I visited with startup attorney Joe Wallin and entrepreneur Michael Schneider for their Law of Startups podcast. You can check it out here:

http://www.thelawofstartups.com/podcast/2017/3/29/episode-98-nate-doran

In August 2015, twenty four investors and I came together to form SWAN Venture Fund on the premise that entrepreneurs needed funding in the Pacific NW.

When we talked with entrepreneurs and listened at pitch meetings, we became aware of how prevalent the crazy term sheets and crazy valuations are. Over coffee, entrepreneurs would often tell me “he said/she said we’re worth this.” And I’d raise my eyebrows and explain to the contrary. Perhaps, they had read articles about companies that have received silicon valley venture financing at a certain valuation and decided their pre-revenue startup should be worth about the same. Or they’ve gotten lost in valuation discussions, gave up on trying to come to market terms, and asked for a convertible note, because it was “easier.”

In Seattle, and pretty much anywhere outside of the valley, it becomes clear to anyone who takes the time to do the research, that there are multiple private markets for equity. Angels and VCs do rub elbows from time to time, but can have different investment strategies, motivations, and therefore price startups differently. Angels and VCs use similar language, but sometimes will have different meanings and expectations. But VC’s often will have a bigger megaphone than angels, about the deals they close. So, it should be no surprise that entrepreneurs and other advisers might take their valuation cues from VC rounds. This might even lead entrepreneurs and others to believe that VC’s are the only game in town. But, if you look at the statistics, the opposite is true. Angels fund 10 times the number of seed deals than VC’s, every year.

Up to this point, the angel community hasn’t been openly pushing back on entrepreneur valuations in Seattle as it could. The terms are getting in the way of the conversation. Sticker price shock overwhelms investors’ ability to see the quality of the company. This is a private market; buyer and seller still determine equity price, but the buyer isn’t haggling and instead buys stock at sticker price. And seed-stage valuations have climbed year over year until they’ve exceeded investors’ willingness to buy. Entrepreneurs often complain that they can’t raise money because angels aren’t interested enough or have impossible-to-achieve standards. I often hear entrepreneurs say: “If I could just raise money, I’d do x, y, z. Then it would be worth so much…”

The result: entrepreneurs were having a hard time raising money. Their difficulty isn’t just because fundraising is hard, but because they aren’t pricing their offering appropriately for the angel market.

Individually, angels don’t invest enough to create leverage in the conversation for a great startup to change terms. In groups, individuals still have little leverage around deals they understand. Entrepreneurs won’t change terms for a single $25k or $50k check.

We formed SWAN because when we speak up as investors and put our money where our mouths are. Then we begin to bring valuations back to reality and deals close.

I’ve been in the Seattle Angel community for a little over 4 years as of the writing of this opening post. I left Keiretsu in December of 2014 in pursuit of new horizons – to set up the SWAN Venture Fund and work on other projects, like this blog.

My last role as “Entrepreneur Director” for Keiretsu Forum Northwest was to discover, coach, and prepare entrepreneurs for Angel fundraising. These companies more-frequently came from Oregon, Washington, Idaho, and Vancouver, BC. But I also collaborated with the Bay Area and Mid-Atlantic regions. During that time, I helped a lot of companies raise money in the Pacific Northwest, met a lot of wonderful people in the startup and PNW angel communities, and I made a difference. Keiretsu Forum NW reported that their angels invested $53 million into ~70 companies during my time there.

We have ~10 active angel groups in Seattle (Alliance of Angels, Bellingham Angels, Element 8, Keiretsu, Puget Sound Venture Club, Seattle Angel Conference, Seraph, Tacoma Angels, TAGS, WINGS, Zino) that invest between $30 million and $50 million per year among startups raising their first $500k to $1.5 million (depending upon how you count the investments made). There are also several independent funds forming to invest at the seed stage (Seattle Angel Fund, SWAN Venture Fund). But, beyond the first or second round, Angels aren’t in a position to support a company with a bridge note or priced round.

Yet, there are a lot of great entrepreneurs who are actively attempting to raise money for their companies with little success. These companies are considered either too immature for angel investors or have reached a saturation point in the Angel equity market with little interest above what they have already raised (some close friends of mine in the startup community).

I have several theories about why this happens, but I won’t cover all of them in this post. One theory is that in terms of the volume of startup investments made, Seattle’s investment community, like the rest of the country outside of the valley, is not a venture capital town. It is really an angel investing town and the unfortunate part of this is most of the entrepreneurs price their equity rounds for VC’s, not Angels (which can be a bit of a shock for some). There are just more opportunities for angel deals here than there are for venture capital deals, (which is also true at the national level).

You should know that there are multiple equity markets: VC fund-raising and Angel fund-raising in Seattle are separate equity markets. For example: there are many companies attempting to raise $500k seed rounds from angels with premoney valuations 2x-3x above the national average of $2.5 million – $3 million (in the annual Halo Report). I’ve met many entrepreneurs who understand that this is an issue, but started raising with higher valuations ($5-8 million VC seed premoney) because they thought they could raise money from VC’s. But when they could not obtain VC funding, they adjusted their valuations at or below the average Angel premoney values and were then better able to raise Angel financing. These entrepreneurs are a minority. Many entrepreneurs who couldn’t get VC funding and didn’t adjust their valuations in time, eventually ran out of money and closed their businesses.

So, there seems to be a need in writing this blog, for the entrepreneurs who have the perception that there is little funding available, to help you find. What will this look like? Blog material written by me will probably be a collection of interviews with founders, pieces about companies, and thoughts about startups and fund-raising. I am open to collaborative work with entrepreneurs and other blogs because this is about you and for you. As this blog grows, there will be a separate page of resources available for entrepreneurs to help you navigate the PNW investing scene to learn about and better connect with the investor community.

I hope this finds you well. Cheers!

Nate Doran