CommonAngels is a small venture capital fund with over 60 Boston-area angel investors and a few family offices as its limited partners. The group is currently investing from CommonAngels Ventures Fund IV, which regulatory filings show had its first close last fall of roughly $13MM. CommonAngels invests in early stage information technology related companies. Areas of interest include AdTech, FinTech, mobile, healthcare IT, and enterprise software (applications, infrastructure and security).
Maia Heymann, who had been an angel investor with the group since 2006, and was for ten years a venture capitalist, joined CommonAngels as the full-time Senior Managing Director in 2013, and has helped make some significant changes to their approach and structure, all designed to make CommonAngels a more responsive and appealing partner to early stage technology companies.
Q. Maia, what differentiates CommonAngels from other angel networks?
A. We’ve tried very hard to align our structure and our processes to be as entrepreneur-friendly as possible. We’ve simplified the investment process, doubled the frequency of our meetings, and made our fund the primary investment vehicle.
We think a fund goes a long way toward making us more attractive to entrepreneurs. When we invest, the largest investment comes from the fund. A handful of our angels with relevant experience, connections, and expertise will also participate.
This is good for the startup’s cap table and simplifies the process of managing investors for the entrepreneur. It also makes the cap table more attractive to VCs who may be leading the next rounds. We like to refer to the fund as offering “clarity of capital”.
Our dedicated capital from the fund plus our angels’ industry expertise enable us to have a faster decision-making process, and that makes for a very powerful model for seed-stage investing.
Q Who are your LPs?
A. They are successful technology executives and software executives who themselves have started, grown, and often exited tech companies. We once referred to them as “members,” but now they are our limited partners. Everyone who joins CommonAngels commits capital to our fund so there is cohesion and alignment.
Q. What is your investment process like?
A. The value of our model is to bring the right folks with the right domain knowledge to help assess an investment opportunity, to help determine if we can add-value to the entrepreneur’s company. Once we think there is mutual fit, we invite the entrepreneur to present at our partners meeting (we meet two times every month) and we engage in a dialog with the founders. Our angels who have the relevant experience in the sector have already been sought-out, have already helped with diligence, and we listen particularly to their input and feedback.
Q. What stage company are you looking for?
A. Our sweet spot is a company that is ready to test its go-to-market strategy. Their technology is mostly ready, and they need capital to test product-market fit and secure their first paying customers. Often this means we are the first significant outside investor.
Q. What do you look for in a startup?
A. We like focus. We like to see a team that has knowledge about its target market. We like hard to replicate technology that is solving hard problems. The business model matters. We like companies that are likely to be capital efficient. Our adtech portfolio includes companies such as YieldBot, Offerpop, OwnerIQ. Our software investments includes a broad array with companies like Curoverse, Promoboxx, Wymsee, Tesora, and Coherent Path. And finally our B2C portfolio includes Disruptor Beam and 1000Museums.
Q. Do you lead?
A. Yes. We will provide a term sheet for what we refer to as a “seed preferred” round. And in most cases we take a board seat, which goes to one of our limited partners who has directly relevant experience. A seed preferred round might consist of $200,000 – $400,000 from our fund, with additional capital contributed by a handful of the right limited partners. We reserve capital for follow-on rounds.
Q. How many new investments do you make a year?
A. We are on track for eight to ten this year. The current fund we are investing out of will likely end-up with a portfolio of 25 companies.
Q. What advantages do you offer angels who are part of your network and fund?
A. One advantage is better deal flow. Our structure and process is designed to make CommonAngels the first place entrepreneurs look for seed capital. Other advantages are: a broad and deep network to help vet and diligence investment opportunities; peers’ networks to identify and source talent for hiring into portfolio companies; and full-time professional managers who are structuring terms, reviewing legal dox, ensuring pro rata rights for our investors, managing the investments, assisting the companies with follow-on rounds, and staging capital.
Q. You are investors in docTracker, a data security company that was founded in France, but is now headquartered in the U.S. In general, what is your feeling about the right time for a startup to think about expanding outside its home market?
A. We look at it on a case-by-case basis. It really depends on the industry and the distribution model.
Q. What are your geographic preferences?
A. The majority of our investments is in New England, but we will consider companies in other geographies if we have strong existing relationships with the company’s founders. We have several portfolio companies in New York. We are investors in Klipfolio, in Ottawa, Canada, because of our wonderful history with Mike Weider. We will follow great entrepreneurs wherever they go.
Q. Has AngelList changed life for angel groups?
A. I don’t know about other angel groups. For us at CommonAngels, no, it hasn’t. We view AngelList as market expanding, and it enables entrepreneurs to reach a potential new investor base. For us, the entrepreneurs coming to us are coming for our networks and connections. They know who our angels are and what companies they’ve built and they want to tap into that knowledge base.
Q. What is your opinion of convertible notes?
A. They have a place. But in general, we don’t think convertible notes align investor and entrepreneur interests, and we take that very seriously. I’ve even seen some cases when, unfortunately, entrepreneurs using convertible notes were not aware of how much of their company they were actually selling, and we care deeply about how much equity our entrepreneurs retain.
Q. And equity crowd funding?
A. We think it could become problematic for companies with scores of individuals involved in their seed rounds when they look for institutional capital. Managing all those equity investors is going to take precious management time, and companies that go this route are going to have very unattractive cap tables. There are vehicles to get around this, putting all investors into one LLC, for instance via some of the syndicates that are forming. But it’s unlikely that many of these investors are going to add real value beyond their cash. Finally, I do wonder what happens to these smaller investors if the dark days of re-caps, rights offerings, cram-downs return.
One of the advantages of the fund-centric model we adopted at CommonAngels is that our portfolio companies can have clean cap tables, and our angels who do join the round generally bring highly relevant experience and connections.
Q. Could Boston support a dedicated FinTech accelerator?
A. As an investor, I think specializing exclusively in FinTech is tricky. FinTech, especially when it’s focused on B2B, can be highly cyclical. When markets turn, as they did during the financial crisis, the sales cycle becomes very long, as buyers who are conservative in the best of time become even more so. You can have long periods of time when selling products or services to financial services companies become very difficult, if not impossible. Support for a dedicated FinTech accelerator could well dry up during those periods.
Q. Are noncompete agreements a bad idea, or the worst idea possible?
A. Yes and yes. I sometimes joke that indentured servitude was outlawed a few centuries ago. People with ideas should have the freedom to pursue their ideas. When I moved back to Massachusetts after 10 years in California I was surprised to see that non-competes were still enforceable here. There is confusion around mixing non-disclosure/confidentiality agreements and even non-solicits into the discussion about non-competes. Those are important and are very different things. Governor Patrick recently introduced legislation to eliminate non-competes in MA. Go to nononcompete.co to voice your support for eliminating noncompetes. There you will find an easy way to send a letter to your state representative. Do it!