The State of the Global Investment Community, with Angel Capital Association CEO Pat Gouhin

Good morning, everyone, and welcome to our Founder Institute Venture Network event on the state of the global investor community. My name is Ryan McLeady, and I'm head of global operations for the Founder Institute. We are the world's largest pre-seed startup accelerator with a portfolio of 6,500 startups across 200 cities with a mentor network of over 35,000 mentors. We have got an incredible event for you today. I'm excited to be your host. We've got investors from all over the world joining us today to talk about the state of the global investor community. So because we have an international audience, please say hello in the chat. Tell us where you're dialing in from. I already see some familiar names and faces here. So before we begin, I'd like to share one really quick announcement. The Angel Capital Association is hosting its 2023 Summit live in Las Vegas from May 16th to the 18th. We'd like to extend a special invitation to the Founder Institute community who can register and receive a $200 discount off the registration fee. Dustin, our producer, will put that link in the chat with the discount code. And without further ado, it's my pleasure to introduce Pat Gouhan, CEO of the Angel Capital Association, joining us from Raleigh, North Carolina. Pat, welcome. Thank you so much for joining us today. Do you want to say hi and do a quick intro?

Yeah, thanks so much, Ryan, for allowing me to be on today, and thanks for that plug of our big event that's coming up here in a couple weeks. So we've got a team that's putting together a great program. It's all coming together nicely, so hopefully we'll be able to see some of your audience there. Just as a way of background, Ryan and I were just talking before this, and I like to joke around that this is my third profession and third career, and I haven't even got out of the A's in the alphabet, in that I started in aerospace and then moved into automation and now doing angel investing. So had a ball in all three of those areas, and we'll get to talk, I think, mostly today about the angel investing side of it. But I'm excited to be here.

Yeah, thanks, Pat. Well, before we begin, um, I'd like to remind the investors here today that this is a live event. We want to hear from you. If you have a question or a topic you'd like us to cover, please just put it in the chat. Our producer and team will put it in the, uh, queue for us. And so before we jump into the state of the global investor community, Pat, maybe like a little bit more on, on you. So you You're based in Raleigh. I think you have an angel group out there as well, right?

Yeah. So I'm the CEO of the Angel Capital Association, which is actually headquartered in Kansas City. We were found there almost 20 years ago out of the Kauffman Foundation. But my journey kind of started on the banks of Lake Erie in Cleveland and then through Washington, D.C., where I was for about 15 years. And then about 20 years ago, I moved down to the Raleigh-Durham area. And so it was 4 years ago that I took the job at ACA, but have lived in the Raleigh-Durham area, we've got a really incredible startup ecosystem here. We've got a kind of industrial-based angel group called RTP Capital, and then we have different angel groups that are associated with the universities— NC State, Duke, University of North Carolina. They work very closely with a lot of VCs in the area, and then with all the incubators and accelerators and innovation hubs that we've got. So this is really an up-and-coming and thriving part of the area. I think it looks a lot like Austin did a couple of decades ago.

Yeah, I could see that. And, you know, before when we were talking, I mentioned that we actually have a team that's launching Founder Institute in Raleigh. So that's really exciting to see. And, you know, when you started, or I guess when you were a part of this angel group, what I find is very interesting is that there's the Angel Capital Association, which effectively like originally was an association of different angel groups, and now it's starting to evolve a little bit more. Can you tell us what role ACA plays in the ecosystem and what that evolution's looked like over the years?

Sure. So, you know, as I mentioned, we're about 20 years old. We are a professional society. For the first decade plus, we thought of ourselves as a trade organization. And when I came in, you know, one of the discussions I had with the search committee and the board was trade organizations are made up of corporate members and they represent corporate interests. That's not really who we are or what we're doing. We're a professional society made up of individuals. Yes, they happen to belong to various groups, but that really puts us in a different light where we're the steward of the angel investment community. So that really reframed the discussion for us to say, okay, we're not going to be so inwardly focused. Let's look at the startup ecosystem, all the other stakeholders that are out there, and figure out our role, you know, our piece of the puzzle in providing support. So now we like to say that entrepreneurs are the engine for economic growth and angels are the fuel for that engine. So it's just kind of reframing who we are and what we do. At the end of the day, we've got about 16,000 members that are all accredited investors as determined by the Securities and Exchange Commission. And I think we'll be talking about that a little bit more. But the great majority of those are not individual investors doing it on their own. They belong to one of 250 groups that are member organizations of the Angel Capital Association. And for all those groups and for their members, the individuals in there, we provide the typical kind of products and services and benefits. You know, it kind of starts with networking and events, this ACA Summit that you mentioned that'll be in Las Vegas. We also do a lot of education and smart practices in trying to kind of curate the knowledge from the practitioners in the field. Then we're trying to kind of bring out the science of angel investing with the data analytics initiative, looking at you know, where the investments are going, what's working, what's not, different trends across sectors. And we produce an annual report called the Angel Funders Report, freely available to the world, that goes into a lot of that. And then the final area that we're heavily involved in is advocacy and public policy, making sure that we educate and look out for the best interests of investors and entrepreneurs with folks in Washington, D.C., be it either on the legislative side or the regulatory side. So that's kind of us in a nutshell.

And is the ACA international? We have a lot of different leaders from various cities, whether it's São Paulo, Brazil, or Portugal, or a variety of different countries. Is ACA primarily US-based? Are you starting to expand internationally?

Yeah, I would say, you know, we are in the infant stages of being an international organization. And I say that because remember when I said we were originally thought of as a trade organization. In that realm, we said, well, we're only in North America, and we had a couple of Canadian members. That was really it. But then when we said, wait a minute, we've got a different calling, it really is to be the steward of the community that knows no geographic boundaries. So we changed our bylaws 2 years ago, and we are now open to international members. We're trying to be very intentional in that outreach strategy because there's a lot of other sister organizations in other parts of the world that are doing great work just as we do here. And so we don't want to be seen as competition or threatening to them, but rather collaborative with them to raise the tide for all boats.

Yeah, that makes a lot of sense. There's a lot of cultural similarities with ACA and Founder Institute in how we try to expand globally to support founders on that side of the fence. So you mentioned the Funders Report. Maybe we could start there. Congrats, by the way, it was a really fantastic report. For those of you who've not read it, you can go to the ACA website. Download it. But the 2022 report had a lot of really interesting content in it. And I think this really lays the foundation of our conversation today, because one of the stark statistics that stood out to me was based on a study conducted by the Desert Angels. They estimated that every— for every $100,000 of capital invested by an angel investor, that it generated 5.8 direct jobs, $458,000 in wages, $2.1 million in economic output, and $37,000 in state and local revenue. Obviously, this is a huge, you know, validation for the need to increase angel investment activity. But what have you seen from the top level? I mean, are those numbers accurate? Have you seen other statistics as well around that?

Yeah, let me just put an exclamation point on what you said. Desert Angels is one of our groups out in Tucson, Arizona. They did this study over a 10-year period. And, you know, the two numbers that stick out to me, $100,000 invested, every single $100,000 led to $2.1 million in economic output. So there's a 21x multiplier. If you look at the amount of money that that one group put in over that decade, it was $47.3 million. So you do the math, $47.3 million times 21, you've got $1 billion of local economic output. So this is a machine. And, you know, we've seen that in one community. We've got 250 of these, you know, across the U.S. and a few international as well. Desert Angels is certainly one of our lead groups that, you know, they've got their act together, they're deploying capital and they're making it work. But there are many other examples across the country. The other point that I would just make on that, Ryan, is that this is still a relatively new profession. I mean, the great majority of our groups got started around 2010 or so, some of them a little bit earlier, some later than that. But, you know, I mean, they're still doing this assessment on what's the return over the long haul, because as we know, this is patient capital, right? I mean, it's going to take at least 5 years, if not 10, to get a return on that. So we're just beginning to see the early data come in on the economic impact coming from what these groups are doing.

That's such a good point, because in 2012, when we started VetTech, I remember Kaufman did a study that there was a 2.1 multiplier effect for every tech job created in a city or a region. So you create a tech job, there's 2.1 jobs that are created to support that tech job. Have you seen any updates? I mean, that's almost 10 years old and here we are now. You've got this 21x multiplier in terms of, you know, the amount invested to the amount of economic output created. Have you seen any updates to that Kauffman study or does that still sound about right in that multiplier effect of indirect jobs?

You know, I haven't seen specific updates to that study. I know Kauffman is regularly producing new reports with a lot of good stats in there. And I And I think other economic development groups are as well. I have seen numbers anywhere from that on the low side up to 7 or 8, you know, that, that, that there's just this multiplier, as you said, in there that creates the service jobs or the others that when you have those high-tech jobs, high wages, and that it trickles down to the rest of the economy.

Yeah, that makes a lot of sense. You know, one of the things we're doing at Founder Institute is trying to create more venture capital firms all over the world through our VC Lab program. And it has the same goal, right? Create local jobs, invest in innovation. And I think angel capital is such an important engine for these local innovation ecosystems. You know, if you're an aspiring angel investor, what, where do you go and what do you do if you wanted to create an angel group, or if you wanted to even just start investing in companies in your region? What do you do to get started?

So let me start, you know, even, you know, before that, in saying that we really think angel investing is a misunderstood profession that most folks don't even know what it is, or they have the very wrong perception. So what we've started to do is, on a regular basis, put out a webinar called Demystifying Angel Investing that talks about it, how you get involved, who's eligible, how it works. According to the Securities and Exchange Commission, there are 16 million individuals in the US today that could pass the financial thresholds to be an accredited investor. And I believe we're at a unique point in our history where for the first time we've got all these baby boomers that are retiring. They've got health, they've got wealth, they've got a personal network, they've got subject matter expertise, filled with energy, they want to give back. Well, what do they do? We think that we are a good, safe alternative for them to diversify their retirement. The typical angel investor, we advise only to put 5% or 10% of your net worth in there. So it is a high-risk asset class. If you lost 5%, it's not going to change your lifestyle, right? But on the other hand, that allows you to get involved locally with your startup ecosystem and contribute, you know, to help mentor the next generation of, you know, founders and, you know, have some fun while you're doing this and getting a financial return. So what we advise is, you know, the first thing is to really understand the risk, to understand what angel investing is. How do you do that? You go to a free webinar like Demystifying Angel Investing. If one chooses, they could become a member, an individual member of the Angel Capital Association, $300 a year, where they get access to hundreds of free webinars on how do you value a pre-revenue company, what's a capitalization table, what are term sheets, and what's good and bad and so forth. Once they get comfortable with that and they figure out, hey, this is for me or this isn't, That's when they say, well, I'm ready to make an investment. You know, how do I do that? That's when we plug them into one of those 250 local groups and say, where are you at? Oh, you're in the Raleigh-Durham area. You should join RTP Capital. And then they go to a monthly meeting. They see how that works. They find out, you know, it's a friendly, you know, environment. It's not collaborative. It's not cutthroat at all. And generally they participate and then they become a lifelong participant in that local area.

Yeah, I love the decentralized model that you have with all these different groups. I also saw some information around Angel University where you could kind of learn some of those, those terms. There's a, there's a lot of synergy with Founder Institute because we have, as I mentioned, 35,000 mentors all over the world. These mentors do office hours, they come in and do sessions. Many of them are already investors, and I'm sure, you know, all of them are aspiring investors. But when they're ready to take the leap and go into the investment side, I think it's important to have some kind of like local group or structure that we could send them to. So maybe we take that offline because I think, you know, if there's a way to plug in those two networks, I think it'd be really powerful as a way of unlocking more angel investment capital in these different regions around the world.

Let me—

let's go to the perfect storm real quick because I think this is really the meat and potatoes of what's been going on. Do you want to give a quick overview of that? Like, let me just tee this up for everyone here. The world is changing so quickly. I mean, you see what's going on with AI, you see what's going on in the political nature and just the global stage right now. And it really does feel like we're at this important inflection point in human history. So what is the perfect storm that you're seeing right now, Pat?

Yeah, so I really think there's a three-punch perfect storm that is kind of building. And so let's quickly talk about the three punches and then we can come back and go into detail on each one of them. The first one, I think, you know, is pretty much behind us, and that is the retraction of capital markets that really took place throughout 2022 and continued into 2023. And I'd be happy to go back and talk more about kind of what we saw there and what's going on. But that's the first punch— retraction of capital markets. Then we saw a retraction of venture debt. And that really is around Silicon Valley Bank and all that happened there in recent months. Big punch. And then the third one is the pending regulatory issues that potentially could come out of the Securities and Exchange Commission in the very near term, most notably changing those financial thresholds to be an accredited investor that I just talked about. Depending upon if they change those and where they went with them, that could be absolutely catastrophic and could overnight take a lot of the early-stage capital off the table and make it not available for entrepreneurs. So first, punch capital markets, second, venture debt, and third, regulatory changes.

You've been meeting with a lot of leaders in Washington, D.C., as well as just startup leaders all over the country. Maybe could you give a quick overview of, you know, what the accredited investor process is now? And then have they specified what they want to change it to, or is that an ongoing conversation?

Yeah, it is an ongoing conversation. But as of today, to be an accredited investor, you have to have annual income of $200,000 a year with the likely probability that you'll make that in the future as an individual. If you are married, then it's $300,000, you know, for a couple that would also make you an accredited investor. Or if you don't meet the annual financial thresholds, if you have $1 million in net worth minus your primary residence, then you can also qualify as an accredited investor. Those were set arbitrarily in the world of 1982. So if you think about that, in 1982, there wasn't really an angel investment community. There were some VCs. They were sitting on the coast— Silicon Valley, Boston, New York— and the Securities Exchange Commission set the threshold at that point in time. Several years later, they did go back. At that time when they set the numbers, your primary residence was included in there and they said, "Okay, we're going to take that out." But the issue is that for 40 years they have not indexed those to inflation. And so there is a lot of pressure on them to say, "Oh, we need to adjust those." Now, our position representing the angel investment space is, "Why? What's the problem?" You know, it's a different world now. They were arbitrarily set. Things are working. And the response that generally comes back is fraud, you know, because capital formation is one of the priorities of the Securities and Exchange Commission. The other is investor protection. And we say, well, you know, no doubt there are bad actors out there that go into nursing homes and rip off old people, but that's not the angel community. That's not what we see. And so we're working with them to educate them, to kind of show the process, how these groups come together. It's a team sport. They go through due diligence, they work with the founders, they figure out whether it's the right investment, the right terms, and it's still high risk, but by doing all that, you de-risk a lot of the components of it. So it is an ongoing discussion with them. Our fear would be if they index that to inflation, you could see these numbers double or triple, which we estimate could take, 50% or so of the angels that are currently eligible out of the market. One of the numbers that I didn't give you, Ryan, is those 16,000 accredited investors in 250 groups. They put $950 million annually into roughly 3,000 to 4,000 startups. So call that a billion. So if the Securities and Exchange Commission doubled that or tripled those numbers and 50% of those angels were gone, you know, that could take $500 million off the table that would no longer be able to be invested in private placements. So it's a big deal.

Yeah, it sounds like a very big deal. Is Washington tone deaf to this? I mean, have you spoken with leaders that completely understand the value of angel investing? I mean, who's really driving this? This seems crazy. Yeah.

You know, I mean, you can look at it and say, well, it defies common sense. But on the other hand, you know, there's a lot of pressures on them and we've seen a lot of bad things happen in capital markets. There is certainly, I think, on the surface, the thought of, well, you know, we've got these private markets, private placements, they don't have the same regulatory issues, we need to tighten that up so that they look more like the public markets, or, you know, drive these companies to the public markets sooner. But I think when you, you know, analyze it from that perspective, the flaw is that there's a huge difference that we all understand between that startup that's got 3 employees or 5 employees or whatever and been around for 6 months or 2 years or whatever, and the large established 100-year-old multinational. Yes, they need audits, they need all of the reporting requirements, but you can't impose those same kind of regulations on a company that doesn't have revenues yet and has only been around for 6 months or 9 months. So that's kind of the conversation. And, you know, I have heard some say, well, You know, you've got this financial threshold to be an accredited investor. They've talked about measures of sophistication and, you know, you prove your competence level. And some say, well, even if you have those two things, that's still not good enough because there's no information. There's simply not information available on these early-stage companies to make good decisions, which we'll argue all day long. And I've extended hundreds of invitations to folks to say, if you really believe that, come into any one of our 250 angel groups. They meet monthly. They go through a rigorous due diligence finance process that is a team activity where they're working collaboratively with the founders to go through a series, a systematic series of risks. These are all the risks that that company has at the early stage. You know, how are we going to analyze them? How are we going to de-risk them? And then they make that decision. Should we make an investment or not? But it is a very rigorous process based upon data. And that's what I think a lot of folks in the DC area just don't understand, the full impact and how it all comes together.

Yeah. Well, you know, I'm glad you're fighting the good fight. It just seems crazy to me that when you're in an innovation war and a great power struggle, you don't want to cut off your left hand to fight that. So let me ask you this. I mean, you know, we're seeing investment activity slow down over the last couple of months. SVB obviously, like, sent reverberations and shockwaves to the international startup ecosystem. What advice do you have for investors on how they could weather this storm?

Yeah, well, so if I can back up to kind of set the stage a little on that, remember that first punch that I talked about that I said it's kind of worked its way through? 2020 and 2021 were record years for VCs and for angels. There was a lot of exits, there was a whole lot of capital. And so what happened? It was recycled. Everybody was putting that back in and we saw valuations go up considerably. If you look at early-stage valuations between 2015 and 2023, they doubled. If you look at mid-stage, that was about 4x. And if you look at late-stage, they went up 7x. Valuations increased 7-fold over 7 years. Clearly not sustainable. That was driven by all of the available cash that was there. So then 2022 comes in and we've got inflation, we've got World Wars, we've got challenges going on in ecosystems, and those valuations started to come down, right? So at that point, there was a— just like you see in real estate, from a buyer's to a seller's market— we saw a turn. You know, 2020 and '21 were a great time to be an entrepreneur. You could control the terms. That has changed drastically, and it started at the beginning of 2022, and it's still continuing. The numbers are going down. So I think at that, a lot of the entrepreneurs said, well, you know, gee, I'm looking at a lower valuation now. I don't really like the terms. I got some runway. I'm not going to raise now. I'm going to take an alternative approach and go get that venture debt. That's going to be cheaper in the long run. And Silicon Valley Bank really played a unique role in what they provided to these early-stage startups that didn't have collateral and couldn't go get a normal loan. Right. By some accounts, we estimate that all of our members in total have about 50,000 startups in their portfolio, and we estimate that 50% or so of those were affiliated with Silicon Valley Bank. So that could have been just catastrophic. It wasn't, you know, thank God it kind of played out in the positive way that it did. But that was a tough weekend, you know, several weeks ago. But that's really what we're looking at now is to say, okay, that option came out off the table. Venture debt's much tighter, valuations are down. So your comment was, what should the investors do? Well, if you're on the investor side, the terms have changed. You know, they're going to be beneficial to you. You're going to be able to get lower valuations. You're going to be able to get better terms, probably going to be able to get governance, you know, seats on the board and things that maybe you couldn't have got before. And all of those things, I think, make it a better environment for the investor. However, you know, you have to understand that being an angel is about proper diversification. Some companies, if they are not well positioned, are probably not going to make it through this. So it becomes one where I think the angels need to look at their portfolios and say, who's got runway? What level of runway do they have? How are they doing? Are they hitting their milestones? And do I have dry powder that I can deploy? And is that going to be a good investment versus maybe perhaps something a new company that would be at a discount, if you will, because of today's valuation versus what they were a couple of years ago. So it's a complex environment. It's changing daily, but there's a whole lot to think about whether you are the investor or the entrepreneur.

Yeah, I think that's really interesting. You know, speaking of Silicon Valley Bank, I think they provided about $6.7 billion in venture debt capital. I believe it's about a $30, $32 billion industry. So there's now this like big gap in the market when it comes to venture debt. I've spoken with some investors and some of them actually have been a fan of using venture debt as their preferred investment vehicle. Have you seen any updates or more an increase in activity of angels actually, instead of investing on the equity side, providing debt investment capital?

Yeah, not a drastic increase, but I certainly think there's more attention to unique deals. And creative, uh, you know, creative approaches. The entrepreneurs, they need to have runway, right? They've got to get capital wherever they can get it. Uh, if they can't do a raise at the terms they like and they can't, you know, get venture debt from the typical approach, what are they going to do? I have heard of some instances where instead of doing kind of a bridge round as a convertible note, they'll go through a promissory note and offer interest terms. You know, hey, we're going to do a raise in 6 months, but I need this promissory note at these interest rates rates for, you know, the next 6 months, uh, which, you know, are obviously significantly higher than an investor could go by going to a bank and putting it in a CD or something like that. Uh, still risky, but on the other hand, if they've got good recurring revenue and they're headed for a raise in 6 months, and, you know, this bridge is 10% of whatever that total raise is, that's probably, you know, not a bad bet. There's probably a good chance they're going to get that far and get that raise, and then Of course, they want that promissory note off their books as quick as they can. The other thing that really began to happen the past couple of years, so it's not specifically tied to either that first or second punch, but I think it again just goes back to looking at new models that might catch hold. One of those is revenue-based financing initiatives. And so we are seeing some of our angel groups move in that direction, which essentially means that if you are that founder and you've got revenues, but you don't want to cough up equity in the form of a raise, then you could negotiate a deal with a revenue-based financing arm where they might say, okay, we'll loan you $500,000. We want a 2x or a 3x return on that. So in the end, they're going to get paid $1 million or $1.5 million. But unlike, you know, a bank note, there's not a specific term to it. They're going to tie that to your monthly revenue. And so you're going to come to agree upon, hey, I would like, you know, 6%, 7%, 8% of your monthly revenues until we get to that 2x, 3x number, at which point in time everybody's free and clear and there's no, you know, transfer of equity.

In those revenue-based deals, is it typically unsecured? It's secured against their revenue, but it's not— I mean, you know, you could go to, you know, National Bank or some of these others and get like a 20% loan or something crazy for that same amount. But it's going to be secured, maybe even personally secured. Is that the value of revenue-based financing for founders?

You know, it's early enough that I don't know that there is one cookie-cutter approach to that. So any entrepreneur that finds that interesting, I would say shop around, look at the angel group, see who's doing that and see what the right fit is for you. I would also say that historically the relationship has been very low local between the entrepreneur and the angel. But because of the pandemic and because things going virtual, what we've seen is a lot of extension of the geographic boundaries to which the groups look for deal flow. And so when you get into a specialty kind of financing, I think there are a few groups around the country where, you know, that local group might say, well, that's not what we do, but we know some folks in Idaho that do that. Why don't you go talk to you know, such and such and see if that's a good fit for you. So it is a relatively small community where everybody is talking to each other and truly trying to help the entrepreneurs so that they've got the capital that they need to grow the business.

Yeah, that makes a lot of sense. I do want to take some audience questions before we move off that topic, though. Do you see any other secondary effects from the collapse of Silicon Valley Bank, any other reverberations that might be coming in the ecosystem?

Well, absolutely. And I don't think that has unfolded yet. So we took this punch, but we don't really know how badly we're damaged. There's certainly, I think, a reputational damage for all of us, whether you're the investor or you're the entrepreneur. Those that don't understand how it all works or come together, all they need to hear is Silicon Valley Bank. Oh, that's bad. I'm running away. And then you had all these other regional banks that there was fear and they took a hit. It was just like, oh, well, gee, I got to get all my money out of Silicon Valley Bank. I got to get it out of all of these others as well. Some of that was certainly not rational and was a panic response. So we don't know whether that's all going to come back and what will happen there as it stabilizes to a new normal. And then, of course, I think at this point we don't really know what the regulatory implications are going to be. To all of this. That's certainly under discussion. And, you know, we've seen crises like this in the past that have certainly led to significant regulatory changes. And I would expect in some way that to still be coming in the months ahead.

Thank you for sharing your perspective. Let's jump into some of these audience questions. I want to start with Jason because he had mentioned, so he says, I thought the SEC was considering lowering the financial requirements for an accredited investor. Is that not the case anymore?

Well, they have been quiet in specifically where they are going other than to say change is probably imminent. So there's one side that says, hey, hasn't been indexed, let's raise that. There's another side that says, well, you know, gee, we really need to open up capital to underserved communities and to others that because wealth isn't really a proxy for sophistication anyway. So why don't we move more towards some education measure? I don't know where that will ultimately end up other than they have for a couple of years now talked about adding measures of sophistication so that if you did not meet the financial threshold, then you could take an examination, go through some courses or whatever, and pass the accredited investor definition through that method. Now, when they changed that, I think it was in 2020, they did open up, I think, 3 FINRA examinations, Series 7, 65, and 82, maybe. But those don't really provide a good overview on the risks of being an angel investor, how it all works, and how to de-risk that. So from my perspective, you know, that's fine if you're a financial planner or you're in that industry, but probably not for the average person that wants to get into this. What we have proposed to the Securities and Exchange Commission is that they do in fact open up sophistication and that one of the measures be the 10 courses that we have curated called Angel University, because we believe that that is the best curriculum that's out there that is built upon about 20 years of curated content from practitioners, you know, the men and women that have been doing this since the very early days and bringing out, you know, all the smart practices associated with that. But ultimately, we really don't know where the Securities and Exchange Commission is going to go. 5 different commissioners, they're all talking about it amongst themselves. And then, of course, you've got the legislative impact on this too, because congressmen and senators care quite a bit about this and they have their own set of opinions on what should be done.

Could you talk a little bit more about Angel University? How does it work and like, what's that process look like?

So 16,000 members, they're all volunteers. We have what's called an Education and Smart Practices Committee that is volunteers that are practitioners that have been doing angel investing for, in some cases, 30 or 40 years. I mean, I truly mean the pioneers of this. They are from all parts of the world, really, not just the US, and from angel groups of all different levels, from networks, from funds and all that. And they get together monthly and determine what curriculum we should update, what should be added, and so forth. We started this process maybe 3 or 4 years ago. Informally, we did it before that, but we said we really need to kind of turn this into a product. So we started with a handful of courses. Those are now our basic courses, and then we've been adding more advanced. But at the moment, we've got 10 2-hour courses that are taught by practicing volunteers that are all vetted. So, I mean, we make sure that they know what they're doing. And the courses range from anything from the fundamentals of angel investing to valuation, to term sheets, to capitalization tables, to managing boards, to driving exits. And more courses are planned. So I really think that that is the best curriculum that is out there that gives gives any interested investor or entrepreneur the ability to say, okay, these are the risks associated with early-stage investing, and here's what I need to watch out for, here's what I need to do to de-risk them. I would also say that, remember, we kind of talked about that pivot that we organizationally went through. There was a time when we said we're an organization of investors and, you know, we need to kind of keep the entrepreneurs at arm's length. We've changed that perception in the past couple of years to say, you know, why? What's the harm? We are the steward of the community. We need to bring all stakeholders in. So 2 years ago, for the first time, we opened up our courses to entrepreneurs and it was an absolute, you know, love fest because the entrepreneurs said, hey, this allowed me to get inside the mind of the investor. So even if I'm not raising now, when I do go to raise, I'll know exactly what they expect and in what format in the terms. And on the investor side, they said, yeah, I used to be an entrepreneur, but I forgot about— I forgot what it was like to walk in their shoes or that. And so it just led to a very rich discussion that both sides benefited tremendously from and brought them together in a collaborative way. And that's what we're trying to do across the country is really build these relationships where, you know, the angels are helping the entrepreneurs. And even if they're not ready now or whatever, or they give them guidance. So when you are ready in 6 months or 2 years or whatever, come to your local angel group. We'll already have known you, we'll have been working with you, and, you know, it's a mutual alignment of expectations that really drives efficiency.

I get— I gotta say, Pat, I mean, it's really refreshing to kind of hear this perspective from you because I think, you know, many times founders and investors, they're, they're sort of like a contention there. And, you know, just the advocacy that you guys are providing, the support not only to investors but also to founders, you really are doing a doing a great job being a steward of the ecosystem. So thanks for all you're doing there. Let me go to TJ here. He's got a tactical question for you, which is, how can angels avoid getting pushed out and having their upside capped by later-stage VCs?

Yeah, so, you know, we just kind of talked about the potential tension that can exist between, you know, the entrepreneur and the investor. Well, I think there's a similar tension that does exist between angels and the VCs. And so a lot of that comes down to the relationships, right? And the fact that we all have to understand the role we play. I look at it and say, dollar-wise, we don't touch the community the way the VCs do, but on a just sheer number of companies, we see and invest in a whole lot more. And those are really the pipeline for the VC community. Right? If we weren't flushing out and getting those early failures and helping to de-risk them, the quality for the VC market would be a lot less. So, you know, we're playing in the pre-seed, seed, Series A space, maybe Series B. And, you know, before the 2022 downturn, VCs were coming down and they were starting to get into that pre-seed, seed. Well, I think they've gone back to their sweet spot. We focused on our sweet spot. And I think, you know, just as time goes on, more standards— and that's probably too strong of a word, but, you know, standards and how this is all done, you know, happen. And there's a harmonization that, that way, again, expectations are aligned when that company goes through pre-seed, seed, Series A, and they're ready to get the attention of the VC community. Ideally, we'd like VCs to look at the way it was done and say, okay, that's pretty tight, that's pretty clean, we like the cap table, there's no side letters, you know, we'll pay attention to them. So the more the entrepreneur early on demand special treatment, probably the less likely they are to get funding. But also that can cause a negative ripple effect for round after round that ultimately those angels potentially could get pushed out or the side deals are stricken later. Because at the end of the day, you need money now. And if there's someone coming in saying, we'll give you a big chunk, but we don't like those previous terms. And it's that or bankruptcy, right? The angels are going to vote themselves out of the the power or authority that they once had in negotiating.

Yeah, you bring up so many good points there. I mean, it seems like it comes down to creating some kind of standardization so that there's no weird situations that might cause, you know, uncomfortable situations, or, and/or relationships, right? So the better— what I found is that the better relationship an investor has with the founder, the more likely that founder will stick out for the investor and protect them in future rounds, or to give them allocation in future rounds. And at the same time, the better the relationship the angel has with the venture capitalist or making the referral for them to invest in that company, it kind of curbs some of that bad behavior. But as you mentioned, I mean, you know, it is a tough game. Anything can happen. The company could go through some really tough times and then you might be forced with a situation to recap the company and that might be what's in the best interest. So certainly there's no silver bullet here, but I do think that, you know, there are some ways investors can protect themselves. Let me ask another question here. So Jaime had a question around angel investing models, like investing in a group or investing in a fund or doing a syndicate. Where have you found the most success?

Well, I think that that is evolving. So I would say historically we saw most of our groups generate a network. And just to provide a little primer there, so in that kind of a situation, we might have anywhere from 30 to 300 members. They get together monthly. There's a volunteer screening committee that determines what entrepreneurs come in. They come in, they pitch. Then after the entrepreneurs leave, that group kind of has an informal discussion about, hey, do we like this company? Who thinks that, you know, they might be interested in raising your hand. When you raise your hand, you probably just signed on to the due diligence committee to go write a report. Then that group might go study the company for a couple of weeks, prepare a report, send it back. And then again, it's just a general call. Okay, here's our due diligence report. Who's in? How much are you in for? Then let's say we have 10 people that want to put in $250,000. We go back to the entrepreneur to say, we've got $250,000 over 10 people. Do you like that? What level of authority do we have in writing the term sheet? So that's Model A. Model B is a fund. And this, I would say, many times is for the investor that wants quicker diversification, meaning they don't want to take the time to find 10 companies and invest in them. They'd rather write one check, a bigger check, and turn that over to the general partners of that fund. Who that's what they're really doing is sourcing deal flow, looking to take what may be a $5 million fund or $10 million fund and then allocate that over 20, 30, 50 companies or whatever. So that's easier on the investor side, but then you're giving up a management fee and, you know, carried interest to those general partners. Some people are fine with that. Others might say, you know, I like the network model. What we also see evolving is many that have both. They have a sidecar fund or they've got some kind of hybrid model where you can participate individually or as part of that fund. And then the final question you mentioned was syndicates. What we are starting to see really take off across the country, and I think it's one of the positive unintended consequences of the pandemic, is that relationships were And so these groups started trusting each other and said, you know, gee, we've got, you know, a great entrepreneur. It's a million-dollar raise. We're in for $250,000. We think you guys should take a look at them. And then we make that soft introduction of the entrepreneur. We say we're willing to share due diligence or whatever it may be. And then the next thing you know, again, it's easier for that entrepreneur, he or she, to go to that neighboring group and do the pitch again based on the feedback and the mentoring that we've provided. And maybe fill out that round more quickly than they otherwise would. And we're seeing a lot of discussions, a lot of trust building, and a lot of harmonization of the process and the forms and all that between ACA member angel groups. So I think it's an exciting time and a positive one that should open up a lot of opportunity for entrepreneurs that previously wasn't there, and investors.

And a lot of time you'll see that same investor will actually participate in all three of those different models. They might be an OP in a fund, do individual angel investing, and also be part of a syndicate. Let me run through a hypothetical scenario with you. So let's say—

Is this where it gets tough?

Yeah. Let's say you're a founder and you exited your company. It was small, but you walked away with $20 million and 5% of your net worth is $1 million and you want to put $1 million to work either as an angel investor or just investing in startups.

What is—

what would you recommend to that founder? Should they invest $100K across 10 companies? Is there a certain threshold that you think kind of maximizes diversification? What would you do with that million dollars as a brand new angel investor?

Okay, let— I'll answer that, but first let me say that angels love serial entrepreneurs, and there's no reason that you couldn't do that from an investment standpoint, but then go find the next company. Company. And obviously the reason they like that is because you've been there, you've done it, you face the challenges, you've pivoted, you've had the exit, you know what you're doing. So if you're that entrepreneur that's been successful, don't give up on being an entrepreneur if that's where your passion is, because that elevates your stock within the angel community. But to your point, you know, uh, again, we would say at an absolute most, if you're experienced, seasoned, know what you're doing, 10% of whatever your net worth is. Otherwise, you know, a number more like 5. Diversification is absolutely key. And that means you need at a bare minimum 10 companies, 10 different investments. All the better if it's 20, 25, 30, something like that. Because even the most seasoned angels aren't able to pick home runs. And I mean, entrepreneurs know this. Catastrophic events happen, black swan events, things that you couldn't have predicted or seen coming. So diversification is key. You know, when Ryan and I were talking before this, one of the things he said is, hey, your background's aerospace, so, you know, is that the focus of your investing? And I said that I thought that was one of the big challenges the community faces, is that people go where they are comfortable. And if you spent a 30-year career in pharmaceuticals or whatever, that might be where your interest lies because you think you know the most about that. But the reality is all sectors go through cycles. Geographies have issues. So I think when we talk about diversification, we mean it by every sense of the word, by geography, by sector, by demographics of the founder, by stage of the company. And I think the sharp GPs that manage funds, that's what they're doing. They're looking for that proper diversification. And again, if they've got X million to deploy, they can do that probably relatively quickly. If you're that individual and you want to source your own deal flow and build your own portfolio, that's probably going to take you a number of years to do. And understanding that these investments are going to take 5, 7, 10 years before you start to see the positive exits, you got to be patient about that. But that would be my advice. And I think one that does that, that knows what they're doing, follows best practice relative to term sheets, valuations, and everything, you can expect an annualized return in the 20s, you know, perhaps even mid-20s. We've got lots of empirical evidence showing that's going on, you know, all day long. So that certainly beats the stock market.

Yeah, that's great. And not to mention, it's probably a lot more fun as well. So thank you, Pat. Let's go to another audience question here. This actually comes from a founder, but I think it's really relevant, which is— so they're basically a German, they're based in Berlin. They're looking to connect with US-based investors. Obviously, the pandemic has kind of like reduced like regional barriers of investing. But how do you, how do early-stage angels view, in the US, view investing in international startups?

You know, I think it's challenging and changing. And I say that because there are tax implications, there are some, you know, foreign government implications. Those are changing, you know, regularly. However, the angel wants the best companies and they want the best deals in that. What we also see, and I know this because when we launched that Angel University, the instructor said, we're not really comfortable, you know, teaching this to international students because we don't understand the local implications, the cultures, the laws, or whatever. And so that was kind of our first position. But what we heard from the international community was, We don't care about any of that. We understand local. We know to get the valuations that we want and to see the exits, we need to be in the US market. So that's kind of where it starts, is that a lot of these foreign-born companies are incorporating in the state of Delaware. And I think that many of the angel groups have pretty hard rules and regulations on where they will invest. I do think they're, you know, that is changing and they're exploring options. But I think it's still relatively tough for a foreign entrepreneur to break into the US market. I know I can think of at least 5 cases just in the past year where foreign entrepreneurs said, I'm relocating to the state of such and such because they knew that's where they needed to be to build hold the ongoing relationships with the investors and show that they were here. So I know that's probably not as direct of an answer as they were looking for, but it's still a challenging environment if you're a foreign entrepreneur.

Yeah, I agree with that. Many of the companies in Funding Lab, they always ask, like, you know, whether they're based in Germany or England, should we incorporate a Delaware C-Corp to then go after investment capital I usually tell them that it's better to try and raise locally and like build the company where your market is. So if you're going to enter the US market and you're going to, you know, grow and scale within the US market, it actually might make sense to do that. But if you're, you know, incorporating a Delaware C-Corp to run a German e-commerce business, you probably should not do that. Let's— I know we only have a couple minutes here, so let me just do one last call for questions. There's something that Ricardo mentioned here in the chat, which he says, most of the angel investments I've done were based first and foremost on team. That decision is usually based on a longer-term trust-based relationship from either past working experiences. He's asking, how can I scale that capacity in a wider network? How do you do relationships at scale?

Well, I tell you, I mean, that's where I think that the, uh, from an investor standpoint, the group model that we have is priceless. And, uh, just to give you my own example, I mentioned I've got an aerospace background. I belong to the local group called RTP Capital. We've got about 65 members. A lot of them are doctors, a lot of them are lawyers, a lot of them are PhDs in different engineering disciplines. And so by building that relationship, just by participating in the monthly meetings when a company comes in that maybe I'm interested, maybe I'm not, but I get the benefit at essentially no cost to me beyond my membership dues to the group of hearing all of the wisdom from these people. And in some instances, you know, I've known this person for multiple years and they say, oh, well, for 20 years I ran, you know, this secret branch of the government or whatever on, you know, AI. And you say, my God, I didn't have any idea. And they give you this perspective on what they think the opportunity is or is And so, I mean, isn't life really all about building these networks and just kind of doing what you can to expand that? And that's why I say if you're on the entrepreneur side, same thing. When you're not raising, go build that relationship with the local investors. They want to know what you're doing and what's going on there. They'll help you free of charge. They'll just mentor you. And then when you're ready or you need them, you'll already have a foot in the door.

Yeah, I think that's, that's good. I do believe, I mean, so much of this is relationship-based and, and, you know, you mentioned earlier, angel investing is patient capital. You build these relationships over time and you make, you know, decisions based upon that. So I think being part of a group is certainly helpful, or being part of a network where you can get good trusted deal flow is important. Pat, what can Founder Institute and our FI Venture Network do to support the work that you're doing at the ACA?

Yeah, you know, I think that really comes down to joining the movement. And by that, I simply mean in the most broadest sense, being a positive entrepreneurial ecosystem builder. And I know you are, but I mean, we all have kind of a slightly different piece of the pie. I think we all need to work together. We all need to be communicating. And then when some of these issues come up regarding, say, the accredited investor definition, That's where we need to really speak with one voice and rally together to say, hey, those of you that are making the decisions, you know, let's look at the positives here. And is that really going to be in the best interest of the country or the world or, you know, whatever it may be? So I think just the more we can have these kind of collaborative discussions, understanding where we can carry water for each other and, you know, no doubt there's going to be competitive forces in there as well. But as long as we all we all stay above board and keep our eye on the strategic goals, I think that that will be, you know, a big push because I don't think we've ever had that as a community.

Yeah, you know, I've been calling for a long time that, you know, the innovation community needs to unite together to accomplish these goals. So I'm glad that, you know, we share that value alignment. Let me ask you this, and this is kind of like one last question. We'll wrap up here shortly. What's one message that you have for the startup leaders on the call from the global startup ecosystem, or even political leaders in Washington who might see this?

Stay calm. And it's a, you know, it's a long-term game, you know, so don't get caught up in those inevitable cycles that are there. Let's keep our eye on the prize. I think it's economic growth and improving humanity. None of us can do that alone, but we can all do that together where you're whether on the entrepreneurial side, the investor side, the economic development side, whatever it is. So I think that's our, you know, reason for being here is to make life better for all those that come after us. I think we can do that.

Yeah, 100% agree. Well, this has been fantastic, Pat. Thank you so much for joining us. Should I come out to Vegas in a couple weeks?

Absolutely, I'd love to see you. There'll be a whole lot of rich content there, and we can continue these strategic conversations. So thanks for having me. It's been a ball.

Yeah, my gratitude to the audience for joining us today. We look forward to building the startup ecosystem with you all. I think we can wrap here. This is Ryan Michaeletti signing off. Take good care, everyone, and happy founding.

Thank you, everyone.