Two SDAC Angel Investors weigh in on funding Startups: "Jockey or Horse?"

First-time entrepreneurs often have great business ideas that provoke their passion to start a business.  Our guests, Stacy Pena and Brian Engleman, are Fund Managers for the San Diego Angel Conference and they will share their experience as to how angel investors view founding entrepreneurs and the business ideas they pitch for funding.  Don't miss this chance to gain insight into how to best position your startup to gain the support of investors.

Transcript

SDAC Brian Engleman & Stacy Peña

Jeanne Gray: I'm Jeanne Gray, publisher of American Entrepreneurship Today and host of the podcast series, Experienced Voices, where I talk with highly accomplished people who share the critical elements that led to their success. 

How many of us have come up with great ideas but have failed to act? Our guests today are two angel investors who fund startup entrepreneurs, those who have taken the high risk plunge to pursue their dreams. Stacy Pena and Brian Engelman are fund managers for the San Diego Angel Conference, who share their insight about the entrepreneurs they back, and why just having a great idea is not enough to gain investor funding.

I pose to them. Is it the jockey or the horse that runs the best startup race? I'm going to start it off with Brian. What do they mean when they're referring to a jockey and a horse?

Aren't we talking about funding or, or a racetrack?

Brian Engleman: Yeah, we're talking about angel investing and thanks for having us on your podcast, Jeanne. You know, typically the jockey is going to be the entrepreneur and the horse is going to be the business. And as everybody realizes, the reality is it's a mixture of both. But if we were forced to choose, I'd have to say it would be the jockey.

We've seen innumerable cases where the right jockey is able to make course corrections to the horse, while the fastest horses in the field can be taken down by the wrong jockey. The cool thing is the vast majority of us can be awesome jockeys, which By understanding our weaknesses and working to improve those, hiring the right talent around us to fill those voids as necessary.

 At the extreme, if a, if an entrepreneur just decides, you know what? I just don't like running the company. I love doing the tech. Then hire yourself a co founder, bring, bring that person in and have them do that 

Jeanne Gray: work for you. What do you feel about this metaphor?

Stacy Peña: I also agree with Brian. I definitely think you can take that an A team and B product is better than an A product and a B team, and that just because, just because Brian had mentioned that they can course correct quickly, they can pivot, they're, they can see way ahead in the future to see if there's, there's going to be any obstacles more than an inexperienced, 

Jeanne Gray: Active angels, you must have experience with the founding entrepreneurs and the quirks that they bring with them.

 What do you feel are some of the positive traits of a, of an entrepreneur you have funded? We can get into a couple of the negative ones, but Brian, I'll kick off with you again. What, what do you think is a couple of positive traits for an entrepreneur who who's worthy of being funded? 

Brian Engleman: Sure. Well, we do like to see somebody who's got experience in the space that that's always helpful.

Somebody who's got a passion for the product or service. And, you know, sometimes hearing the story behind that, why, you know, is it a, a parent that died of some particular type of cancer? And you're very passionate about solving that as an example. Someone who's coachable. Definitely somebody who is going to be available to answer questions when an investor has those questions and, and at the same time set appropriate boundaries, right?

If you've got, if you're spending your entire day answering questions, you're not doing the job of the business. And that's very important as well. So, Those to me are, are some positive traits that I like. 

Jeanne Gray: Stacy, Brian mentioned the word coachable. How do you interpret that when you're looking at you funded a particular.

A business plan you, the, the money's coming into the startup. Now you're engaging with that entrepreneur. Where does the word coachable fit in?

Stacy Peña: , a certain founder comes to mind she was strong, confident, resilient but not as coachable in terms of being flexible on her valuation.

And when we were not seeing eye to eye, , she continued to stay the course and it really, impacted her ability to go on and raise more money at that valuation, , that is probably one of the more, Concepts that is really important in 

Jeanne Gray: being.

 I've experienced shown both of you that that's on the checklist that if you're seeing, even though an entrepreneur who's extremely passionate about their business model. Most of those business models have to be adjusted once they're in the market. Do you have that in your little checklist of when you're interfacing with a pitching entrepreneur and, and seeing a personality trade of rigidity?

Brian Engleman: Yeah, that's, that's definitely a yellow flag. It may not be a red flag and you know, listen, this entrepreneur, if you ask 10 people, About one thing or another in your business, you're guaranteed to get at least nine different opinions, right? You can't listen to every single thing. It's just impossible but I think One of the things Stacy was pointing out specific to, to valuation is early on it is challenging.

How do you value a company that's just not in the market yet or just getting into the market? And there are concerns about future funding. You want to finish that round and you don't want to have a down round, meaning valuation lower next time than, than this time. And that's part of the process that we go through certainly at the San Diego Angel Conference.

And being coachable to me Means you're willing to listen to those outside voices. You have the to take a course that's different from the one you intended to take based on the best information you've got at that time, right? Information is imperfect. And at the angel stage, this also means taking feedback on things.

Things like your presentation and considering different 

Jeanne Gray: market. You're engaging with them through the presentation process and seeing how they're reacting to your questions and, and whether they're engaging well. In the circumstance, when a startup is coming to you and you have either equal co founders or an entrepreneur.

Who you think is really good, but you know, there's a skill gap. How, what, what do you say to them? Stacy, I'll throw this to you is is having equal co founders, a positive, negative, or It could be neither,

Stacy Peña: but most of the time it is, it is a yellow flag. as investors, we want to know there's one person who's going to make that decision. And when there's two chiefs at some point, they are going to disagree with one another and it's going to stall innovation. It's going to stall the whole, the, them getting to market, getting new funding.

. Preferably, we like to see a distinctive difference between a founder and a co founder. And what 

Jeanne Gray: about a case where you really like the entrepreneur, but there's a skill gap? Do you hang back and tell them, come back when you have more people lined up for these other positions or You just move on to another candidate and let them figure it out.

Stacy Peña: Well, 

if, if an entrepreneur came through the, the SDAC process and there was a big skill set that was going to hinder them meeting that next milestone, then we would have to really do some deep due diligence to make sure that with, once that money was provided, that they would be able to close that, that skill gap.

Brian, do you have any other comments? 

Brian Engleman: I'd say it probably depends on that gap, right? How important is that gap? How big is that gap? Where are they in their development process? We do have a lot of single founders, right? We, we look at pre seed, seed, and some early stages. Series A. And we come across companies that, that have a single founder.

And for those in particular, I think it's, it's very important for us to see that a, they, they recognize those skill gaps. ? B, they have a path to filling that gap. We actually have a finalist that our finalists were just selected two days ago. We actually have a finalist that did that during our process, actually just hired CTO about 10 days ago, and we haven't even had a chance to meet that CTO yet.

 We'll be doing that in this next round. That's an example of somebody who recognizes the needs of the company, where her strengths lie. Are where she's not strong and where she needs the most help early on. And, and she showed us that she's able to do that and execute on it. And that to us is the sign of a good, a good entrepreneur.

Jeanne Gray: When a entrepreneur is doing a pitch deck. And they are, cause we're focusing on team in our discussion. Is it valid for them, for them to list individuals who are on an advisory board, who they say, if I am funded, this individual will come on board. Do you like that approach? That they've identified people, but they cannot yet afford them to be in the venture.

Brian Engleman: Yeah, very much . so. You know, depending on the stage, these companies, I think, as you just kind of pointed out to you, they're not going to even have boards yet. They just have advisory panels or advisory boards. They don't have a formal board yet. And identifying those that might become new hires or those that might move from an advisory position to a, to a formal board position after funding that's another sign of a good entrepreneur and 

Jeanne Gray: Well, let's tackle the whole aspect of, of leadership is, especially since there are so many solo entrepreneurs who are really passionate, but, you know, they may or may not have executive level experience in overseeing companies.

 When you're dealing. Now you've put your money in and you see an individual not showing the leadership that is going to get to the next funding milestone. Do angels intervene to, do you sit down and try to help this individual understand what good leadership is? Or you haven't come across that as a problem because you've screened them so well.

You're both, you're both smiling. I, I need an answer to this. I will have to call on Stacy. Have you ever intervened with a, with a a funded entrepreneur about their weak leadership skills?

Stacy Peña: I, I think it really depends on the relationship. That's the investor investor has with the founder. And there's a trust there that the investor can go in and see if there's, I don't want to say miss or the leadership is lacking, but at this stage, most of our companies, they're, they're very few, the very small teams, there's not a there's not a lot of leadership going on.

There's just a lot of execution and planning and strategy. . As the team grows, leadership becomes much more important, and that executive level leadership skill set obviously becomes more important. And the advisors on their board, the investors on as their as their mentors usually can bring that to the table at the time that it's needed.

But I haven't come across, we haven't come across any really negative. instances. What about you, Brian? 

Brian Engleman: Well, I think we were, we were both smiling Jeanne because we wish we were that good at screening. Right. And you know, for, for the entrepreneurs that are, that are listening to this podcast, one of the things that, that every investor should be doing as they're evaluating whether or not to fund a startup is look, can I spend time every month, For the next five, six, 10 years with this founder and the founder's team.

And that's a very serious consideration. As far as your question, Jeanne, I think it really depends on how far along. That company is, as I said, kind of from the pre seed through series a, there's a wide range of companies. Some again, maybe individual entrepreneurs with maybe advisory boards. As you get on into seed and series a, these companies should have formal boards.

And if you're a lead investor One of the things that's commonly done is you get a seat on that board, okay? There will be many, many investors and the majority of those investors are not going to be sitting on the board. They may have an advisory capacity on, on that on that board, but they wouldn't have a voting capacity.

But if you're sitting on that board and leadership isn't right, there's actually a fiduciary duty to act. And whether that action is helping that founder Maybe they're blind to that weakness and leadership. Maybe they're blind to how they're affecting the rest of their team. It may just be some some training or retraining or some, you know, some coaching from from the board members or in the extreme, it may be necessary to look at bringing on a replacement, right?

That doesn't mean that the founders get gets kicked out. I know that happens from time to time, but I think the objective would be to keep that expertise on and maybe bring somebody else into that leadership role that can be 

Jeanne Gray: more effective. I guess the more, most public case of that is Uber, when they, look how far they went with their founder before actually, a change was made.

So It is a very difficult decision. Then maybe take us through. You, you have a startup pre seed, seed, and then series a, can you describe a little bit of the metamorphosis that goes on in a company? Cause you know, I guess the, the most obvious one is in order for a company to grow, you have to bring on people.

And we are kind of touching on that in terms of the team, but is there another way of looking at the. Elements within the startup that change as you grow in size and go through different funding stages. Is there, now the CFO becomes more important if you're going for a Series A, whereas less important in a pre seed round?

Brian Engleman: I'd say that you're right there. That's a good example. From the business side. You kind of move from an idea, concept, prototype, first to market. And as you move into a series A, you really need to be showing some traction, right? Every industry is different. And what traction means is going to be different.

SAS companies need to have a growing number of customers, preferably showing stickiness or that customers are returning and reusing that on a monthly or yearly basis. Biotech has to have Proof of concept and be moving towards regulatory approval, et cetera. , you know, again, every industry is a little bit different, but with each of those stages, you need to be moving forward and proving to future investors that this is worth really more and more money, right?

Because as you, as you move on into Series A and beyond, you know, you could be talking tens or even hundreds of millions of dollars. 

Jeanne Gray: I thought maybe we would move a little bit into the conference that the San Diego, San Diego Angel Conference that is occurring yearly now and in the, in the spring. Describe what your typical applicants are, because I think I know from, from history that you accept around a hundred for the program in terms of months In advance of the actual conference.

So Stacy, describe a little bit about who comes and applies for the conference. Why, and why do they get accepted? And when they do get accepted, what are you doing to help them prepare for the conference?

Stacy Peña: Our preparation for the conference starts the fall before the actual conference follows in the spring of the following year. We host a number of workshops that bring entrepreneurs together to work through coaching workshops. And and consulting through our sister company, the Brink SBDC to get their pitch deck and be investment ready.

 We use our ecosystem of partners to attract entrepreneurs who are interested in, fundraising. And we work with those entrepreneurs over four months. To get them to where they're ready to apply to the San Diego angel conference. And and use that as deal flow to train our angel, our new angel investors.

 It's really kind of feeding the pipeline for angel investors because the, the San Diego angel conference mission is to activate new angels. And to fund um, innovative companies that can grow and return. 

Jeanne Gray: Clarify. I know the announcement goes out looking for applicants, you know, it's, it's publicly disseminated.

 The number I had in my head is, is 100. Are there 100 applicants accepted for that program? And then it's winnowed down or all 100 Immediately goes into the conference for later evaluation. 

Stacy Peña: We have attracted a hundred applicants over a hundred applicants this year. And basically what that means is they've, they've gone in and they've, they've gone into our application portal and imported all of their documents, their pitch deck, and a one minute video from that, we will take that hundred and we will spread them out across the.

And the angel investors on teams to evaluate every one of those hundred applicants. We will then get together to discuss and whittle that down to about 50 companies. Once we have the 50 companies, we will put them on a ballot, have further discussion, further high level due diligence, and the investors will vote.

Vote for the, for their top 25 and that is kind of where it, where it really starts is once we get to 25 then we'll bring them in to make a three minute presentation. , over 2 nights, the next week, we will take that, that 25 and get to our semi finalists. We will, we will repeat that process until we are down to our top 6, which just happened yesterday.

And those top 6. We will work with over the next two months, doing very, very deep. A deep dive due diligence into every aspect of their business from team to competition to go to market strategy to all the financials and and we break up a different due diligence teams for those top 6. 

Jeanne Gray: That's what I'm saying.

 Then on the day of the conference are those six all presenting? 

Stacy Peña: Yes, they will pitch at the finale. And the great thing about it is that we do not decide on the winner until that, that that all six have been pitched, pitched their their companies. And we will go into chambers and discuss who is going to win and who, and if we want to fund any runner ups.

 In that moment, we are actually deciding who is going to walk away with the, The funding. 

Jeanne Gray: Brian, I understand that there's a pool of funds that's created, but that pool also Change may change based upon additional money that may come through on the day of the conference. Is that true? 

Brian Engleman: Yes, it is.

 The way the angel conference is set up, we are we're an LLC and each of the members is basically buying units within that LLC and. You can buy as many units as you want, but we cap out voting units at four that somebody doesn't come in with a, with a block of money at the very end and make the decision for everyone.

This is a group decision. That's part of the learning process at San Diego angel conference for those new angel investors. And that's where it gets a little bit wild and wooly. We've written into the LLC that assuming we raised 200, 000, that winning company gets 200, 000 as we raise additional money, it's totally up to the investors, how that is spread out.

If we think we've got the next Google, then. You know, maybe we go all in, but more typically, since one of the things we're trying to teach angel investors is it's good to have a portfolio of companies. This is a very risky environment where unfortunately, seven out of 10 typically will fail, right? We want to spread that money out and have a portfolio of companies.

We've invested in most of the time, three companies. One year we, we went for five but we've decided to, Especially in the environment, the last couple of years to write bigger checks to the companies and we've, we've selected three one winner who's typically gets between 250 and 350, 000 and the others we've kind of meant we try to not go below a hundred thousand dollars and, and that sometimes helps us determine how many companies and how much to give each of those runners up.

Jeanne Gray: At that point, I imagine the competition among the, the presenters is getting pretty fierce. You know cause they could, I would imagine if I was there, I'd almost be tasting the 200, 000, but I somehow have to knock off the other five to get the money. Going back into chambers, are there any common threads that are pulled out to say it was the presentations that made the difference or a particular factor?

How nitty gritty does it get into that? Private room in which you now have to separate really six, you know, highly touted or thought of ventures. 

Brian Engleman: That's right. We have discussions along the way. , at each stage that Stacy mentioned, the 25 to 12 where they're giving us three minute pitches and then the 12 to the finalists where they're giving us 10 minute pitches and then this finalists where they're doing their 10 minute pitches again, all the while we're having conversations were meeting a small groups were meeting as large groups.

So We get into fairly good detail. Honestly, this is a. Series a due diligence that we're doing on everybody and for those that are a little bit earlier. It's a bit of a Hard slog for the entrepreneurs It's a lot of work to a person each one of them has come back and say how valuable it was to them Because if they're going to continue going on funding they've got to do all of this anyway Right.

And it's a, it really is a wonderful combination of, of teaching angel investors, some of the questions that they need to be at, well, hopefully all of the questions that they need to be asking, what are some of the yellow and red flags they need to be looking for? What type of investments interest them while at the same time for the founders, they're learning a great deal, whether they get funding or not.

There's a a, a term that Stacy used earlier. And, and And in the podcast and SPV. And what's exciting is even companies that don't actually get funding from SDAC often attract three, four, Five, 10 investors that are interested and they may have come in quote, unquote, fifth place, right? Whatever, whatever place they would have come in in the finals.

And they still end up with a hundred thousand dollars of investment. It doesn't always happen, but the exciting thing is it's lead generation for the investors. And it's a fantastic opportunity for founders to get in front of anywhere between typically 60 to 80 investors every single year. 

Jeanne Gray: If I'm participating as an entrepreneur, And not, let's say, even if I am not in the top six, is there a communication among the angel groups in California or the Southwest where a sixth or seventh or eighth or ninth place venture feels just as you've said, some, some.

X extra benefit by the grapevine. Does that work?

Brian Engleman: Certainly. Among the San Diego angel investment community. Yes, we have examples of that past years. We've already got examples of that this year where we've got, I think it's four or five companies that have been dropped from the competition, but they've got enough interest from investors that they're even either making direct investments or they're finding other mechanisms to help these founders out.

Typically, within the community, there may be some crosstalk, certainly when it comes to the finalists. Remember, they have due diligence documents that we've created for them. And we have a particular agreement that binds these other organizations to the same rules, which is don't don't share the due diligence document with the founders.

Sorry, founders you know, and, and don't spread this out without our permission, because it is our due diligence document, but certainly the finalists have those DD docs shared among many different, and not just in the region, but across the nation. As San Diego angel conferences grown, we've grown in reputation.

We get very positive feedback on the due diligence we do on these companies. And that in turn has expanded the interest from other angel groups across the U. S. 

Jeanne Gray: I just wanted to follow up Stacy with that one point you mentioned the conference also is a great vehicle for bringing new angels into the fold.

 How does, how does that work? It's the publicity or. Existing angels are inviting other angels. How do you warm up a new, a new investor?

Stacy Peña: We do that all season long. We continue to throw events that bring investors friends. , they can kind of feel comfortable about understanding what angel investing is throughout the entire process for the finale. We we use we. Throughout the process, we do a lot of PR about our process, about the entrepreneurs, about the quarter finalists, about the semi finalists and the finalists.

 There's a lot of press out there. We, we typically have someone at, at the conference from the press. And we use our, our partner ecosystem, you know, we get, we, we give them tickets to hand to pass out to their stakeholders as well as we have sponsorships and we use their networks to get the word out to attract.

People who may be interested in angel investing don't know where to start. That's kind of a marketing machine that we use to, to gather additional investors additional community leaders and. Executives, faculty, students, we really try to include everyone to get excited about this ecosystem.

Jeanne Gray: Let's wrap up and talk a little bit about what's, what's hot. Will every company applying to UB have artificial intelligence at this point? Even if they're not using it, are, is there a dot AI? Where is artificial intelligence impacting The applicant pool, you know, cause. It's hot really now, but it started last year.

And you know, we, what were you seeing and what do you anticipate or, or you're already seeing in who the applicants are? 

Brian Engleman: Sure. Well, I think you, you, you said it well, Jeanne the short answer is yes. We see a lot of AI this year, whether or not they're using AI and, you know, a lot of, a lot of AI is, is actually machine learning, which is fine.

You know, a lot of it. Kind of comes down to the data that's collected and how that's utilized within, within the company. We have a lot of biotech that, you know, arguably, again, a lot of it's ML, but arguably are getting into AI a little bit. And we, Take it with a grain of salt and we look at those, you know, fairly closely to understand what's really being utilized.

It is somewhat of a buzzword and I would I would caution founders out there, entrepreneurs out there, not to just put AI, you know, it's great that you've got some technology that's related to AI in there but make sure that you're truly using it because it it can be a little bit of a downer to To, to hear AI and then understand what they're doing isn't anything close to AI.

Is it 

Jeanne Gray: conversely though, that are you seeing business models? That are out of date because their industry has already moved into AI and, and their skillset missed the, the move, our entrepreneurs being left on the side of the road unexpectedly because of how quickly AI has been embraced. 

Brian Engleman: I don't, I don't think personally.

I think it may be the opposite. My experience is that the entrepreneurs jump on it first and that some of the companies that are existing that, that might be a little bit slow to the game. And there's a good reason for it. I mean, you don't want to, you don't, as a large company, you don't want to put what you've got at risk at the same time.

You know, the, the, the corporate graveyard is full of companies that weren't able to make those changes. I think really we are with AI where we might have been with the Internet 30, 35 years ago where everybody says it, everybody knows they need to do it, nobody's doing it quite right yet. Oh 

Jeanne Gray: that's actually, that's a really good analogy I would say.

, it was great speaking to you both. I think Covered a number of points for aspiring entrepreneurs, especially those looking for funding that they're hitting the mark on the fundamentals. And when they do approach angel investors or apply to a conference, they've got some things foundation in place that gets them on your radar.

 Thank you, Stacy. Thank you, Brian. Really enjoyed speaking with you today. Thank you, Jeanne. 

Stacy Peña: It was a pleasure being here. Thank you. 

Brian Engleman: Thank you. Bye now. 

Jeanne Gray: You have been listening to the podcast series, Experienced Voices. To hear more and subscribe, visit americanentrepreneurship. com forward slash podcast, where you will also find a form for listener feedback.