Pay Per Callers Show - Ashok Kamal, Tech Coast Angels

[Ringba]

Learn how to take your business to the next level and gain outside funding to do it with insights from Ashok Kamal, Executive Director of Tech Coast Angels.

Listen to the Audio Version

Show Notes

• Tech Coast Angels (TCA) looks for the best companies to invest money in.
• An ‘Accredited Investor’ is a high-net worth individual who invests in startups with an understanding of the risk.
  • SEC Definition: Someone who is sophisticated enough to invest in private companies. To be an accredited investors, individuals must demonstrate an annual income of $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income.
• Since joining, TCA has funded 40-50 companies plus additional rounds.
• Typical financing ranges from $.5 million to $1.5 million per round.
• How the Funding Process works for Entrepreneurs at TCA:
  • Online Application with Pitch deck, Executive summary, Business info, etc.
  • Matched with a TCA member who is familiar with the industry to evaluate.
  • Exploratory meeting, conference call or committee screening.
  • Formal Presentation looking at the business / market opportunity.
  • Due Diligence looking under the hood (30-day process).
  • Investment is made and a deal is signed.
• Target your investors, know your audience and understand their thesis.
• Be prepared! Have your materials and documents ready and on-hand (cap table, financial projections, patents, etc).
• Don’t add time to your deal! Time kills deals.
• Be trustworthy. Investors don’t want to partner with someone they don’t trust.
• Have a clear and concise story about your business.
• Don’t make it hard for investors to help you! Be prepared and make it easy for them.
• As an entrepreneur, you want to be in a position to tell the best story possible.
• Good story starter lines include: users, revenue, and other funding efforts (FOMO).
• Adam: Angel investors look for companies they can help grow and lend their expertise to.
• Generating Monthly Recurring Revenue (MRR) and a history of growth is a good starting point for starting to find investors.
• Adam: Bring user acquisition metrics, how you got them, traffic sources, plan to scale, etc.
• Know your Customer Acquisition Costs (CAC) and Lifetime Value (LTV).
• Due Diligence: Technical Fundamentals, Trust and Relationship Building.
• Adam: Transparency is crucial. Admit when you don’t have an answer.
• Be open to questions and feedback during the due diligence process.
• VCs look at conversion rates, traffic, retention, cohorts, revenue, CAC, LTV.
• Corporate stuff like compensation, cap table, previous funding, financials, and strategy.
• Idiosyncratic variables, market variables and hard numbers help determine business valuation.
• For early-stage companies, investors often look at comparable companies.
• It’s not a success to raise money. Making money is how you get success.
• Adam: Ask for help and advice when you need it!
• Prove you are coach-able by following through with the advice you get.

Example Pitch Decks

• Sequoia Capital, How To Pitch - Article
• SlideBean, Sequoia Capital Pitch - Deck
• Buffer, The Slide Deck We Used To Raise Half A Million Dollars - Article
• SlideShare, Buffer Seed Round Pitch - Deck

About Tech Coast Angels

Tech Coast Angels (TCA) is one of the largest and most active networks of angel investors in the US comprising 5 chapters and over 300 members located across Southern California. Founded in 1997, TCA identifies, mentors and funds early stage companies to help get their ideas to market, and where TCA members devote their time, expertise and capital to help companies grow and succeed.

TCA members not only invest but frequently serve on boards and assist companies with relationships, strategy, supply chain, team building and additional fundraising. Tech Coast Angels has an outstanding deal flow of opportunities and a simplified yet organized process for screening and completing due diligence.

Website: http://www.tcasandiego.com

About Ashok Kamal

Ashok Kamal is a social entrepreneur and angel investor based in California. With diverse experience starting, leading and investing in organizations in the private, public and nonprofit sectors, Ashok believes that entrepreneurship is the foundation for reframing problems as opportunities, unlocking solutions and unleashing human potential. He has also spoken and presented at events like South By Southwest (SXSW), Sustainable Brands, GreenBiz Forum, LAUNCH Festival and the White House's Sustainable Symposium as well as contributed numerous articles to publications like VentureBeat, Forbes and Fast Company.

LinkedIn: https://www.linkedin.com/in/ashokkamal

Episode Transcript

Adam Young:
Welcome to the Pay Per Callers Show. My name is Adam Young, the founder of Ringba. And today I have Ashok Kamal, the executive director of Tech Coast Angels. Tech Coast Angels is an angel investment group located in San Diego, Los Angeles, and San Francisco. It's the largest in the country. They fund hundreds of millions of dollars worth of startups. And I'm really excited to have him on the show today, so that we can discuss more about how people in our industry can take their business to the next level and gain outside funding to do it. So thank you so much for joining us today, Ashok.

Ashok Kamal:
Thank you. I'm glad to be here today.

Adam Young:
Great. So tell us more about Tech Coast Angels and how it operates. And just from a high level, more information about the organization.

Ashok Kamal:
Yeah. So we're an angel investing organization. So it's basically a conglomerate of over 150 accredited angel investors just here in San Diego, and we have chapters in LA and Orange County as well. And what we do is look for the best companies to invest money in them. It's as simple as that. We focus on technology companies. So in our world, that means life science and biotech along with software and material science and cleantech. And we're looking for great seed stage startups to invest money in and then hopefully help as well because this group of 150 people, let's call it, are all successful in their own right. So these are software entrepreneurs, these are pharma executives, and these are C-level corporate people who have 10, 20, 30 years sometimes of experience. So when you get investment from TCA, you're getting not only capital, but you're also getting social capital as well and all of the resources that comes along with it.

Adam Young:
And what specifically does accredited investor mean?

Ashok Kamal:
So it basically means you're a high-net-worth individual who is dumb enough to invest in startups and understand you may lose your money or you may make a lot of money. That's sort of the risk-reward sort of trade-off. But according to the SEC - so accreditation is an SEC qualification - it means that you're sophisticated enough to invest in private companies, and that's why there is a, at present, sort of bar for professional angel investing.

Adam Young:
Great. And that bar is somewhere in the neighborhood of $250,000 a year in income or $1 million in net worth, correct?

Ashok Kamal:
That's right. Yeah. And then for married couples, it's slightly different. I think $300,000 combined joint income with the expectation that you will continue to make that level of income or have that level of net worth. So if it was a one-time thing, that doesn't qualify you. And you self report as an investor. But the idea is if you claim to be accredited and you're not, and if something goes wrong with the startup, you're not going to get very far in the courts because when you proclaim to be accredited, which is part of the signing of documents you do when investing in a company, if somebody has never invested in companies before, you're basically saying, "I understand what I'm getting myself into [laughter]."

Adam Young:
And sometimes that can go not so great.

Ashok Kamal:
It can. It's a roller coaster just like working at a startup. It's a roller-coaster journey, and you're there along for the ride as an investor. Just like as an entrepreneur, there's a lot of ups and downs. It's miracles and disasters that go head to head every day, and that's before launching. I say that as a former startup founder several times over.

Adam Young:
So how many companies throughout Tech Coast Angels have you helped gain funding up to this point?

Ashok Kamal:
So I've been with TCA for going on three years now. I invested in a company when I moved to San Diego from New York City. I brought that company to TCA. That's how I got involved. TCA was restructuring at the time and asked me if I would come on board and help run the organization. I'm in that now two and a half years. We've funded about 40 to 50 companies including some follow-on rounds. So we'll have companies that had raised money from TCA in the past that would be doing a bridge round or a new round, and we'll follow on and participate. One of the principles of angel investing is to keep making bets on the winners, if you can tell that they're winning, since obviously a lot of the companies in the early stage don't make it to the next stage. So we've done about 40 to 50 financings in my time. Maybe about half of that is new companies. And a typical financing ranges from a half million dollars as a round to-- we go as big as a million and a half in recent financing.

Adam Young:
Great. Well, one of the things I think is really interesting about fundraising and the companies we see at Tech Coast Angels-- and for those that aren't initiated, I actually chair the technology committee at Tech Coast Angels, and so I also see all these deals come through. And the number one thing that pops in my head when I see most of these deals that maybe don't get funding is where is their marketing tact? A lot of these companies don't know how to sell their product or what they're going to do with it. They can make some great technology or a great consumer product, and then they're just lost, and they can't go out and get users. And that's the interesting thing about our industry because it's the complete opposite. Everyone that works in it is usually an extremely creative marketer. They know how to acquire tons of users whether it be B2B or B2C, and yet we never see them come through the funding process. And I think part of that is because marketers generally are in the trenches and are fighting their way to success on a daily basis and maybe aren't thinking about growing their companies. And this is why I wanted to introduce TCA to our audience because we have all these investors that are looking to fund organizations, and there is a complete lack of organization that has the marketing talent that we're really looking for. And my hope here is to bridge that gap and introduce angels to our audience. And so I think that's a great segue into the funding process. So if you wouldn't mind, will you please start from beginning to end and sort of walk us through what a funding process looks like for an angel investment deal.

Ashok Kamal:
Yeah. So I'll walk you through sort of the TCA process because it can vary a little bit across-- there are hundreds of angel groups in the country, and then of course there are individuals who are super angels. And it's a very fragmented ecosystem, but it accounts for a lot of the total capital that goes into early-stage companies. So as far as TCA goes, we have a process where you basically come in often with a referral or through our connections at different incubators and accelerators where we're kind of always sort of pruning the portfolio, looking for companies that we think fit our thesis. Then let's say you come in, you do an online application, which basically gives us your deck and executive summary. And then someone like me and someone smarter like you will look at these applications. On the biotech side, we have really smart biotech people that-- basically, we want to match the right person to the right company at the right time. So when the company comes in, we get the eyeballs on it that first of all understands what they're doing because you want people looking at companies that come from or are at least familiar with that vertical. Then if we think there's a fit, then we'll have some sort of a meeting with the company. So we'll either do a one-on-one or get a few people together and meet with them. We'll do a conference call, or we'll bring them into one of our committee screens, we call it. So just about every month we run the tech committee which you chair, and we have a parallel in life science. And we'll have companies come in, do a short sort of orientation presentation. And then if we think, based on that meeting, there's real legs with the broader group, then we'll ask them to come in and do a truly formal presentation, which is kind of a Shark Tank style format without the jokes and kind of hopefully the mean guys on the other end of the table. But what we're looking at there is the business opportunity, the team, the technology, sort of the ask for the entrepreneur. Don't forget to tell us what you're looking for and what you want to do with the money. And then if, at that point, we think there's a deal to be had, we'll go into our final due diligence. For us, that's a 30-day process where we look really under the hood, and that can mean from the legal to the financing to the technology, of course. And at the conclusion of that diligence process, which we purport to get done within 30 days, then we'll invest in the company. And that can come from our fund, and it can come from individual investors. So, in total, you're usually looking at a half a million to $1 million from TCA when we really like a deal.

Adam Young:
Great. And what are some things that entrepreneurs coming into this process don't do very well? What are some of the regular problems that you see?

Ashok Kamal:
Yeah. So I think kind of targeting your investors as an entrepreneur, it's important to know who you're pitching. So you don't want to go to a group like TCA when you're opening up a coffee shop. Now, obviously, this is a sort of technology audience. But, for example, there are VCs out there and investors who don't invest in SaaS because they're focused on consumer tech, or they're focused on biotech. So understanding your investor and knowing their thesis is the first kind of mistake that entrepreneurs make when they don't understand who they're pitching to. I mean, then you want to be prepared. So assume that things go right and that the investors say, "Hey, this is a deal that we're interested in." Have your cap table ready. Have your financial projections. If you have patents, have your patents. Have your formation documents. The kind of things that investors want to see in due diligence. It's great when you have a deal room, for example, set up virtually where you can just direct us to a folder that we can go through the documents which basically are the same across investors. If you don't have that preparation, you're going to add time to the process. And time kills deals because things are happening in the industry that could adversely affect you. Yes, you may benefit from some tailwinds, but headwinds happen all the time as well. And time is generally not going to be on your side. We also have competing deals, so the longer it takes for us to figure out what you're doing, the more other deals that are coming into our funnel, and they're taking attention. And that's a scarce resource when you're an entrepreneur pitching investors is you need to keep their attention, and being prepared is a good way to do that.

Adam Young:
So, in short, having shit together.

Ashok Kamal:
That's a good principle in life and in startups.

Adam Young:
Exactly. And what are some of the behaviors that entrepreneurs exhibit that turn off investors?

Ashok Kamal:
So I think first and foremost is trust. At the end of the day, you're talking about a partnership where people are putting their hard earned money into companies. And if we don't trust the entrepreneur-- we think they're shifty because they don't answer questions straightforwardly. If you ask them one question and they answer another, let alone they answer a question in a way that is deceptive kind of at best, at worst, outright lying, then those are absolute deal killers. And when you see a lot of deals, like in our case at TCA you're talking about hundreds of deals a year, and we're investing in maybe two or three percent, which is a high proportion of deals for a professional investment group, but nevertheless it's obviously a small fraction of companies that we see overall. Don't give people reasons to put your company in the garbage can. So be trustworthy, be prepared, have a concise story that you can tell. Those are best practices. Obviously, the inverse of that is make a complicated pitch that no one can understand what you're doing [laughter]. That's a deal killer. Don't tell people what you want. That's a deal killer. What actually is this person looking for, and what are they planning on using the money for? And when you don't share that with an investor, again, then you're going to make them ask more questions about things that you don't want them asking questions about when you want them focusing on the quality of the company, not simple stuff like how much money you're raising.

Adam Young:
Sequoia actually has a really amazing example pitch deck that I like to send to entrepreneurs. We'll make sure that we link it at the bottom of the video so that they can go through it. But essentially, it's a standardized pitch deck that has all of the basics in there. It's not 10 slides. I think it's 15. But it allows the entrepreneur to tell a short, concise story with all of the financial materials that an investor wants to see. And, I mean, in reality, it is a show. You're going up in front of some investors. You need to get them excited about your offering. They need to understand the whole business from start to finish. And they only have 15 minutes to do it. So it's not an easy thing to do. And preparation, like you said, is just so important to success.

Ashok Kamal:
Yeah. And I think that concision is a really important point that you sort of alluded to. Another great example that I often share is the buffer, how-we-raised-$1-million deck, so we owe this friend of mine. We invested together on a company called outside.co, and that deck, which is about 10 or 12 slides, sort of tells us a story through an arc as a great example of the way to do it.

Adam Young:
And those usually are the deals that get funded, the ones that have the really good storytellers. As much as it's about the financials of the business and how much money we could all make, in reality, people love a good story, and it helps them really understand the business. And so practicing that pitch over and over again. Making sure they have the story straight, so it's trustworthy. It's all the fundamentals and the simple things that I really think get the good entrepreneurs funded quickly.

Ashok Kamal:
Right. And any company has to have some numbers and there's some basic fundamentals. But because these are startups that we're typically looking at, and maybe they launched within the past year, they're not going to have a huge track record most likely of numbers, but what they can have is a great story. So that's where you can really make a difference as a founder in pitching your company, is the story that you tell.

Adam Young:
And with our audience, that's the best part about it. They get to walk in and literally say, "Hey. I'm a marketer. I know how to bring users in. I can sell. We can generate the revenue. I just need help maybe building my product, or scaling my first team, or--" a lot of the things that a lot of the members in TCA have done time and time again. And that's one of the cool things I like about TCA, is a lot of the members, when a deal comes through in their field, will actually get hands on. They'll help the entrepreneurs. They'll advise them. And a lot of this they do out of the kindness of their heart just because they really like the process.

Ashok Kamal:
Yeah, that's right. We're a weird subculture of people that actually care and love this stuff. That's why you choose to be an angel versus say an LP in some nameless fund. And some people are also, say, LPs in venture capital funds. But I think when you choose to do angel investing, you're kind of signing up for a lifestyle, and the big part of it is because you want to support these entrepreneurs. Sometimes you see yourself in these entrepreneurs.

Adam Young:
Yeah. Absolutely. I mean, this is what we're spending our free time doing right now, and I love going to the TCA meetings and working with entrepreneurs. It's a lot of fun. It's really educational. And you get to help people go after their dreams, which is really, really cool. And that's why, again, it's really important that the entrepreneurs respect the people in the room who are willing to take a risk on them - and it's a huge risk - by showing up prepared and having all their shit together.

Ashok Kamal:
Yeah. Don't make it hard for us to help you [laughter]. I mean, that's an important thing. And I had to say this to a couple of companies last week because they missed, for example, a deadline they created to send me some collateral. And the point is, we want to help you, but don't make it hard for us to do that.

Adam Young:
Great advice. And when should founders reach out?

Ashok Kamal:
So I think starting with a conversation is a-- any point of entry that you can get. Maybe you meet at a mixer somewhere, or you're at a conference or an event. But the actual formal presentation, when you pull that trigger, you want to sort of have your ducks in a row and have your stars aligned to have the best story possible. So that's going to vary for every company. I can't say that it should be after one month or nine months. It really depends. But what you want to have is momentum kind of behind your company. Whether it's through users. Whether it's through revenue. Whether it's through other fundraising your doing. So nothing gets an investor into a deal quicker than FOMO or sort of deal tension. So we invest with other VCs and with other angels in syndicated deals. When you're doing 1, 2 million dollar financings, there's usually room for a couple of people, a couple of groups, to be a part of that financing. So as an entrepreneur, you want to build the relationship over time, if possible, but pull the trigger when it becomes a deal that nobody wants to miss.

Adam Young:
And on the SaaS side, I think it's important that they're beyond just an idea. They need to have maybe a minimum viable product with some beta users and people that can at least give feedback. It's not uncommon for an investor to want to call clients and actually do a demo of the product and use the product and understand it, so that they can get involved because I think one of the cool things about angels is they're looking for companies where they can help and use their life expertise in, and so they actually need something to sink their teeth into. And so if someone's going to apply with the deal and they have no product, nothing, just an idea, now is not the right time to go to an angel group.

Ashok Kamal:
That's right. You've spoken like a man who's done a couple of these customer calls and some diligence scrubbing. So in the SaaS world, I would say somewhere in the, let's say, few thousand dollars in MRR is definitely a good kind of time to come in. I mean, that's not a hard and fast rule, but if you're generating some recurring revenue and hopefully you're growing a little bit, that I think is kind of a point of starting these formal conversations.

Adam Young:
And one of the things they should come with when they have that MRR is user acquisition metrics: how they got the users, where the traffic's coming from, how they plan to scale them. Things that you and I typically have to explain to entrepreneurs. But with the audience we have here, they already do this all day, every day. And that's why we're really seeking out those deals that have the marketing talent because they have all the metrics ready to go, and it makes it really easy on us to do due diligence and understand where their business is going. I'm repeating myself here, but this is a big problem we face, so I'm excited that these people are going to see this.

Ashok Kamal:
Well, it's worth repeating because even though we repeat these messages - and by the way, investors all over the Internet repeat these messages, the Sequoias of the world - for some reason, we still get pitches every single day that are not listening to these messages. So if you know your cost of customer acquisition and it's not negative, that's a good time to go to an investor because then we can look at it like adding fuel into a fire, and we can visualize the growth. You don't need to already be on the rocket ship kind of curve toward 10X growth, but we need to be able to visualize how our contributions can get you on that road, and the best way to do that is to be able to paint a picture through what you're doing right now, having positive unit economics. That is an easy math equation to do.

Adam Young:
And it falls right into the pitch story as well. We get to the part about where we're going and the growth, and they show their hockey stick chart, which almost 100% of entrepreneurs do even though they shouldn't. At least the marketers can then explain, "Well, we're spending $20 to get a customer. We're making $80 on that customer. This is why we can see our growth." And that's a really simple thing, but a very powerful one when told in a pitch.

Ashok Kamal:
That's right. And the key to understanding and believing that hockey stick curve is, let's say, the last one, two, three months where you show that you've gotten a good grasp on what that cost of acquisition and lifetime value of the customer will be. The flip side of that, we see the artificial inflection point or what I call the Viagra hockey stick curve, which is, "If you all invest in our company, we are automatically going to 10X. But by the way, we haven't figured out what the cost of acquisition is going to be for us in the last week, so we're just magically going to levitate, if you will." So have a good basis for why that curve is going to go into the hockey stick and up into the right, and then that's what investors want to invest in.

Adam Young:
So they want reality?

Ashok Kamal:
Yeah. Exactly.

Adam Young:
As much as the hype is fun, reality is where deals get funded.

Ashok Kamal:
Right. So storytelling in reality-- obviously, storytelling can sometimes be embellishing, creating a reality, but you want to have some basis. So it's a little bit of art, and it's a little bit of science.

Adam Young:
Now, the due diligence process that TCA goes through, can you give me a little bit more information about what that process is like? What it feels like for the entrepreneur because sometimes it's not always fun. And just sort of prepare our audience for what that really looks like.

Ashok Kamal:
Yeah. So this has two aspects to it. There's the technical fundamentals, and then there's the sort of trust and relationship building of it, right? So focusing on sort of the technicalities, you're looking at things like the financing projections, like the history in financing, maybe other investors that have been in the deal. The marketing plan is a huge part of what you're going to look at there because as an investor you're investing in the future growth of the company, so the marketing plan is the story, kind of, if you will. As you're doing that, you're also interacting with this human being that is the entrepreneur or their team. And that's when you're trying to establish: Are they credible? Is it somebody that we like working with, that will like working with us? Or are they people that we feel like we can be helpful to? Are they coachable? Do they want to take feedback? So you have those sort of two aspects I would say to the due diligence process. One is sort of the numbers and the fundamentals and the technicalities. And the other is sort of the feel that you have with somebody because when you invest in a company, you're sort of signing up for a, in a best case scenario, 5- to 10-year horizon. That's typically how long it's going to take for one of these companies to exit. So that's a long-term kind of partnership that you're engaging in. Me, personally, with companies I've invested in, I'll take calls at any time. I mean, it could be Friday at 6 o'clock, and if that's the time that the founder can talk, and I want to help, and I do, I'm going to take the call, regardless. So you want to make sure that there's kind of a fit in that relationship, and that's part of what due diligence is all about.

Adam Young:
So establishing the relationship. And I think one of the most important parts of that is transparency. "I don't know, but I'll find out," is a really good answer to any question because entrepreneurs want to have the answers, and so it always feels like sometimes they're trying to force out an answer when they don't have it, and that's completely unnecessary. We don't all have the answers, and it's more important to communicate honestly and be transparent than it is to always have the answers.

Ashok Kamal:
That's right. And being open to opening the kimono during that diligence is sort of what you should expect. So if you're getting asked questions, and they're fair business questions, try not to be surly or kind of keep things too close to the chest because you're asking for somebody's money. And assuming that you're dealing with good investors-- I like to think at TCA we are. We're not asking inappropriate questions. We're asking you questions like, "How much have you grown in traffic over the past month? What are your daily active users?" If you don't want to answer those questions, you're not ready for fundraising with anybody.

Adam Young:
Now, the actual diligence process though, can you shine some light on what types of deep information are going to be required for a funding process due diligence?

Ashok Kamal:
Yeah. So thinking about, let's say, sort of SaaS kind of in a little bit consumer internet companies. I mean, we're looking at web metrics kind of information on your conversion rates, your traffic, retention, and maybe some cohort analysis, how much money you're making off of each user, and how much you're spending to get those users. So basic hardcore kind of numbers that are-- assuming you've launched and you're generating some traction, that should be pretty easy for you to share as a company. Hopefully, you're tracking those things because hopefully you're managing against those things. So that's why I don't think there's a huge chasm between what investors want to see during the diligence process and what the entrepreneur should be managing and reporting into their teams on a weekly if not daily process to begin with. Then there's also the corporate stuff, so we might be looking at things like the composition of the board, and again, who else is on the cap table, meaning other investors that have been part of the company in the past, sort of what the financing plans are going forward, how much money is it going to take to get this company to an exit. So there's business questions like that. But on the product and sort of the marketing side, these are all metrics that hopefully are your KPIs, your key performance indicators that you're looking at as a founder every single day.

Adam Young:
And when a founder comes in and they're presenting their ask, which is, how much money they want to raise, and what the deal terms are, and whether it's an equity deal or a convertible note, and the valuation, how should they come up with the valuation? And I want to preface this because we see such a wide range of valuations from undervalued, to where they should be, to the craziest valuations you could ever imagine. You're laughing right now [laughter] [crosstalk]--

Ashok Kamal:
[crosstalk] What I saw this morning.

Adam Young:
Exactly. How should an entrepreneur really value their company when coming to an angel group?

Ashok Kamal:
Yeah. So I think there's sort of idiosyncratic valuation variables, and then there's sort of market stuff. And it's some combination where the end of the day the investors know this is an early-stage company. And unlike a publicly traded company with P/E multiples, you just can't home in precisely on a number, so you have to kind of triangulate on some different figures. So let's talk about what some of those kind of indicators are. Well, one is within the company itself, if they have launched. And if they've got some revenue, it's a little bit easier. You can take a look at SaaS multiples, for example, of other companies when they got acquired or when they raised money at a similar stage, and then sort of you can back into what a fair valuation might be for your company today. So that's one way of doing it. That only works, again, if you have some numbers that you could draw upon to be able to derive a number. If you're sort of prelaunch or you've launched pretty recently, it's a little bit harder. In those cases, I look mostly to comparables. So what stage are you at? Let's say, I think or we think that a company is appropriate for the Y Combinator accelerator or sort of at that level, well, you know what companies are valued at when they go into an accelerator.
It's maybe two and a half million dollars if you just do the math on how much equity Y Combinator, let's say, takes for how much money they invest. So generally, if you're sort of pretty early stage but there's something interesting there, you're probably going to be in the 3 million-ish or so range. If you're a little beyond, let's say, what that accelerated stage is, then you kind of look at, again, other companies in your space that have reached financing rounds. So they maybe haven't been acquired, but they've raised money from other investors like Sequoia, and those deal terms have been disclosed. So you can kind of try and benchmark yourself against other companies in your space. So there's generally, I would say for every company, some type of reference that they can use, and that's part of your job as an entrepreneur to pick wisely. You want to have, obviously, kind of aspirational comparisons because your comparisons are generally going to be people that are succeeding, but at the same time, you don't want them to be so aspirational that they're delusional. So that's where your credibility and the time that you take in, as an entrepreneur, your research comes into play.
And then there's other market stuff, So things like the Series A Crunch that affect valuing of companies. Those are macro tech investing sort of climate factors that change over time. Right now, for example, I would say valuations have been going down. So post Series A Crunch that wiped out a lot of mezzanine, let's say, tech startups, now companies that were raising at a $10 million valuation might be raising at a 6 or a 7. Companies that were easily getting $5-million valuations are raising at a 2 or a 3. And as a founder, that's okay because the key thing to remember is, it's not a success to raise money. Making money is how you get successful. Sure, raising money is a function on a path, hopefully, to making money and to maybe selling your company or having some kind of liquidity event, but it's only a means to an end. The problem is when you raise money at an inflated valuation, the chickens come home to roost eventually. Let's say that's the next round when other investors are coming in. Because they see that you raised money at a ridiculous valuation, let's say, a year ago, and the market isn't what attributes for this change, and they think it's fair and the market thinks a lower valuation is warranted, that means you're going to have a down round. So when you raise from unsophisticated investors who just put this high valuation, the founder feels good for six months. Well, you eventually have to justify that when you go to raise money again. And the worst thing to do - worse than not raising money at all - is having a down round because unless there is a really good reason for it - sometimes there are - it usually signals that something's not good with the company and you've lost a lot of leverage. So you want to raise at fair terms. That's the bottom line. I think good investors want to invest at fair terms, and good founders want to raise at fair terms. When you have that understanding, then it creates a winning environment for everybody.

Adam Young:
And when a company is pre-revenue, they haven't had any revenue yet, and they go for those really high valuations, if they launch and the revenue doesn't catch up to their projections, it just murders their future chances of fundraising and that's a major problem. Also, I think founders don't realize that angel investors or anyone coming in and putting in a significant amount of money - and I say significant at about half a million to maybe $2 million, which is significant for a brand new startup, that small, small team - that angel organization or those investors, they're going to want to have probably somewhere in the neighborhood of 15 to 30 percent of the company for that. So regardless of valuation, the investors need to walk away with a large enough piece of the organization, otherwise when a future fundraising round happens they get diluted so small that they don't have a meaningful position in the company anymore, maybe that means they don't want to help anymore, and that's not a good thing. So as the founder, they need to be cognizant of that alone. And you can actually reverse engineer your valuation around that, which is a really simple way to do it. If you need half a million dollars and they need 25% of the company, we know we're at a $2-million valuation. This is real simple math. And I think a lot of founders don't take the time to think about that, and they come in, they give us a valuation, and then 15 minutes later they're like, "Wait, wait, wait, wait, wait. We'll do a different valuation." And that just says to the investors, "They're not thinking about it." And that's a warning sign.

Ashok Kamal:
Right. Exactly. Yeah. So a lot of this, again, is about trust and credibility. And if you have well-thought-out answers, even if there's no one right answer, you're going to check that box with the investor, and we can move on to other considerations.

Adam Young:
And it's okay to ask for help too. I think you know this better than anyone else at TCA, entrepreneurs should ask for help, and if they're unsure, they should just say, "I'm unsure. Can you give me a little bit of advice?" Because TCA, the members, they'll give it to them, and then usually that is the first sign that says this person's coachable. We can work with this person as opposed to the entrepreneur who has their everything set in stone and is very demanding, hard to work with. People don't want to work with assholes.

Ashok Kamal:
Right. And people do want to work with people that get shit done. So there's probably nothing more powerful than a company that comes, maybe they need some advice, they need some help. We help them figure out a plan of attack. Six months later, they come back, and they say, "By the way, guess what we just accomplished? It's ABC that we talked about doing six months ago." That's the way you get your company funded.

Adam Young:
Exactly. And at a higher valuation. The one the entrepreneur wants. So maybe this conversation with an angel group like TCA should start six months before you're really ready to fund raise. Show up. Have a discussion. Talk about what you're doing, and where you're going. And then circle back around when you need the funding, and then say, "Hey, guys. Look, I did exactly what I said I was going to do. I exceeded expectations. Here's what we did. I'm ready to finally get some funding."

Ashok Kamal:
That's right. And we're in the community, so it's our job to be accessible. So we get probably three, four, five pitch decks a day, but we formally might look at 5 to 10 companies a month. What are we doing with all the other pitch decks and founders that we're interacting with?

Adam Young:
What are we doing with all these applications?-

Ashok Kamal:
Building the relationships [laughter]. And we're keeping track of them, and through different means, to be able to initiate those conversations. So then when the clock starts ticking, then we already have some context and some foundation to build upon.

Adam Young:
And I think my favorite thing about an entrepreneur is when they show up and they have their own skin in the game.

Ashok Kamal:
Oh yeah.

Adam Young:
And they're not shy about it. They didn't take only friends and family money. Maybe they sacrificed everything they had. Maybe they sold their car. I don't know what it is, but they needed to put whatever they could into their company to get it to that point. I have a lot of respect for that because it takes a lot of work and a lot of commitment, and then if you give that entrepreneur money, at least you know they're not going to squander it on nonsense. And if they fail, they lose everything, and it's going to hurt. And so that may sound predatory, but it's really not. It just signifies who the hustlers are. And I know so many hustlers in the affiliate, in the marketing world, who've bootstrapped what they've done, who've tried a million things, who've suffered and then succeeded, and I never see these guys coming in for funding anywhere or building real businesses. And so really my goal with this conversation - and I hope it shines through - is that these marketers and affiliates out there have the potential to build amazing businesses. Big ones. They can acquire the users. They're super clever. They're super smart. And these are the entrepreneurs that we really want to see, and they're so rare outside of the marketing industry. That hopefully we'll start to attract them in because they have more potential than any other type of entrepreneur I've ever had the pleasure of meeting.

Ashok Kamal:
Yeah. Gritty, scrappy, resourceful. Those are the kind of things we want to see in successful founders.

Adam Young:
Amazing. Well, thank you so much for joining us on the show today. I really appreciate you taking the time out of your day to come over here and meet. If an entrepreneur wants to get a hold of Tech Coast Angels and apply, how do they do it?

Ashok Kamal:
So they start by going to our website, TCASanDiego.com. There we kind of go through some of the mechanics, reviewing some of what we talked about today. I'm always accessible as well. So you can find me on social media as @AK_LaunchLeader is my Twitter handle. Ashok@TechCoastAngels.com is my email address. You don't have to guess to figure out what it is. And again, I'm always open to meeting entrepreneurs. I'm interested in the marketing-tech space. And when I say I am speaking for Tech Coast Angels, I think it's an area where there's a lot of innovation. To me, marketing is sort of the new tech. It's not just about having a great idea. It's about how are you going to make money, and marketing is becoming so sophisticated. It is becoming the technology. And it's an area that there's good M&A, acquisition activity as well, with some of the bigger companies buying these sort of startups. So I think marketing-tech companies are one of the areas that were interested in seeing from. If you're one of those people, get in touch with us.

Adam Young:
And by the way, this doesn't mean you have to be located in San Diego. Tech Coast Angels, especially the San Diego chapter, is willing to hear entrepreneurs from anywhere in the United States that's looking for funding. So please, by all means, contact Ashok, contact Tech Coast Angels, we want to meet you, and we want to help you take your company to the next level. Thank you again for being here.

Ashok Kamal:
Thanks, Adam.


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