Archangel Ventures organised a casual chat with a few angel investors last Thursday. For those who missed out, below is a short summary of our discussion. Thanks to everyone who made it a lively discussion.
- Ben introduced the Archangel team — 13 investments in Australian and New Zealand founders over the last 13 months. Invested about $3m and plan to invest at the same rate in 2022.
- Investing a lot of our own money alongside our LPs and pleased with the results so far.
- Having experienced people in your corner can help navigate an increasingly frothy venture landscape and avoid landmines for investors and founders alike.
How will Surry Hills house price affect startup valuations?
- Context: Surry Hills: The Palo Alto of Asia
- Discussion around the startup enclaves and their impact on house prices — usually corporates follow and then startups are priced out and the cycle begins anew in a different area.
- If Surry Hills is the San Francisco of Australia (is it?) where is the Miami?
How unsafe is a SAFE?
- Archangel prioritises its ability to follow on, however with the sector heating up significantly we are seeing multiple SAFE rounds in a row and that can create issues with follow on rights and accurately calculating shares at conversion.
- People are seeing very founder friendly terms in SAFEs at the moment as new money flows into the sector (eg uncapped SAFEs with small discounts). This ignores the high risk of investing in startups.
- As you can’t convert SAFEs at will, it’s easy for angel investors to miss out on ESIC benefits in fast growing companies.
- People are seeing more linking of valuation caps to milestones in rolling SAFEs.
- Discussion around whether we can develop a standardised SAFE or standardised portion of the SAFE to ensure rights are protected and there is less friction in deals.
- Idea for a blog to help investors out — what to look for in a SAFE / spreadsheet to show how moving caps and time around impacts returns.
- SAFEs are often used to postpone decisions (eg valuation, board composition or founder vesting) but there is value in setting the expectations upfront with investors.
- Angels do have some responsibility for the ecosystem and protecting naive or first time founders from predatory angels.
How to say no?
- This is the most important but also hardest part of the job — being selective and saying no to 10x-100x more founders than you can fund.
- Need to be delicate and respectful — it is their dreams and livelihood. They are all good people but you can’t fund everyone.
- Can frame a ‘no’ as what you might like to see before re-engaging in the future.
- Most issues arise in initial screening or diligence — rarely do investors pull out at the execution phase.
When to sell? The secondaries market is heating up.
- Secondaries are when existing investors, staff or founders seek to sell their shares to incoming investors
- Dry powder is always an issue for angels because of the long time between liquidity events.
- Rayn’s view — when he has a 10x outcome, he likes to take 1x of his investment out to redeploy.
- Usually 10–15% discount on employee/founder shares (because ordinary shares sit behind preferred shares) although it depends on demand and supply and who is buying the secondaries.
Angel Syndicates in Australia and other limitations
- Talked about options like AngelList in Australia — some Australian deals are appearing on AngelList through US syndicates.
- Trust structures can enable syndicates but if there’s a benefit to the arranger it is likely a financial product requiring an Australian Financial Services Licence (AFSL).
- Requiring an AFSL and insurance is a barrier for new syndicates.
- Discussion around the sophisticated investor test limiting women angel investors.
- Some participants were interested in advocating for an easier qualified investor test vs the sophisticated investor certificate.
Thanks to Andrew for the notes, and Ben for the edits.