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The reality of Profitably raising money from angels and VCs in New York

Image representing Profitably as depicted in C...

Adam Neary wrote an unusually open post about his experience raising $1.1m for Profitably, a provider of small business analytics. (Disclosure: I’m a Mentor for Founder Institute. Adam was one of our star students from the first class in New York, when Profitably was just Adam, a Powerpoint, and a really amazing domain name. I also have a very small stake in Profitably from this past relationship.) I think Profitably’s service makes a lot of sense, and even referred my mother’s company, DanceTime Publications, and my uncle/cousin’s firm, Architectural Designs, as beta clients. Adam’s done a great job building up the company.

His post prompted a productive discussion within the leadership of HBS Angels about how we can create a much more positive experience for our applying companies. Among other things, Adam writes that “The bad news was that we didn’t have a lot of transparency into who was in charge of beating the drum and driving participation within New York Angels [a prominent NYC angel group whom he was approaching]”.

One of our members observed that the onus is on the entrepreneur to understand how the vast majority of angel networks work: they merely expedite investment and do not invest collectively. The NY Angels website says this clearly. However, another member said, “I guess I view this through more of a "customer is always right" lens. It seems in this case, for whatever reason, language posted on [NY Angels] website wasn’t sufficient. And the consequence of the communication gap was a blog post that cast them in an unfavorable light.”

For HBS Angels, we particularly want to strive to move quickly on investments. By the nature of angel networks, that will be challenging. We think that effective use of our technology stack (Angelsoft, BasecampHQ, Dropbox, etc.) will help to keep our virtual operation running smoothly.

We are discussing drafting an ‘entrepreneur bill of rights’, similar to Accolo’s jobseeker bill of rights, which we all then commit to executing. We welcome feedback on how we can run the most entrepreneur-friendly angel network.

As a separate topic: Adam commented that he got negative feedback from some investors on Founder Institute’s warrants in his company. As a general principle, I find that later investors typically have little appreciation for the employees/consultants who came in early but are now less involved. The latest investors realize that the money/time the early investors and employees/consultants put in is a sunk cost, so they’re always trying to shrunk down their percentage. By the nature of its business model, Founder Institute is typically signing with an entrepreneur before their idea is fully baked and often before the entrepreneur has quit his/her prior job. So a structural challenge they have is that they’re very early money, with an unusual structure, and typically there won’t be someone at the table fighting for their rights when later money comes in.

As a several-time Founder Institute mentor, I do firmly believe in the logic and value of their model. Adeo and the team have built a really impressive, highly international organization in a remarkably short time. I encourage entrepreneurs who are looking for some extra help in building their firm to actively consider Founder Institute’s services, along with the numerous other incubators/accelerators available to entrepreneurs.

(Image via CrunchBase)

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Comments

  1. Adam Neary says:

    David,

    Thanks so much for bringing our lessons to the new HBS angels group. I sincerely believe that the experience is driving great improvements to process down here, and if the same lessons come are applied up there, all the better!

    In terms of the NY Angels advertising that everyone would be investing individually, that was very clear on their site, to your point. I think what wasn’t clear was (a) how long the process would take and how many steps would be involved, and (b) once a term sheet was offered from the NYA what the process would look like for drumming up participation among those individuals.

    If, to your example, HBS angels puts entrepreneurs through a 13-14 week process including negotiation and elaborate due diligence, then even if individuals decide for themselves, there should be some sort of expectation that a sizable slug of cash will come out of the process (i.e. more than $25k).

    If, in contrast, the forum is just an opportunity to introduce individuals to entrepreneurs in a pitch format, then that can be relatively compressed (online app, in-person prezo, done and done).

    Hope this helps the process as you guys structure your offering!