Navigating Risks, Rewards, and Innovations in Angel Investing with Patrick Gouhin (Part One)

Forbes Books presents the Startup Science Podcast with Gregory Shepard, brought to you by startupscience.io. Greg is an entrepreneur who's built and sold 12 businesses, a recipient of 4 private equity awards, featured TEDx speaker, and Ben Bella Publishing and Penguin Random House author. Here's Gregory Shepard.

Today I'm joined by Patrick Goohan, the CEO of the Angel Capital Association, a leading organization representing 16,000 1,000 accredited angel investors across 250 groups. With a career spanning leadership roles in major associations and nonprofits, Patrick has a proven track record of driving innovation, fostering collaboration, and advancing professional communities worldwide. Patrick, welcome to the podcast.

Thank you for having me. It's great to be here. I'm looking forward to today.

Yeah, it's really neat to have somebody that's really, really into the whole angel investing background. Let's start out with our first question. How did you change from early engineering to prepare for leadership and roles in startup and investing ecosystems? You have this engineering background, but then you seem to have gone into this investment route, and I'm just curious how that happened and what motivated you to make that happen.

Yeah, so I like to say that I'm in my third career and I haven't even got out of the A's of the alphabet yet. I started in aerospace as an aerospace engineer and then moved into automation. Running an industrial automation society, took a couple years off and ate healthier, did exercise. And my wife and kids said, geez, you should do something productive with your life. I didn't want to kind of go back to the routine that I was in. And so I found this wonderful opportunity that I didn't know anything about angel investing, but I knew how to take a kind of startup organization and institutionalize that and turn it into a professional society. So I started talking with the ACA board. The founder was retiring, and that was almost 6 years ago, and it's been a marriage made in heaven since then. Wow.

So what was the most transformational lesson you learned transitioning from technical roles to executive leadership? It's quite a shift. So I'm sure that you were able to bring some of the technical engineering background logic and way of thinking with you.

Well, you know, a lot of it was the engineering, you know, community based upon principles that are 300 or 400 years old. And, you know, physics doesn't change, right? You throw things up, they fall to the ground as long as there's gravity. And, you know, you get into these large engineering companies, communities that are doing multibillion-dollar activities, and everything's very disciplined, very structured approach, project management front and center on everything. And, you know, everything follows a Gantt chart. Well, moving into the, early-stage space, it wasn't that disciplined. You know, quite often you've got that minimally viable product, you put it out there, you see what the product-market fit is, and you adjust. So that was the biggest, you know, transformational change for me is understanding that all of that infrastructure around project management and being risk-averse was not baked into startup ecosystems.

That's true.

That's absolutely true.

So when you define a successful leadership role in a startup and the investment communities, how do you do that? How do you define a successful leadership role in a startup and an investment community? Like, how do you think about this? Do you think about it in terms of a successful leader is this being logical or soft skills? And a startup investment community as this being this sort of culture, like how do you go about understanding how you can apply your leadership skills and logic to this ecosystem?

I think there's a whole lot of attention by a lot of people that are a lot brighter than me that have gone into asking that question and trying to answer it over the years. But I would say to you that we still haven't quite figured it out, right? Because with These early-stage startups, there's a 50% or so chance that they're going to fail. But the number one criteria that comes out time and time again when we talk to angel investment groups relative to what's the most important thing to them, it's that founder management team and all that they have to offer. There's hard skills in there, there's soft skills too. Nobody's perfect. It's about understanding what your weaknesses and deficiencies are and then making sure that you've got a way to compensate for those. bringing in others on that early management team. It may be working with a coach. It may be tapping into your investors and where their strengths are. The number one reason we hear that companies are not invested in by angels is usually because that founder is not coachable. So that's a very important part about it, is to recognize your weaknesses, listen to others, and compensate as best you can. And I think we see Those CEOs that are doing that, those founders that are doing that generally have, you know, kind of a leg up on the others.

Let's drill in here a little bit on the trends that you're currently seeing in angel investing. Like what excites you most? What concerns do you have? And I mean, across legislation and across the communities themselves, trends, anything that you see that could affect the angel investing ecosystem in a positive way or a negative way.

Yeah, boy, there sure is a whole lot to unpack in that question. You know, I mean, if you look back at recent years, certainly we've had to deal with war, inflation, COVID pandemic, you know, related supply chain disruptions and all of those things that really took a bull market of more than a decade, 12 years or so, and brought an end to it. You know, in 2021, we just saw record years, whether you were an angel, you were a VC, the amount of capital that was there, you know, that drove up valuations to what most of my community would say were unsustainable levels. And we definitely, you know, have seen a correlation to public markets and what's going on in the VC community. But overall, angels have been pretty resilient, meaning the ramp-ups in valuation were not there. We've seen a continued deployment of capital by all of our groups. And at ACA, we've got about 250 member groups that have 16,000 investors in them. that depending upon the year, we'll invest anywhere between $500 million and $1 billion into 3,000 to 4,000 startups. So as I said, '21 was kind of the peak. We've seen a decline since then. However, now we believe we're getting back to a new normal that was pre-pandemic, and that's exciting. We're certainly seeing new sectors erupt, such as artificial intelligence, And all going on, you know, there, that does kind of buck some of the declining trends that we've seen. But overall, there's no question that the market has changed, you know, from that of the seller to the buyer, just as in real estate, meaning that, you know, '21 and before that, we really saw the investors having a lot of the leverage when it came to negotiations. Cash started to dry up a little bit and that leverage switched, you know, to the investor. And so We're kind of going through that change at the moment and seeing how that all works out. But I think there's a lot of hope for the future. Again, angels are patient capital, right? They're not watching what happens in the stock market this month because it's going to be a 5 to 10-year journey before you get that liquidity in your investment. One of the other areas that you mentioned was kind of on the legislative side. That's one of the major benefits of the Angel Capital Association is the advocacy work that we do in Washington, D.C., and really representing both investors and entrepreneurs and making sure that we, you know, have investor protection but also drive capital formation. And so we work closely with the Securities and Exchange Commission on such things as the accredited investor definition and making sure that those thresholds are maintained and potentially opened up for additional measures of sophistication. To let underserved communities in. And then, you know, there's a lot of work on the legislative side as well to make sure proper incentives are there. At the top of that list is probably what's known as the International Revenue Code Section 1202, or Qualified Small Business Stock, which provides an incentive to both investors and entrepreneurs who hold that qualified small business stock for more than 5 years. And then it is a tax-free you know, liquidity event when it does happen. There's some other parameters in there, but we would like to see enhancements to legislation such as that that would really, you know, continue to drive capital formation around the country, not just on the coast, but in every thriving ecosystem that's out there. And we work closely with incubators, accelerators, you know, the, the university entrepreneurship programs and so forth to make sure that we've got a partnership where the private investors are bringing their after-tax dollars in to leverage that innovation on a very local level. And I think all of those things give us a lot of reason to believe in a very bright future that will be filled with innovation that'll keep America competitive.

So how do you think about what's changed since you became CEO? Like, you know, not just in the market, but In terms of specific to founders and specific to angels? Like, what do you think has changed since you entered the market?

Well, you know, I mentioned that engineering is based upon hundreds of years' worth of principles. Really, if you take the angel investment community, we're talking about decades at most. ACA has only been around for 20 years or so. So really, if you think about the evolution from a black art to a science, I think that's the journey we are on, is through data analytics and through studying what's going on, winners and losers, we're becoming smarter about how we do this. And that benefits both the investor and the entrepreneurs as well. So I think that is one of the primary targets at a macro level. If we kind of bring that down to a micro level and look at specifically ACA, what's different? That is that I would say for our first decade or 2, we really looked internally, meaning we were an organization of only investors, and that's kind of where we built the walls so that we were talking amongst ourselves. And that was probably proper because we were trying to figure it all out. We were trying to write the rules of the game and figure out the best practices and harmonize against those and so forth. But then along that journey, we said, well, wait a minute, Our responsibility as a professional society is really to be the steward of the asset class. And once we looked at it with that filter, we said, you know what? We really need to embrace other ecosystem builders, others in the startup community. We shouldn't be afraid of them. We shouldn't be keeping secrets. Let's work together. And so we took the content that had been curated over 15 years or so, and we turned it into what we call Angel University, which is now a 12-course curriculum that was originally focused on investors. And then we said, well, let's open that up to entrepreneurs as well. And a really cool thing happened in that, that was this interactive conversation took place between the investor and the entrepreneur, both getting a better feel and appreciation for each other, which helped kind of calibrate their expectations. So I think, you know, if you look at a particular angel group and a founder comes in and they make a pitch, I'd like to think that now because of those best practices and the harmonization, if they find that there's an interest and they get down to looking at a term sheet, they're closer together. You know, there's not the divide that maybe there once was. Whether we talk about valuation or some subcomponent therein. And I think that's allowed us to kind of really fast-track the conversation, put more capital in the hands of more entrepreneurs earlier.

You hear this thing investability all the time, right? So is the deal investible and how do you get to investability and investor readiness and all these different terms? When you look at the qualities of a startup to make them investible. What are those qualities?

You know, that really depends upon the particular group and their investment thesis and what they are looking for. And that is to say that most angels are playing in the pre-seed, the seed, or the Series A space, not really going much above that. But there's a big difference between what they expect out of a pre-seed round and that of a seed round. But it all starts with making sure that that entrepreneur has a vision. They have a concept that there is a market there, that there is some sort of barrier to entry, intellectual property or something they've got that will allow them to kind of take this idea, this innovation, and scale it across the country, across the world for that matter. Angels are not Terribly interested in lifestyle businesses, meaning, you know, kind of the mom-and-pop shop or something that's not going to have high growth. And they want to know about, you know, that exit strategy so that the more that entrepreneur is thinking about, you know, here are the milestones over the next 3 to 5 years that I've got to, you know, drive to that will get me the revenues I need, that will get me the multiple of, you know, whatever particular sector it is that they're looking for so that there's a liquidity event. And, you know, this is a shared goal, right? Because if the founder succeeds, then the investors are going to succeed. If the investors succeed, the founder's going to succeed. And it's not, you know, the conflict that some might think based on popular television shows that, you know, show it as more of a competitive environment.

So when you think about this from the angel investor side, right, what makes a good angel investor for a startup? Like, what are the characteristics if there's a startup listening and they're raising money from an angel investor, how can they vet the angel investor? Founders also have an issue with investors that are inexperienced, haven't done it before, and they become very difficult for the founder to deal with. How would you educate a founder, hey, this is the qualifications of a good investor?

I think that is a great point because we see that all the time as it works its way through later rounds in your cap table and you've got this dirty cap table that's got investors that might have had expectations beyond the norm. So at ACA, this is a big part of what we do is we try to harmonize the community across the country, and we do it through 250 angel groups. So it's very much a team sport. We're still on that journey from an art to a science, but I think that is the number one criteria would be making sure if you're the entrepreneur you're dealing with, What I'll use the phrase professional investors, but those that are doing it following a prescribed path. And it starts with something as easy as the templates, the legal advice that you get. You as a founder might have an uncle that's an elder care lawyer. That person probably doesn't know anything about early-stage startups and what they need to do to prepare for a priced round. So it's about building that network and making sure that you're kind of following the best practices that are out there. And I think, you know, it's just like a job offer. It's a marriage between the employer and the candidate. It's no different when you're talking about investors and entrepreneurs. It's a marriage. You're going to be together for quite a while and you got to have the right balance in there with mutual respect coming from both sides.

When you think about some of the cool stuff you've done, I mean, you had brought up, this is what we do. You guys do a lot of stuff like this Angel Investor Foundation. Maybe you could tell the folks listening what the Angel Investor Foundation is, how you got the idea, and how it serves both angel investors and founders.

The fundamental difference here is that there are 2 different types of nonprofit associations. One are trade organizations and the other is individual member organization. Generally speaking, the trade organizations are stood up as 501 organizations, whereas those that have a more charitable purpose, such as foundations, are organizations. So ACA was set up 20 years ago as a 501, which meant that we could take on the advocacy arm. We could do a lot of the typical traditional things that are done. What we could not do are the charitable you know, activities where we could offer tax-deductible contributions. So in 2020, we stood up as a wholly owned subsidiary of the ACA, a 501 organization called the Angel Investor Foundation. And that is where we've done a lot of the philanthropy for the community. And again, this is in the spirit of trying to move from an art to a science to bringing out data analytics to educating, to training, to doing all of those things. So today we use both of those brands, 2 different companies for a variety of different purposes, but based within the legal structure of the IRS, it gives us the benefit of having both of those. We do hope to be able to, you know, open this up further in the years ahead to gain more supporters and more followers to see that really at the end of the day, this is all about economic growth. It's about innovation. It's about driving that capital formation into the hands of entrepreneurs that are going to change the world. And to do that, you know, it's a journey, but we've got to keep taking the small steps. And the 2 legal structures are what allows us to do that, as I mentioned, to be the steward of the asset class.

When you think about the ACA and where you are and where you're headed, is there any new innovations or any new directions that the ACA is intending on taking in the coming year outside of this Angel Investor Foundation, which is frigging awesome, by the way.

Well, thank you for that. And we have invested in the past 18 months or so because of that Angel Investor Foundation in back office infrastructure. So we've updated our website, we've added what's called an association management system that gives us better tracking ability on the engagement of our members, what they're doing, where they care about. And, you know, we're trying to build in opportunities for new engagement from them because this is their community. You know, this is the professional society of the angel investment community. And together, that is a very powerful force that can build the content generation we need, disseminated it out there and really advance all that we're doing. So expect to see that. Syndication is another area that we are investing in, and that means different things to different people. But what we saw coming out of the pandemic is that before the pandemic, most groups said, no, we only look at deal flow in our own backyard and we have to do it face-to-face. Well, that was taken away from them. They figured out how to do it by Zoom. It worked well. And then they said, well, why are we only looking at deal flow in our own backyard? So a trust built between angel groups in different cities. And we have now, you know, a couple years after the pandemic, really seen that explode. So we are creating regional syndicate groups of maybe 20 or 30, you know, angel groups from across the Northeast or the Southeast or the Midwest or whatever it may be that are holding regular monthly meetings where they are sharing information on deals. Now, the beautiful part about this is that if you're that entrepreneur and you've got inroads to your local angel group and they invest in your round, I mean, let's just say it's a million-dollar round and that local group says, hey, we're in for $250,000. What's happening every day now is that that group will say, well, let us reach out to our neighbors over in the next city, share our due diligence with them, and see if they have an interest in joining your round. And so the entrepreneurs really have investors in many cases working on their behalf to make introductions, to get them the additional capital that they need to fill out that round quicker. Because what all the investors want is the founders and the management team working on the business, not out there fundraising, right? So I think that's added a lot of efficiency, you know, to the process that benefits both the investor and the entrepreneur. And I think you can expect to see more of that. In the future, the final area that I would mention is the potential of artificial intelligence and what can we do with that as a professional society to take all of that content that our members have curated and repurpose that so it's easy to find. It's in bite-sized digestible nuggets and available on multiple platforms, multiple formats in a way that, you know, the particular investor or entrepreneur can get whatever they need whenever they need it at an affordable price. So those are the questions that kind of keep me up at night that we're trying to resolve to really change the way the game is played.

All right. I want to stop for a second. I want to dive into a fascinating topic, risk, but we'll save that for next time. Coming up in my conversation with Patrick Gouin, CEO of the Angel Capital Association, he'll share one key piece of advice for entrepreneurs.

Make sure that you are coachable. Don't think that you've got all the answers. It's a team sport. Look to those investors that you're gonna bring on, and they've got a lot of experience. Most likely they want to contribute beyond just the capital that they provide. Take advantage of all that, but it starts with, you know, being coachable and listening.

The Startup Science Podcast with Gregory Shepard is brought to you by startupscience.io. Founders can log on to startupscience.io and use code Forbes to get free access. To connect and find out more about Greg, go to gregoryshepard.com. The Startup Science Podcast is a production of Forbes Books.