The Boston Angel Market


[Editor’s Note: Chris Sheehan is a managing director of CommonAngels, which is an investor in Xconomy. This post also appears on Sheehan’s blog.]

I was recently asked by a couple of early stage entrepreneurs to talk about angel investing in Boston.  The angel market around town has always been fairly active and cuts across many sectors, e.g. software, hardware, networking, Internet, life sciences, optics, robotics, medical devices, cleantech, retail, industrial products, etc.  There has been discussion lately about the lack of active angel investors in Web-based businesses—and the concerns are legitimate. But the truth is that there is a wide diversity of Boston-area angel investors, each with diverse interests.

For this post, I’ll focus on the market that I invest in and know best—early stage information technology.  I’ve broken this into two parts: Finding angel investors to help get the venture started, and getting angel support for the go-to-market phase.

First step: Looking for Those First Angels to Get Started

The initial company creation phase involves building a product/service and testing some of your hypotheses about the business.  This is the pre-seed or seed stage, or as one of my members puts it, going “from nothing to something.”  For this stage many startups need anywhere from $10k to a few hundred thousand dollars, depending on the type of business (see my earlier post on case studies for this phase).

Around Boston, as in most geographies, there is a shortage of this type of funding—there are always too many startups and seed stage ideas looking for seed capital.  I would say, though, that the gap “feels” a bit more acute at the moment for IT startups, in particular Web-based startups, as a result of three factors. First, the financial mess that hit us in 2008, and what it did to our investment portfolios—we are 1/2 to 2/3 climbing back, but it’s left a “psychological” mark in the short term. Second, more innovation, particularly around B2B and B2C Web-based businesses, meaning there’s more competition for seed capital in these sectors. Third, the lack of recent or sizeable IT exits that in turn creates a bench of wealthy high tech entrepreneurs to invest in the next set of entrepreneurs.

Most of the initial investment I see for this stage comes from:

  • Founders’ own dollars/unpaid time and family/friends
  • Angels who know the founder(s) or are one or two degrees of separation away. These angels have known you for a while, like you, and basically are betting on “you” along with what they perceive as an interesting opportunity.  These relationships are business, personal, or both. And this is where there is a wide variation—I’ve seen some entrepreneurs quickly raise $200k from their network. On the other hand I’ve seen young, smart entrepreneurs with potentially interesting ideas who unfortunately don’t have a network, and struggle to raise money except from their closest friends and family.
  • Domain experts. These are investors who are working in the entrepreneurs’ space (retail, marketing, EDA, online advertising, restaurants, you name it), and can easily identify both emotionally and intellectually with the problem being addressed. You don’t need to convince them that there is something worth solving.  Having said that, many domain experts in the Boston market seem more willing to serve as advisers than as angel investors.
  • Most check sizes I see are between $5k to $100k, typically $15k – 25k.

Angel groups will invest at this level, although I’d say most tend to look at the next major funding gap—the early go-to-market stage. Venture firms are less likely to invest at this stage. It’s not that they don’t do seed investing, it’s just not their “bread and butter,” as one general partner put it to me recently. And for some VC firms, seed stage investing means funding an entrepreneur they know well who has made them money before.

Aside from money, I cannot underscore how important mentorship and learning from role models are in these early company creation phases. I loudly applaud David Cancel’s efforts to bring modern day mentors to Boston to help young local entrepreneurs. And at TechStars (where I am a mentor) the effort at energizing a terrific mentor base in Boston has been amazing.

Next Stage—Early Go-to-market

Okay, product built (alpha, beta). Consumer, SMB, enterprise app launched.  Founding team in place. You might have some early customers (paying or not paying).

At this point, many IT companies, particularly Web-based startups, will still be in an experimentation phase that can be financed in an efficient manner. And by efficient, I mean with somewhere between $250k to $3M (typically $500k – $1.5M), not $5M or $6M (I’ll post at another time about capital efficiency). Your challenges and goals at this point are:

–        Take the product/service out to the selected market(s)

–        Refine the business model, sales/marketing strategy, service delivery model, etc.

–        Continue to refine the product

–        Undertake the next level of critical hires

–        Figure out whether there is a scalable business with a big opportunity that you have a chance of winning at (current working assumption)…or is this a smaller business with a more modest exit scenario, and what do you need to do to position the company for this?

There isn’t necessarily a clear transition point between stages one and two—as with most issues in company creation, the lines are blurred. But if you have found yourself looking to raise more angel money as you move into the go-to-market phase, your options become wider (but not easier, unfortunately).

1. Individual angels. At this stage you’re still probably looking at your close network, perhaps extended by one or two degrees.  There are lots of individual IT angel investors around town—some very prolific, such as Joe Caruso, John Landry, and Jean Hammond—who are well known and terrific investors/mentors. There are also a lot of mentors who, while not necessarily likely to invest, can be very helpful on both business and financing advice, and making the necessary investor connections.

As noted, the extent of your personal network again is very important. Network heavily; leverage the law firms around town who are in the “deal flow” and know angel investors. Ask fellow entrepreneurs. You will find that angel investors come in many flavors:

–        Experienced, invested in many startups

–        Inexperienced, heavy handed, potentially tough terms

–        Make quick decisions

–        Take forever to make decisions

–        Interested but wants a “lead” investor

–        Wants to be actively involved in the company

–        Could care less about day-to-day management

–        Invests based on “who else is in the deal that I know and trust,” i.e. the “social proof”

–        Invests based on their overall “asset allocation” or have some “high risk” funds that they are prepared to invest out of

–        May or may not write another check (i.e. follow on)

–        Will invest in convertible notes

–        Will only invest in priced rounds

As you pull your round together, a good piece of advice is to find a sophisticated lead angel or angels who can help you craft the deal and lead the round.

2. Angel groups. Groups are very active in New England. You can find a list of groups at Angel Capital Association and Xconomy also has a good list here.

Angel groups in New England vary in size and focus. Check out their websites to get a feel for the membership, types of investments, criteria, and process. Then network around town—find someone from the group you are interested in and talk to them to better understand their process and whether your startup might be a good fit for them.

As a general observation, I’d say the groups are filling an important capital gap—financings between $250k and $1 to $2M. These are financings around “go to market” and typically provide runway for 6 to 18 months. I’ll blog at another time on angel groups, but my rough back-of-the-envelope calculation is that Boston area angel groups have probably invested around $30M+ in local startups over the last five or so years.

Going to a group may seem intimidating, but they offer the benefit of a centralized process and provide momentum to get a deal done. In contrast, talking to individual angels one at a time means you need to build your “sales funnel,” keep replenishing the leads, figure out closure rates (i.e. I need to talk to 6 angels to close one)—all of which takes time and effort.

With groups, you will find the initial screening is based on whether there are members who know your space. For example, at CommonAngels, if it’s a startup in cloud computing I’ll pull in John Landry; for online display advertising, I’ll ask Jay Habegger (CEO OwnerIQ); for digital media; Steve Woit (publisher of Xconomy); for lead gen, Dan Kaplan, (founder of; for energy IT, Martin Flusberg (CEO of Powerhouse Dynamics); etc.

Raising capital in either stage can be challenging. The good news is that there are active, enthusiastic, experienced angel investors in Boston who are willing to help local IT startups, with their time and advice if not always with their money.

Chris Sheehan is a managing director of Lexington, MA-based CommonAngels. Follow @

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