the great founders you know who have struggled against all odds to build incredible companies. Forget the rest and focus on what matters.

If not an Angel Network, then what?

back black swan shotDavid posted a pretty in-depth piece on the First Angel Network this week. This followed an awesome discussion on TechVibes about angel groups over the weekend. The structure and funding model for First Angel Network were a pretty big surprise to me when I moved to Halifax 3 years ago.

Frankly it is pretty easy for us to write a post like David’s because the facts really speak for themselves: Millions of dollars from government sources are flowing in to finance what appears to be the exclusive personal gain of two individuals.

$3000 + 8% is just not acceptable and what makes it even worse is that the 8% does not contribute to the growth or sustainability of the angel group in any way. ACOA and other agencies are the ones paying to maintain the group while the cream is skimmed off the top.

My guess is that the First Angel Network will tell you that their model is normal and that it is on par with what is happening elsewhere. Simply put: it isn’t. It is artificially sustained, it is egregious and the model needs to be wiped out.

Shortly after David’s post went live I had a call with one of the most active angel investors in Atlantic Canada. He’s someone I admire and who always seems to be a step or two ahead of my own thinking. When he speaks I try to listen (which means I have to stop talking. . .).

He doesn’t have much love for a model which skims off the top either, but he’s pragmatic too.

His question to me was: If not First Angel Network, then how do we keep money moving?

Angel groups are not an easy thing: There are large groups of willing but relatively unsophisticated investors out there. They have to be marketed to, rounded up, fed a decent meal (usually) and encouraged to focus while a startup pitches to them for an hour or so total. Not easy and it certainly doesn’t have obvious economics for the organizer. It is a tough model no matter which way you slice it. The question is valid and it is something we need to think about a lot.

The world of tech startups is, or should be at least, different in many ways however. I believe it HAS to be different.

Sophisticated tech angel investors are accessible and they are ready to do deals almost anywhere. Value-add investors will, by definition, be accessible to the network and available to look at deals. We have a significant opportunity here in Atlantic Canada as well because we have some of the best angels in the country living and working here.

The landscape is changing for seed investing in tech and I think we need to find new models which make more sense for a typical startup today.

  1. There are many individuals investing regularly in extremely early stage opportunities in New Brunswick and Nova Scotia
  2. There is far more information available to entrepreneurs about financing structures and models than there ever has been before
  3. 10s of Thousands of investors are accesible via AngelList and other sources
  4. The ecosystem is larger than just these few provinces– we are easily connected in to what is happening in other communities.
  5. Legal and other fees should be minimal. Startups should be able to get a round closed for $5k with a max of $10 for a complicated and priced round.
  6. Early stage capital IS flowing in this part of the country from more formal funds such as OMERS, Rho, Real, Version One Ventures and others.
  7. There is a new fund coming online here which will be leading deals and syndicating with outside investors.

Alternatives will emerge once there is a void to fill and I believe that capital will still flow to great opportunities, while we may have to watch some less awesome ones whither.

There is a loose syndicate of angels emerging in this part of the country and from what I have seen they are all extremely high quality. It is a group made up of exited founders, successful investors and quality operators. THAT is who should be seeing deals and they do far more than 4 deals a year– dozens are getting done.

In the end the challenge we have is not simply to tear down the old. The challenge is to take responsibility for building something that matters in the future and that will create more startups through a better model. I believe that First Angel Network’s model needs to change to become less predatory and more focused on creating value in the ecosystem, otherwise we need a new alternative to replace it.

That is our job here and that is what will really make a difference.

Right now we have the beginnings of an alternative:

These are all founder-friendly and accessible routes to getting access to early stage capital. None of them take 8%.

It’s not perfect, but we will get there.

Atlantic Canadian Founders Deserve Better Than FAN (First Angel Network)

CC-BY-NC-ND-20 Photo by Stephen Poff
AttributionNoncommercialNo Derivative Works Some rights reserved by Stephen Poff

Recently, I have had the pleasure of travelling to the East Coast and working with founders. I have seen the amazing companies and the founders across the region. Moncton, Halifax, Saint John, St. John’s and Charlottetown (among the varied cities). There are amazing companies like LeadSift (disclosure: I work for OMERS Ventures who is an investor in LeadSift), GoInstant, Verafin, Clarity.fm, Lymbix (disclosure: I sit on the Board of Directors), Introhive, InNetwork, Compilr and others.

The region is bristling with great founders, great ideas and a lot of untapped talent. It also holds some amazing secrets like Toon Nagtegaal (LinkedIn) who runs a (also ACOA funded) program for startups that I have been lucky enough to be invited to co-teach (disclosure: this is a paid consulting gig). There are amazing people and companies across the Atlantic Region. It’s only a matter of time until there is another HUGE exit.

However, the region also is a small community that has it’s own culture and politics. Those small town politics have allowed nepotism and crony capitalism to seep in and it has allowed terrible deal structures to be put upon unsuspecting founders and companies. This pisses me off!

When we started StartupNorth we promised ourselves we would always stick up for founders and startups when it mattered. We continue to  support, educate and connect startups and founders with other founders, with capital, with new ideas and educational resources. We need to identify the BULLSHIT that is being allow to pass in Atlantic Canada as supporting entrepreneurs so that the amazing investors that are there don’t have to compete with a backwards and ill-conceived entity.

First Angel Netowrk

Who? I’m talking about First Angel Network (FAN). Why? Here is an example of the full deal they present to entrepreneurs:

  1. Startups apply to pitch the non-profit FAN which is funded and supported by ACOA and others.
    • Most of this funding goes to pay salaries as well as to cover travel expenses.
  2. If a startup is selected to pitch FAN, the startup must agree to pay $3000 to the non-profit  FAN.
  3. Startups MUST also sign a “Consulting Agreement” with a for-profit consulting company owned by Ross Finlay and Brian Lowe.
    • You can NOT pitch the non-profit UNLESS you sign the consulting agreement with the for-profit company.
  4. Startups then pitch the non-profit and if successful get a deal done
  5. If a deal is done, the consulting agreement gives the for-profit shell company and FAN organizers 8% of the total proceeds of the transaction
    • 4% in stock directly to Ross Finlay and Brian Lowe (not the consulting company, directly to the individuals)
    • 4% in cash to the consulting company

This is so wrong! On so many different levels. This is worse than pay to pitch.

Crony Capitalism

The thing that pisses me off the most is that the most nefarious part of the process, the consulting company and payouts to individuals, is not listed on the FAN Funding Process page. We have individuals who collect a salary that is partially (if not completely) funded by a government agency (ACOA). First Angel Network Association received at least $1,123,411.00 in funding between 2006-2011 (nothing reported for 2012). That is an average of $224,682.20/year in funding, and that is just what we could source publicly.

Getting paid by a government agency to source your own deals. Seriously, if you thought management fees were high, what about tax dollars going towards salaries of investors. They are using federal funding to source their own deals and cover expenses and salaries. Something is wrong here. Then they charge entrepreneurs for the privilege of their investment. Which someone already paid them to source. The cost of this capital is incredibly expensive to entrepreneurs taking this investment and to the region.

Atlantic Canadian entrepreneurs and startups deserve better than this.

Do Not Pay to Pitch

Startups should not pay angels or angel networks to pitch. Jason Calacanis wrote the definitive piece on why startups should not pay angel investors to pitch.

“It’s low-class, inappropriate and predatory for a rich person to ask an entrepreneur to PAY THEM for 15 minutes of their time. Seriously, what is the cost to the party hearing the pitch? If you answered “nothing” or “the cost of two cups of coffee” you win the prize!”

Jason eloquently describes why this doesn’t work. It is a imbalance between cash poor startups and rich investors. The imbalance is made worst by. We have been running Founders & Funder$ events. There is no imbalance. Everyone pays the same. Founders. Funders. We try to curate the audience to ensure that only founders actively raising money attend. We also invite a limited number of funders that are actively doing deals (criteria change based on angel investor versus institutional investors). We want everyone to be on equal footing.

And there are a lot of startups and founders that will argue that Jonas, Jevon and I have strong track records (well at least Jonas & Jevon do) and even stronger networks:

“Now, before you go saying “Jason is connected and he has access to angels” remember that I hustled my way into this industry from nothing. I networked at free conferences and figured out a way to get on the radar of uber-angels like Ted Leonsis, Fred Wilson and Mark Cuban. They paid attention to me because I had good ideas. If my ideas had sucked, they would have ignored me. Period.”

Our goal has been to help connect and educate founders and startups. We continue to believe that it is not government agencies, or venture capitalists, or angel networks that will build the next generation of successful Canadian companies. It is the founders and the employees of these startups. It’s the big ideas and the big execution that result from the efforts of dedicated people. They are the ones who deserve a great deal, not some middle man.

What can you do?

  1. Do not pay to pitch. Avoid groups like First Angel Network like the plague.
  2. Tell the people who fund FAN and other angel groups who have a pay to pitch model that you believe they should cut off funding.
  3. If you know an angel investor within an angel networks that make you pay to pitch like FAN, tell them what a bad deal they are getting and offer to connect them to great founders.
  4. Help fellow entrepreneurs by making introductions to qualified angels directly
  5. Explain to your peers that an investment by networks which make you pay to pitch, such as FAN, can only be considered as a means of last resort, and taking this money will affect your future funding opportunities negatively.
  6. List your startup on AngelList, our StartupIndex, Techvibes index and other places to get exposure FOR FREE to great investors

Atlantic Canada is generating some of the highest returns in the country right now for angel investors. The community is small but very focused on big outcomes and it is really showing. I think it’s time to cut ties with this old model and to start giving the founders in Atlantic Canada a deal worth taking.