Angel Investors Lend Expertise as well as Cash
Like many tech entrepreneurs, Joshua Reeves says he thinks his company can change the world. It may do it, too – with the way it was financed, as much as by the product itself.
Reeves’ company, ZenPayroll, has raised several million dollars through a network of technology executives.
His cadre numbers 56 such “angel” investors, almost all of whom are busy running their own companies. That is more than half the number of employees at ZenPayroll, which has 95 workers and opened for business in late 2012. Among ZenPayroll’s investors are people who helped found and run companies like Dropbox, Evernote, Instagram, Yelp, Yahoo and Twitter. Many are worth hundreds of millions of dollars, even a billion dollars, either on paper or actually, depending on whether their companies have entered the public market.
Reeves, who sought $25,000 to $200,000 from each angel investor, is after more than their money. Each month, he sends investors requests for things he wants them to work on for him and his company, which offers online software that takes care of payroll for midsize and small businesses. It might be sales contacts, or information about how to create a corporate culture, or thoughts on new types of software.
“They pay us, and they work for us,” said Reeves, 30, who has grouped his angels into skill areas, like marketing or technology. “They are working entrepreneurs who like to think of themselves as company-builders and attack problems.”
Traditionally, angel investors were just those early people who believed in someone’s dream. Sometimes they were mentors, relatives or friends of friends who would descend with money and walk away, expecting only periodic contacts or updates. But now, Reeves sees a way to exploit his angels’ innate talents.
Jeremy Stoppelman, the co-founder of Yelp, says Reeves talks to him mostly about building a strong company culture. He was introduced to the company through Aaron Levie, the co-founder of Box, whom Reeves has used for other introductions. Elad Gil, who sold one company, Mixer Labs, to Twitter and is now working on a biotech startup, says he gets questions about issues like mobile application technology and business operations.
“We’re operator angels, giving firsthand experience,” Gil said. “We give advice and learn things that will go stale very quickly, on things like acquiring users or using mobile. Money managers can’t do that for a company; their services are more generic.”
Besides, ZenPayroll “is working on a real problem I had in my first startup,” he said. “I wish it had been around then.”
Evoking passion for solving corporate payroll issues seems unlikely, but these are unlikely times in financing technology startups. Just as Tom Sawyer got other boys to whitewash a fence for him, people like Reeves may be onto a way to create an entire company: Draw on the industry’s experience, evoke previous entrepreneurs’ interests and continually expand a network of like-minded investors.
That he can get these human resources says much about the state of values in technology, where money is cheap, compared with time and experience.
Angel investors have been an increasingly important part of how Silicon Valley works for several years, as people have become wealthy earlier in life and corporate tools like free open-source software and cheap cloud-computing resources have lowered the cost of a startup.
AngelList, which offers to match startups with early-stage investors, says it has raised $104-million from 2,673 investors to help finance 243 startups. Investors on AngelList are expected to certify that they have more than $200,000 in income for each of the last two years, or over $1-million in net worth over and above the value of their homes. In some cases, AngelList may require proof.
People can invest by themselves or follow the investments of various tech executives who participate. Reeves is one of the featured investors on AngelList, and he has given money (and, he says, time) to startups like Clever, which makes online software for education, and Patreon, a service like Kickstarter to support artists.
Reeves is giving the companies he finances the same operator angel treatment he gets from his angels. “Fundraising should be like hiring,” he said. “Either way, you are putting people in your company.”
Thanks to two long tech booms in just two decades, there are lots of relatively young executives with lots of money. Many invest close to what they know, throwing millions at familiar human and technology networks.
Some older investors see helping people like Reeves as a way to follow what is happening today and give back in hard-won experience.
“I’m 37. I’m the old guy in the room,” said Stoppelman, the co-founder of Yelp. “It’s kind of fun to leverage your knowledge, build someone else’s success and see your suggestions put to use. Most startups underutilize the people they bring on board.”
Many of the ZenPayroll angels, who have built businesses using the same technologies of cloud computing, mobility and open-source software, see themselves as part of a movement. This technology is changing society, they argue, and they like being part of as much of that as possible.
“This is a transcendent moment,” said Tien Tzuo, the chief executive and co-founder of Zuora, which makes software for companies to run online subscription businesses. “Fifteen or 20 years ago it was about the money or for geek status. There’s now a visceral feeling that we’re changing the world together.”
All of this early-stage money can create a level of implied valuation that may be contributing to what many now say is the overvaluation of technology companies. When, after the early investing rounds, startup companies need the larger sums and corporate connections available through venture capital, they already have a valuation well above what was typical before angel investing became common.
After the venture round, it has become common for some institutional investors, including private equity funds and even mutual funds, to come in before the company goes public, creating an even higher valuation. The institutional investors are betting that the initial public offering will eventually surpass even that valuation. Thus, the angel investors, some argue, are making for a disaster.
“There is a lot of capital in this market with no tech-funding market experience – angels at the bottom, private equity on top,” said Dave McClure, whose 500 Startups has financed many early-stage companies. “Josh deserves a lot of credit, managing an investor group of that size and pushing the investing rounds up.”
Reeves said he was not concerned about a market collapse changing his methods. “This is entrepreneurs helping other entrepreneurs, and that has always been part of the secret sauce of the valley,” he said. “I am looking for mission-driven entrepreneurs. They derive joy from hearing about problems.”