Investing in over 150 startups – Lessons from Angel Capital Association’s Marcia Dawood

Marcia Dawood has invested in over 150 companies (!!). She’s a Venture Partner at Mindshift Capital, and the future Board Chair of the Angel Capital Association. Today, Marcia shares tips for demystifying angel investing, overcoming the fear of writing your first check, how to get access to deal flow, and why angel investing can mean so much more than just a potential return on investment.

Links from some of the companies, events, and people Marcia mentions:
ACA 2021: The Summit of Angel Investing, May 4th-6th
Portfolia
Investors of Color
Eli Valasquez
Catherine Mott

Transcript

Voiceover: Welcome to First Check, a podcast so you can learn how to be the next great venture capitalist or angel investor.

You’ve seen the Uber’s, Google’s, and Pendo’s of the world; the 10 X to 100 X returns. And you want to know how you can get in on the action. As a partner at Cofounders Capital, Host of First Check, Tim McLoughlin has invested over $43 million in startups. And on this podcast, he’s going to share with you what works and what doesn’t so you can be ready to write your first check.

On each episode, Tim brings on investors and founders so they can tell you the ups and downs of venture capital and what lessons they’ve learned along the way. Today’s guest is Marcia Dawood (DAH-wood, not DAY-wood), board member of the Angel Capital Association and partner at Mindshift Capital. On the show, Marcia shares tips for demystifying angel investing, overcoming the fear of writing your first check, and how to get access to deal flow. Here’s the host of First Check, Tim McLoughlin.

Tim McLoughlin: Marcia, thanks so much for joining us today.

Marcia Dawood: Happy to be here.

Tim McLoughlin: All right. So, I think I read somewhere, or I heard somewhere that you’re invested through funds or personally in like, 150 companies or something? Is that accurate?

Marcia Dawood: Yeah. So, I’ve been doing it a little while, almost 10 years now, and I really have this passion for helping underrepresented founders, A; so, women, people of color, people who just don’t have means to kind of get started. And I also love the fund model. I love when funds are able to pool money together and then find the investments of the companies where we want to see change in the world. So, if people want to see change, the only way that they can really do that is to kind of put their money where their mouth is.

Tim McLoughlin: That’s so great. We’re, we’re speaking the same language, so that’s awesome to hear. So. So Marcia, 160 companies, do you remember your first angel check?

Marcia Dawood: Oh, absolutely. Yes. I feel like a lot of times when angels first learn about angel investing, every entrepreneur you talked to, you’re like, “I love you! That’s the best idea I’ve ever heard!” And then you’re like, “I of course want to write a check!” And you’re like, practically crying. And then we learn along the way that you actually have to ask some questions and maybe even try the product before, to make sure it works and, you know, things like that.

So the first company unfortunately did go out of business that we wrote a check for. But very quickly, we wrote two or three checks pretty early in the process. I had no idea what I was doing. And at the time I got introduced to angel investing because my husband is in finance.

And I thought to myself, well, maybe it’s just me, because I was in marketing and sales and operations. Maybe I just don’t know, you know, these terms. I’m hearing people throw these investing terms around. So, in the very first meeting, I lean over to him and I’m like, “What does this mean?” Like, “What’s a convertible note?”

And he’s like, he’s like, “I have absolutely no idea.” So, we kind of learned quickly that, like, we really didn’t know about angel investing so much. So, that’s the power of investing with a group, or investing through a fund. Because you have the power of people who’ve done it before.

Because looking back, I kind of wish I hadn’t made some of those earlier investments, but the good news is I did have the very first check that I wrote. That one I did, at the same time, it, it didn’t go very well. But the second one just had an exit in 2020. So, 2012 to 2020, and now, finally, did exit for 3X. Which, hey, I’ll take a 3X over 8 years. Not the best IRR, but not terrible. So yeah.

Tim McLoughlin: Well, well, good. Well, at least that 3X makes up for the first check too, so.

Marcia Dawood: That’s exactly right.

Tim McLoughlin: Well, hopefully. I don’t know what the amounts were, but hopefully–

Marcia Dawood: No, no. That’s about, that’s about right.

Tim McLoughlin: So, tell us about your work with the Angel Capital Association. What’s the mission there? And obviously, you’re passionate and you’re involved. And so, what are you driving the Angel Capital Association to do?

Marcia Dawood: So, the Angel Capital Association is the professional society of angel investors across the U.S., but also across the globe. So, we have members mainly in the United States and North America, but we have opened up our membership now to international members as well.

So, we’re excited about that. And our mission is to do a couple of things. First, to educate, to bring people together. And, to really be the gold standard for where people want to come when they want to know about angel investing. We do also do some public policy work in Washington, DC. And I won’t get into all the details because I don’t want to bore our listeners here, but, there is a thing called an “accredited investor;” a definition, meaning you have to have a certain amount of income or wealth in order to be an angel.

And that is all driven by SEC guidelines. And it’s important that our Congress people know just how many jobs are created by angel investments. And therefore, making sure that that definition stays intact or even gets expanded. And that’s some of the work that the Angel Capital Association is doing.

But really, my mission as a member of the board, as just an angel investor in the world, is to help get more people to know about the asset class and want to participate. It is an asset class that is risky. A lot of people will lose money just like I did on my very first investment.  But, you don’t do it for just financial returns.

There can be financial gains and you can see lots of examples of that through people who invested in things like Google and Facebook to start out. Also, Home Depot is another angel-backed company that people don’t think of all the time, but there are different things that you do in order to be an angel that don’t necessarily have to do with financial returns.

A lot of that could be, you want to create jobs, you want to use your knowledge from all of the different things that you’ve done in your own career and pass that on to somebody who’s trying to start a new company. And maybe you’re very passionate about something that somebody is doing.

Tim McLoughlin: Yeah, two thoughts there. The first is, I attended an event you host; a virtual event, which was called, “Demystifying Angel Investing,” last week, which I thought was great. And you had a couple of great guests on that were explaining angel investing. And I mean, the title of the event was great, “Demystifying.” Just how to get started and, and really greasing the skids, I guess, for somebody to be able to get into angel investing. What are some of the biggest hurdles you find from folks that want to be angel investors, but they’re a little hesitant to write that first check?

Marcia Dawood: Yeah, that’s a great question. I think there’s two big things. One is, people think they don’t know enough to write a check, or to be an angel, or that they need to have all the information, which is really why I highly, highly encourage people to get involved with a group. And actually watch for a while. Don’t write a check for at least six months or even longer. If you want to wait, it’s totally fine.

But learn about it. Do other things to get yourself acclimated in the community and just starting to get to know more about entrepreneurism and what entrepreneurs need. They need more than just money. They need mentorship, they need people’s networks. If they just open their Rolodex, that’s huge to an entrepreneur. So, that’s one, is just people feeling more comfortable about, you know, “Oh, is this a good company or not a good company to invest in?” And then the other thing is just time. People think, “Oh, I don’t have enough time to do that.”

And in a lot of cases, like I talked about with funds, you know, funds can be a great way for somebody to get started. There’s a group called “Portfolia,” which I’m an investor in the parent company and also in many of their funds. But for as little as $10,000, you can get exposure to 10 different companies.

And, you know, in that case, somebody could get started. They get to diversify by having, you know, different companies. And then they also get to do things like network with other people, they get to learn about the different companies that are being invested in, and they get to, kind of, watch along the sidelines as some of the experts are starting to make those investments. And then they learn.

Tim McLoughlin: Yep. A large percentage of our LP’s, limited partners, AKA investors, in our funds at Cofounders Capital are also angel investors on the side. And a lot of times, it’s a collaboration of us talking to them, them talking to us about best practices, you know, sharing industry expertise and knowledge, and having them be kind of part of that network so we can just leverage each other’s resources, knowledge, experience to make good investments. So, I think that’s great.

Marcia Dawood: Exactly.

Tim McLoughlin: And I assume that the other piece of that is deal flow; when you want to see a lot of deals so you can pick the best deals to invest in. How do you recommend that maybe outside of a group or maybe it’s just joining a group, getting access to that deal flow if you’re not in the early stage investing game?

Marcia Dawood: Very interesting question, especially post-COVID. Because nowadays, you can go online and find lots of things that are going on in angel world where you might not have found that before because people were not online. They did everything through dinner meetings, and in-person meetings. And COVID has really forced people to start to put things online. And I’ve heard from many, many angel groups that they will not go back to all in-person, really ever. They will always have at least a hybrid model so that their members and potential members can get a look at what they’re doing. So, from a deal flow perspective, I always encourage people of course, again, join a group, join a fund.

In a lot of cases, people do want to be in a group that is local. And when we finally get, kind of, let out of our lockdown, we can hopefully go back and start to have in-person meetings again. And that’s great. Another reason why, is because you want to help your community and you’re trying to build businesses in your own backyard. And that’s important too.

So, if you are looking. If it’s somebody who’s listening has, thinking to themselves, “Gosh, I’d really like to get involved, but I don’t know how, or I don’t know what to do,” just literally, you can go right to Google and put angel group in, and then whatever your city or area is. And you will likely come up with something and you can start to talk to that group immediately. And, you know, see where they are and from there, you’ll find lots of other things.

Tim McLoughlin: Yeah, that’s great. You’ve mentioned a couple of times, maybe some flexibility around what angel investors want to invest in. And I, I always talk about, you know, having multiple value props when someone comes and pitches and investor. The first is, which is normally table stakes, but not always, is we’re going to make you a great financial return or a good financial return.

But then you can get into that second value prop to the investor, which is and you’re passionate about investing in underrepresented founders, in women and founders of color. Or, you’re interested in investing back in your own backyard. That’s envious to me a little bit running a fund that has a very set thesis, whereas an angel investor can have a lot of flexibility in value prop two and value prop three; what means something to them and why they’re writing checks. And you mentioned it. Any other things you’ve seen among angel investors you work at, that they really care about and are passionate about?

Marcia Dawood: Yeah. It’s funny you say that when, when there is a fund. So for those listening, a fund has usually a very specific thesis. Like, you’re going to invest in medical devices or you’re going to invest in women-led companies that are doing healthcare or something that’s much more specific. So, your deal flow is limited and you’re looking out much broader. It’s not so geographic. But, it’s important to think about all of the other things that you can do as an angel by yourself.

I always say, whatever my thesis is, even if I tried to write down what my thesis was, I would blow it every time. I would literally, like, I would say, “Oh, I’m not going to invest.” I do this thing, it’s like, “Oh, I’m not going to invest in pharma,” which is like, in a pharmaceutical company. Mainly because they’re high dollar, you know, they take a long time, you have to go through all of this FDA clearance, stuff like that. “No, I don’t want to invest in a pharmaceutical company.” What, what happens a month later? Somebody who’s doing pharmaceutical summer and other, and, “Here I am!” You know? So, I mean, it doesn’t matter.

I usually blow my own thesis, but, angels can really pick the areas that they want to invest in. And so, for example, I really have no business investing in things that are really healthcare-related, just because that’s not my background. So, you know, if I’m going to do that, that’s fine. But I really should definitely make sure that I’m partnering with the people who know about that because I’m not an expert in that field. But then other things that I’m a little better at, maybe then I can offer some, when, during the due diligence process, I can offer some of that expertise to the group of investors who are looking at the company, because I may have some background there.

So, it’s just a matter of really, what do you like? What kind of things do you want to see change in the world? You really need to, want to back the companies where you want to see change, because then, if the company doesn’t necessarily get to the endgame where you want it to, you know that you made a difference.

Tim McLoughlin: Yeah, that’s a great point. Yeah, even if you don’t get the return on capital, you still, you still maybe change the world a little bit. All right. You change some lives, you’ve created some jobs, you did a lot of other great things. So, one of the things I do like about you know, managing a fund is it keeps me very focused on the deals that we’re looking at.

So B2B software, seed stage, it helps me hone in and kind of weed out the noise early on when a deal comes in. But for you, who can have a changing, you know, a fluid thesis as you go through this, how do you put that initial screen on deals to make sure you’re just not overwhelmed at all the opportunities?

Marcia Dawood: That’s, that’s a good point. I do feel like even post-COVID, I’m still having like, tremendous amount of deal flow. Really good. And getting to know a lot of the things that are going on out in the world, but I would have to say that the investments I’ve made in the last few months were in companies that I’ve known for a long time. So even if I wasn’t, maybe I didn’t put a check in when I first met them really, really early on, I kept in touch. And we, you know, I did some other things, maybe some mentoring or helped

make

some connections for them. And then that is how I ended up keeping in good graces with the company so that when they got a little more advanced and they had a round, a funding round that was open, then I could invest at that point.

Tim McLoughlin: So at Cofounders Capital, our last two investments we made, we made one in December, 2020, and one in January, 2021. We hadn’t made an investment in about nine months before that, during COVID. And the two companies we did invest in, we didn’t meet in person because we had known those companies for about two years before that.

And timing wasn’t right at that point. But timing became right down the line. So just like you said, your last few investments were people that you had known for a really long time. And I, I think this is a lesson that maybe goes both ways to entrepreneurs and investors is, you’re saying no way more frequently than you’re saying yes.

Maintain those relationships. As an entrepreneur, you’re hearing no way more than you’re hearingyes Maintain those relationships because timing, timing is everything, right? As you go through this. And I’m sure you’ve seen your fair share of entrepreneurs that maybe blew it when they heard “No,” and gave themselves, gave up a chance of ever raising capital again.

Marcia Dawood: Yes, I have had that. I’ve had a couple of entrepreneurs that hung up on me. So, that wasn’t so nice.

Tim McLoughlin: That’s not good. Yeah, that’s not going to get them to check the next time. And the other thing to that is, you know, investors talk to each other. And so, they’re going to reach–

Marcia Dawood: Yep, we do.

Tim McLoughlin: They’re going to reach out to each other for, “Why did you, or did you not invest in this company?” And there’s been certainly plenty of companies that I’ve talked to, then I pass along to another investor and said, “We’re not investing because of X reason, but you really should take a hard look at this.” And, and that’s the kind of outcome I think an entrepreneur wants, even if they hear it now.

Marcia Dawood: That’s right. Yep.

Tim McLoughlin: So, I want to think back to your, your diligence process as you’re doing your diligence on the company.  Are there any “No-goes” for you when you see a company? Is there something in the early stages of having a conversation with them that’ll just make you stop right there and save a lot of time of moving forward with an investment?

Marcia Dawood: Well, my thing really is about the entrepreneur’s time. It is so, so tough for entrepreneurs to fundraise. It takes, literally, it is a full-time job. And they’re trying to get their company off the ground. So, anything that I can do to make their life easier, to not have to answer so many questions. So like I said, I very rarely, if ever, would just find a company and invest in it by myself. I’m always working with other people, either with another group or with one of the groups that I’m involved with, or a fund, or something like that. So, there’s always multiple people, but I try very hard to pick a person who is the point-person for that entrepreneur.

And the only questions that then get asked the entrepreneur in the diligence process, go through that one person. Otherwise, this poor entrepreneur has like a hundred people asking them questions and they’re repeating themselves over and over again. So, if you have entrepreneurs that are listening on this call, I will tell you one of the best pieces of advice I can give is make a frequently-asked questions sheet, then video yourself talking about it and answering the questions and give that to people ahead of time.

Because this way, when they ask you a question, you give it to them, then it doesn’t sound as good. But if you give it to them ahead of time, then people are like, “Oh wow, they’re answering my questions before they even knew I had them.” It’s a beautiful thing. So, really diligence can be an easier process for entrepreneurs if they kind of put all of the things that they think people will ask them upfront, then it goes much smoother.

Tim McLoughlin: I often tell entrepreneurs when they’re asking for money, when they’re asking for an investment, to put themselves in the investor’s shoes. Does that investment amount make sense into that sector at that stage? So if you look at somebody that has a, a fund, like we do, you know, raising $50,000 from our fund might not make sense for us because of the number of checks we would have to write. So put yourself in the investor’s shoes. But the investor, it’s just as important. Put yourself in the entrepreneur’s shoes.

If they’re raising a $300,000 round and you’re considering a $5,000 investment into their company, how much time of that entrepreneur should you be taking? And how do you help them through that process?

Marcia Dawood: Exactly. Yes. And once you’re an investor, it is, it’s the same on the other side of the check too. Because it’s a marriage. This is a long-term relationship that you’re having with this person or team as far as the company is concerned. You need to have a good relationship going. And the, the time that you’re writing the check is when everybody’s on their best behavior. So after that, you also have to take into consideration, you have to be just as nice, you know, on the backend.

Tim McLoughlin: What, what have you done, so this, great segue into the next question, what have you done to make sure that you have the appropriate amount of information, post-investment, without getting overly involved in companies that maybe you’re a small minority of the cap table?

Marcia Dawood: Ugh, this is a toughie. KPIs are very important. Getting to know exactly what it is that the company’s focused on. So, if you establish that upfront when you are making an investment, then it’s much easier for the company, for you, to know how they’re doing. It’s some kind of a benchmark that you can go up against so that when you’re getting their newsletter and you’re getting their financial reports at the end of every quarter, you hope, fingers crossed, that you can go and look at where you thought they should be to where they are. And you know, that to me is a good way to keep your investors engaged, but yet, not have them asking you a thousand questions. So, you know, by the time that an entrepreneur gets to like, a series A raise even, which isn’t that far down the road of their life-cycle, they could have 80 to a hundred investors, and depending on how they took their investments early on.

And trying to appease all of those people, the best thing that you could do is be very proactive. Put out a quarterly report that essentially tells them, what’s going on? What happened? Where are you with sales? Or users? Or whatever your metrics are? And then letting them know, basically, how much cash do you have? When are you going to raise again? And you know, what can you do to make whatever it is that you’re doing be that much better? And what do you need from them? Ask your investors for help. Ask them for intros. Tell them that you’re hiring somebody for sales and you need help finding the person. Any of those things. Investors will get involved and they’ll help if you ask.

Tim McLoughlin: There were a couple of things that you said that are so great. And it’s the, what’s the good? What’s the bad? What’s the ask? Because if you ask your entrepreneurs for help for a year or two years, even when things aren’t going wrong, if they never gave you any help, it’s kind of hard for them to come back and be really upset with you.

So give them the opportunity to be able to help. The other thing that I heard is, you want a proper cadence of sharing information and a consistent cadence and consistent information that you’re reporting back. So, if you’re an early investor in a company, maybe tell them the cadence that you’re expecting.

Is it monthly? Is it quarterly? Is it, hopefully, it’s more than annually, but, tell them what you’re expecting, and then I like consistent information back from the entrepreneurs. And requesting that upfront, which is, “Hey, if you’re going to report on revenue or number of customers, let’s report on revenue and number of customers the next time I get an update. And like you said, it’s all about the benchmark. And then finally, last thing is, where are you at on cash? When are you going to be raising again? I know you’re going to be coming to me for another check. So I like to be able to have some insight into when that is and when I need to be prepared for it.

The hardest thing for me as an, as an investor is a company you’ve already invested in. And they, they need capital. And, very rarely does anyone come to you and say, “Don’t worry about writing me another check, the business isn’t going to work. I’m done.” More frequently, it’s, “I just need another couple of months. I just need to close this one deal.” So, as an angel investor that’s in so many deals, how do you start thinking about when to say no and when to cut your losses?

Marcia Dawood: Ooh, that’s a good question. When to say no before, or once you’ve written a check, you’re talking about?

Tim McLoughlin: You’ve already written a check, you built the relationship with the entrepreneur, they’re working their ass off, and they’re running out of money, and their story to you is, “I just need a little more capital.”

Marcia Dawood: Yeah. So, I will say that it is important to have a board at any point in the time of your life cycle as a company. A board of directors is important. And as an angel investor or a fund person, any investor in a company, you should be wondering who that board is? Who’s it comprised of? And then, what are they doing? Because there’s three things that a board needs to always be talking about. One, you’ve already mentioned, which is, don’t run out of cash, like ever. And if you’re about to run out of cash, that’s already a problem. So you need to have a good 12 months of runway in the bank at all times.

But the other thing that a board needs to look at is, do you have the right management team? And that could even be the CEO and the founder. Like, I’ve seen companies where the founder needed to be replaced and if that, if that’s what’s needed, the board needs to be on top of that. And then the other thing is, what’s the exit strategy?

If those three things are talked about at every board meeting, which should be happening  in the early stages, at least quarterly. Probably monthly.

Tim McLoughlin: We do monthly after an investment, and then it goes to bi-monthly, and then quarterly is as the least frequent we would ever do.

Marcia Dawood: Yeah. That makes a lot of sense. In a lot of cases, you may have monthly meetings, but you’re still talking to that entrepreneur in-between. So I would say like, the board of directors is really important. And sometimes there, there may be only be three people on the board, but as an investor, you want to know who those people are.

Even if you can’t be on there, I can’t be an investor, you know, on the board of all the companies that I’m invested in, but I want to make sure that I know who the board members are. And at that point, I can kind of make a decision on what’s going on? What can be helpful? You know, there’s, I learned how to, I learned all about angel investing from a woman named Catherine Mott up in Pittsburgh, Pennsylvania, and she is like, a total rockstar in angel world.

And I have never seen anyone who can go into a company as a board member and make the kind of change that she can. She’s, literally has turned around so many companies and it’s  really impressive. And she taught me so much about, well, when you look at a company and, and you’ve already written that check, like, you’re in. And you know, it’s not, this isn’t something that is for the faint of heart and you have to be willing to have the hard conversations and go through the ups and downs with them. But, that’s what makes successful companies.

Tim McLoughlin: So what do you say to a founder that comes to you and says, “Hey, this is what we’re raising, but we don’t have a board right now. And we don’t want a board because we’re going to wait until our next round of fundraising.”

Yes. I’ve, I’ve heard that many times. Listen, a three-person board where you have the founder, another person on the management team, and one, one person representing the investors, is not too much to ask. So, if they’re really not willing to even do that little, then I don’t know. There’s something else wrong.

I think, one of the conversations we always have to have with founders before we make an investment is, what happens if you’re not the right person to be the CEO in a year, two years, five years? And I think it’s very fair for, for the entrepreneur to flip that and say, what if you’re not the right board member in a year, two years, three years?

And, it’s a good open discussion to be able to have, but one thing for our angel investors or potential angel investors that are listening to the call is, if an entrepreneur says that they don’t want to fill that board seat because they don’t think it’s going to be the right long-term person, let them know that there can be terms on it. Let them know that somebody can roll off the board; that there are mechanisms you can put in place to kind of control that.

Marcia Dawood: Absolutely. Yeah. It’s very important that people realize that, you know, you want to pick the board members that you need in your company. So for example, I’ve been asked to be on boards before where I actually said to the founder, “I don’t think I’m the right person for you. You already have somebody who knows about fundraising, or knows about this, that, or the other thing. You need somebody who knows your industry or knows this, that,” you know, it’s not always the person who’s writing the checks.

And sometimes you need an independent board member, somebody who, who really isn’t tied to the fundraising, who, who will just literally take a look at the company and say, “Hey, this is what we need to do in order to accelerate,” especially when you’re dealing with companies that have to do with very complicated supply-chain or, or things that are very complicated.

Tim McLoughlin: We have a company that’s raising another round of financing and we’ve quickly moved from a software product to moving, going down the FDA path. And I’m on the board there. And I know nothing about going down the FDA path. And I had to raise my hand pretty quickly when we were making some big decisions and say, “Someone needs to come and we need to change the board structure. it’s a different company now than when we invested. And let’s get the appropriate experience on the board at this point.” So.

Marcia Dawood: Yes.

Tim McLoughlin: So, you’ve made 160, you’re in 160 deals, whatever that number is; that big number. Some of them have worked out pretty well, I assume, I hope. You’re still doing it, so that’s good. Characteristics of good companies or entrepreneurs that you’ve seen as you’ve seen, you know, just so much data that you have. What’s the consistency and characteristics of the good deals?

Marcia Dawood: Strong team, number one. That’s always important, having the, the founder and the person who’s kind of the brains behind it, whether it’s a science or it’s a product or whatever it is,  you need to have that person surrounded by the right people.

And, I would say a lot of it has to do with like, staging too. You know, being realistic about how long it’s going to take to get to a certain point, how much funding you’re going to need, who are the people that you need to have help you to get to that point? Not, not from a funding perspective so much, but who are you going to need as far as advisors?

Some of the best companies I’ve seen put a rockstar team of advisors together before they even put a board together because they’re trying to show, “Look, I know that I don’t know how to scale a food company where I have to do co-packing and all of a sudden I need to get into like, whole foods and,” whatever. You know, the story is, and all of the things that they’re trying to do, you need experts for that. So, surrounding yourself with a advisory team is really important as well.

Tim McLoughlin: That’s great. So, tactically, when you start writing these, these checks, one thing I learned on the Demystifying Angel Investing event last week was about the diversification and the number of companies that, where diversification starts, and it doesn’t end. Just, just continuing that trend. But do you have any recommendations on when angel investors are looking and want to get into 20, 30 companies, diversify their portfolio? Should they be changing the size of the checks that they’re writing? Should they rewriting similar size checks? Should they only be looking for deals at a certain stage? What are your thoughts? How you handle that?

Marcia Dawood: So, I would say for every person it’s probably different. And I say that because again, angel investing is a risky asset class. And you should really only be investing money that you don’t need right away. It’s not liquid. It’s not like investing in the stock market and saying, “Oh, I’m just going to go ahead and sell those shares of whatever stock and be able to take them out of my account.” It doesn’t work like that. So, you need to be able to put the money to work for a while. It’s patient capital.

So, it is important to think about how much of your liquid assets you are going to put there because they will quickly become e-liquid. So, that’s also a big part of how you make the decision. If people want to get into multiple companies and have that diversification, it’s important to make sure that you are invested in funds, in my opinion.

I mean, unless you have just, gobs of money, which most angel investors do not. We are not like the people on Shark Tank who have planes and billions of dollars or anything like . That. We are literally like the people next door who are just trying to help in their community and want to put some money to work with companies that are in really early stages.

And it’s a private company. That’s what makes it an angel investment, meaning that you can’t go do on E-Trade or, you know, Trade it. But it’s important to try to get as much diversification as you possibly can. And that’s how you end up being able to kind of, hedge those things like I talked about earlier, where I lost all the money in the first company I invested in. But a fund will do that.

A fund will help you to get more exposure. And, you know, they used to say, they used to say back in the day, when I first started doing angel investing, about 10 years ago. They’d say, “Oh, well, you should be invested in at least 10 companies so that you have like, five that’ll go out of business and then three that’ll do okay, and then two, that’ll kind of be your better exits and you’ll get a certain amount of return from that.”

But honestly, nowadays, I just don’t think 10 is enough. It really has to be more like 20 or 30. And that takes time. And so, you know, places like your fund, Portfolia I mentioned. I’m also in a group called, “Next Wave Impact Fund.”

I mean, there, there’s all kinds of things kind of all over the country nowadays and ways that you can get involved. And, that’s probably the best way if you’re new, to just get to learn.

Tim McLoughlin: And one of the things that a fund has a ability to do maybe is, is project a little bit more around follow on capital; how much money are you reserving to protect your investment down the line.

Marcia Dawood: Yeah, we could have a whole episode on follow on funding.

Tim McLoughlin: Hey, maybe we, maybe we will? Hopefully, you know, hopefully First Check will be here for a while or we could do this again.

Marcia Dawood: Yeah. That’s true.

Tim McLoughlin: One of the hot topics in investing VCs is DEI initiatives, diversity, equity, and inclusion. We’re making efforts at Cofounders Capital, we’re talking with entrepreneurial communities about how to get more underrepresented founders, capitalize growing their business. What role do you think angels play in that? Obviously it’s something you’re passionate about.

Marcia Dawood: Angels play a huge role because of all of the companies that end up getting funded, 90% of the companies are angel-backed. And then it’s only like 10% of companies that ever get all the way to a true VC level. So, angels play a huge role in that and I started a group within the Angel Capital Association. We call it “Growing Women’s Capital.” And I started about three, four years ago. And it is a way for all of the groups within the U.S. to get together.

We get together once a month on a zoom call. We’ve been doing it this way for the last four years. It wasn’t because of COVID.  And we showcase different companies that are women-led. And we just had a call actually today. And we were able to see three different companies. We had 40 different groups on the call.

So that’s, that’s a pretty neat power to have. And, we’re going to keep doing that and, you know, put together, there’s also a group called, “The Investors of Color Network,” led by my buddy, Eli Velasquez, up in Boston, and Samer Yousif, and those two have really put together a nice network for people of color.

So it’s, we just have to keep having the conversations that these groups, you know, underrepresented founders across the world, are creating the companies where we want to see change. And if we want to keep doing that and keep seeing the change, we have to keep backing them.

Tim McLoughlin: One of the things that, one of the initiatives that we’ve tried to take on was how do we increase deal flow from underrepresented founders that hopefully our, our portfolio mirrors the percent you know, of the deal flow that we see. One of the challenges that we’ve seen is, a lot of the deals we do have raised significant friends and family capital. Or some smaller, early round before we get in. And so, when you look at a wealth gap that might exist early on, it’s just, that angel investment, increasing the number of angels that are writing checks at these earliest stages, is going to really help that get more deal flow to the later stage investors that can write bigger checks and help these companies grow in scale. So, I applaud your initiative.

So, all right, you ready for my hard-hitting final question here? You got this. So, here’s the hypothetical. You’re personally going to make an angel investment. You meet with 10 companies and have to write a hundred thousand dollar check into one of the 10, but you only get to ask one question to each company. What is the question that you ask?

Marcia Dawood: Tell me about a recent act of kindness that you’ve done.

Tim McLoughlin: Wow. That is a great answer. And what are you hoping to get out of that response?

Marcia Dawood: So, if, If you’re truly looking at angel investing for more than just the financial returns, every angel that I’ve talked to tells me all of these different reasons that they’re angel investors and most of them come back to, they really want to support the entrepreneurs.

They want to pay it forward. I hear the words, “Pay it forward all the time.” And so, I would hope that in the company, since, since I’m only allowed one question, you know? And trying to pick, “Oh, do you ask about the team? What’s the product? What’s your scalability? How many people, you know? You could ask a thousand questions, but since you only have one question, I’d really like to just see from the entrepreneur standpoint, you know, how are they thinking about giving it forward. And, as an entrepreneur, even if you’re scraping and trying to raise money and doing other things, they’re probably still thinking about what they can do. And in a lot of cases, their answer could be, “Hey, I’m paying it forward because I made a product that’s going to change people’s lives.”

Tim McLoughlin: Cool. That’s a great answer. Well, Marcia, listen, hopefully we can have you back on someday to, we have a couple of other topics that we need to dig a little bit deeper into, but, thank you  for coming. And if anyone wants to learn more about the Angel Capital Association, where should they go?

Marcia Dawood: Yes. So, the Angel Capital Association can be found on the website, angelcapitalassociation.org. And there are a couple of things that I’d love for the listeners to know. One, is that we have something called angel university, which allows people to learn more about angel investing through very basic up to more advanced courses. But the big news is we are having a summit. And it is a virtual summit.

There could be a tiny hybrid of in-person with it if we’re allowed to open up by the beginning of May, but for the most part right now, it’s virtual. And it’s May 4th through the sixth, and we are going to be doing some really interesting things to let people who have never done angel investing before learn more about it. And it will not be an all-zoom, kind of crazy, conference like people have seen. We’re going to be doing a lot of things where people can network and get to know other people. So, definitely mark your calendar, May 4th through the sixth, then come to the Angel Capital Association website to learn more.

Tim McLoughlin: That’s great. Thank you, Marcia.

Marcia Dawood: Thank you. Thanks for having me.

Tim McLoughlin: Yeah, we’ll talk soon.

Voiceover: That was Tim McLoughlin with Marcia Dawood. Like Marcia mentioned, you can visit AngelCapitalAssociation.org to sign up for the summit, and you’ll find all of the information in the show notes.
Also, for more upcoming news on this podcast and an upcoming course from Tim, sign up for our newsletter at FirstCheckPodcast.com.
And if you like this show, please subscribe, rate, and review on any podcast app, including the one you’re listening to right now – and find us on instagram or twitter, where we’re at FirstCheckPod. This podcast is a production of Earfluence. Thanks for listening, and we’ll see you next time on First Check.

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First Check is hosted by Cofounders Capital partner Tim McLoughlin, and is a production of Earfluence.

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