We made the announcement the other night at our quarterly CapitalLounge event, but here it is again for those that missed it.

AngelLounge is the angel investor community component of Startuplounge.  It is currently comprised of 80+ vetted angel investors in Georgia. The member list reads like a who’s who.

The good news is that not only have we not even scratched the surface of Atlanta, but we are also reaching out to other parts of the state as well, including Savannah, Columbus, Douglasville, Rome, etc.

The group meets each month in an almost “unconference” like setting.  The goals are to have an open forum for the discussion of topics relating to angel investing, to encourage cross-pollination among investors as it pertains to deal flow, to create new angel investors by bringing in high net worth individuals seeking to explore early stage investing as a vehicle, and to create a logical funnel for these investors into the early-stage scene in Georgia.

One of the key pain points that has been constantly brought up at the meetings is the lack of exposure to investment opportunities (”deal flow”).  As evidenced by the over 160 companies that attended our CapitalLounge event the other night (over half of which were new to the event), there is clearly “stuff going on”.  So, putting our entrepreneurial hat on - we listened to the customer, and came up with a solution.  Actually, two solutions - a short term and a long term solution.

The short term solution is available today (the better, long-term solution is in development).

We have rolled out an automated deal referral and distribution system.  To distribute information on your deal, simply head to StartupLounge.com. If you haven’t done so, you’ll need to create a free community account in order to participate.

This is different from investment matching sites such as GoBig Network etc. because this isn’t just matching business plans with a blind database.

The AngelLounge members have organized themselves into vertical markets ranging from IT to consumer products to alternative energy to biotech. Each industry vertical has an angel investor volunteering to serve as an IAC (Industry Angel Coordinator). Any entrepreneur within the StartupLounge community can go online, upload their one pager or executive summary, and select the industries that fit the deal. The deal will be distributed on their behalf to the appropriate IACs. 

Every deal will get seen by the network, period - no bottlenecks - no middleman - no gatekeepers.

The role of the IAC is simply to ensure that the information received is actually a fit for the industry (or industries) that the entrepreneur selected. If it isn’t a fit for that IAC (e.g. the entrepreneur selected the wrong industry by mistake), the IAC simply forwards the deal to the appropriate IAC. Assuming an industry match, the deal is then distributed to the angel members who have expressed an interest in seeing deals in that particular market.

Devlishly simple.

Each angel is free to follow-up with the entrepreneur on their own - this is not a pledge fund, or a fund of any sort, for that matter. This is merely a mechanism to get deal flow going among local angels.

The angels have committed to delivering an initial response to the entrepreneur within within one (1) week. This takes us out of the role of gatekeeper and lets you deliver your opportunity directly multiple investors that actively want to see your deal.

This makes StartupLounge/AngelLounge the largest organized angel network in Georgia, and quite possibly in the Southeast.  This group is growing like mad, and there is little doubt in my mind that we’ll reach 100 members by Q1, and quite possibly double in size in 2009.

A special thanks to Jeff McConnell, Chris Demetree, and the others who logged a lot of time brainstorming the system.  Also thanks to Charlie Paparelli (Paparelli Ventures) who puts a boatload of effort into driving the overall effort with AngelLounge.

BTW, if you are interested in joining AngelLounge as an investor member, contact me. There is no fee to join (why should there be?), but there is an interview process.

Cheers.

As I mentioned in my last post, our next Capital Lounge event is this Wednesday, 8/27. This is going to be far and away the best event we’ve done, on so many levels. More quality deals, more investors (4 to 1 company to investor ratio), and a couple of pretty big announcements, including one in particular that, to quote Mike Blake, that will “change the face of of the Atlanta early stage capital ecosystem.”

If you’ve ever planned a big event before, you obviously know all of the logistics and planning that go into it. CapitalLounge is no different. It’s a ton of work, for sure. But one thing that we do that many other groups don’t do is vet the attendees. This adds an order of magnitude to the effort required to pull off this event.

A key reason for the success of the CapitalLounge event is our vigilant effort to restrict attendance to direct capital providers and entrepreneurs with fast-growth potential. Investors and entrepreneurs are able to get maximum value from the event when they can spend their time establishing relationships with one another, rather than be distracted by other entities (hordes of service providers, job seekers, low quality deals, investor-wannabe types, etc.)

For the upcoming event, roughly one (1) out of every 4.5 applications was rejected for one reason or another. That’s a lot of filtering - and that equates to a lot of work. We have to do it this way - otherwise, we end up becoming the thing that we are trying change. There can be no sacrifice of the vision.

We get a lot of questions (especially from those whose applications are rejected) about the criteria we use, how we review applications, etc. Even though a lot of this information is automatically emailed to the applicant if their application is denied, I thought it might be instructional to provide a little more insight into how we select entrepreneurs, investors, and observers for this event.

Some General Background Info

Much like an investor is going to take just a few seconds to make a quick judgment call on whether or not they wish to look at a particular deal, we do the same. But we have to do it while drinking from the firehouse of applications that come pouring in each time we announce this event. First impressions go a long way, obviously.

95% of the applications that are approved gain that approval generally within a minute of us looking at it. The other 5% come from those that we have to research, those that appeal and change our mind, etc.

Also, because of the volume of applications we receive, coupled with the fact that this is a not-for-profit, grassroots, volunteer community effort, we can’t respond personally to each and every application that gets rejected. Sorry - we have day jobs, too. Please keep that in mind before writing us nasty-grams.

The Signup Process

Before I begin, it is important to talk about the actual signup process. For some reason, some folks seem to get confused about the process, despite it being described very clearly (and in detail) on the site. The first time you apply, it is a 3 step process - for future events you’d like to attend, it is a 1-step process.

First, you have to create a free community account. No biggie - name and email address are basically all that is required.

Second, you have to login, and create at least one active profile. A profile is way for you to model your presence within the ecosystem. Since you can have multiple profiles associated with your account, it facilitates parallel entrepreneurs that have multiple deals going at any given time, entrepreneurs who are also angel investors, etc.

A note regarding profiles is in order. What you put in your profile is important - it isn’t just fluff or crap to store in our database. Obviously, it is the first thing we look at when we are evaluating the merits of you being in the room. If you give us little information to go on, then that’s what we’ll use when we look at your deal. If you get rejected because you put some lame one-line pitch in (e.g. “We’re a software company”), don’t complain when you get denied.

Finally, once you have a profile, you can simply visit the event calendar on our site, and apply to whatever events you want (CapitalLounge, PitchCamp, etc.). Of course, for subsequent events, you can skip steps 1 and 2, since you will already have your profile in the system.

How We Evaluate Entrepreneurs

There are lots of reasons why we reject an application from an entrepreneur - more so than any other classification of attendee. Here are some of the more common ones:

The event is simply full:

Due to the extreme demand for this event, coupled with the limited size of our venue, we have instituted a cap on the number of deals that we can facilitate at each events. It is entirely possible that we are simply full for the current event. The chances of this happening are much higher the closer we get to the date of the event. We typically approve applications for somewhere between 125-150 companies for each event.

Geography:

The venture must be located in the Southeast United States (preferably in Georgia) or anticipate a relocation to Georgia in the near future. While we certainly want to pull regional deal flow, deals from Georgia will take precedence over deals from other parts of the region. Again, the closer we get to the actual date of the event, the worse your chances are of getting in if you are a non-Georgia company.

Service Providers:

The primary business of the applicant must not be the provision of consulting, legal, accounting, design, marketing, recruiting or other professional services for cash. This is obvious, and a core part of our StartupLounge mantra. In fact, I’d go so far as to say we helped pioneer the “no service providers allowed” rule in Atlanta. We’re proud of it. It’s a key reason why this event rocks. It’s a key reason why a lot of other events aimed at entrepreneurs are not as successful - because those events are often overrun with service providers, and that scares off most legitimate entrepreneurs and investors.

We do realize that often times, entrepreneurs have to bootstrap their company by earning money doing whatever they can. Often, this means the entrepreneur is not only the founder and CEO of Acme Software, but also a marketing consultant for hire (or some other service profession). I will admit that these are almost always judgment calls on our part. There is no silver bullet. While we want to help every entrepreneur we can, we also have a responsibility to the larger StartupLounge community to preserve the integrity of the event by keeping service providers out. Often times, we’ll talk to the entrepreneur to make sure that they realize that they are there to represent their startup, not their services business.The few that have gone against their word won’t be coming back.

If we do approve the application of someone who also has a services business going to pay the bills, it is absolutely imperative that they represent only their startup while at our event. Representing the services business in any form at our event, be it verbally in conversation, handing out another set of business cards, following up with someone after the event and attempting to sell them services, etc. would most likely prevent the entrepreneur, their guest, and their company from attending future events, and could likely generate some ill-will out there among the StartupLounge community of entrepreneurs and investors. Our community is incredibly protective of the environment that we are trying to create at CapitalLounge, and most violations – even slight perceived ones – get back to us as organizers pretty quickly.

Non Fast-Growth Company

The primary business of the applicant has to “likely be of potential interest” to investors as a fast-growth opportunity. This type of venture will eventually employ between 20 and 500 people, have sales growth of at least 20 percent projected each year for four straight years, and target five-year revenue projections between $10 and $50 million (at least). Typical industries would include (but are not limited to) information technology, healthcare/medical devices, life sciences/biotech, pharmaceutical, nanotech, alternative energy/cleantech, and new media. Ventures within industries such as newspapers, gambling, franchises, real estate, food/spirits distribution, pornography, or other such markets are not a good fit for this event.

While we are certainly staunch advocates of small business, the CapitalLounge event is not aimed at providing the level and type of capital needed to launch small businesses that are generally not considered to be venture-capital type opportunities. These include, but are not limited to: franchises, restaurants, consulting businesses, professional services such as accounting, brick-and-mortar retail opportunities, fitness clubs, health spas, faith-related businesses, real estate development, distributorships, and certain consumer product ventures. If your application described what would be considered a “lifestyle” or services business, we would almost certainly deny your application on this basis.

We do recognize that sometimes, companies that would not initially be classified as a “fast-growth” opportunity could take off, and turn into billion dollar companies. Unfortunately, we can’t predict the future, so we have to draw a line in the sand somewhere.

Freshness of Deals

We strive very hard to keep the event “fresh” for our investor community by trying to get as many new deals in the room as possible. New deals will almost always take precedence over deals that have attended the event at least 2 or 3 times in the past.

Lack of Progress

If it is our perception that the venture has not materially progressed since the last “n” times that you attended CapitalLounge (if applicable), your application to attend will likely be refused. Examples: After attending CapitalLounge for 2 or 3 events in a row (better part of a year!), you still don’t have a web site, your product hasn’t launched yet, you have no PR stream, your expectations of investors were and continue to be out-of-synch with the current market, etc. In short, you seem to be waiting for someone to write you a check in order to further your idea.

We did a lengthy “Under the Bus” segment on this type of entrepreneur in our recent podcast with Noro-Moseley Partners.

Low Quality Deal

If your deal is perceived to be of a level of quality beneath what we consider to be the “minimum threshhold”, your application will likely get rejected. We research each new deal that is submitted prior to making a decision on them. Things that may count against you: not having a web site, having an email address from a free email provider such as Yahoo! or Hotmail, some negative information from your past that we found on Google, you have a day job as a service provider - but no web site for your new venture, you have a web site for your services company but not your new venture, etc.

Yes, this is subjective. We realize this, and it isn’t going to change - because it can’t. Think of this as an aggregate of things. If there are too many yellow flags on your deal, you will likely either get rejected outright, or go into the hold queue pending further research.

I could give you lots of examples of some of the things we’ve seen, but obviously I don’t want to embarrass anyone. Trust me, though - we’ve seen it all.

Lack of Information

If we simply cannot find enough information about your venture to make a decision, we will likely have to reject the application. For example, you have no web site (or the one you provided doesn’t work), and the one-line pitch you provided on your application is nebulous (”We’re a technology company” .. WTF?).

We simply don’t the time to fill in those kinds of blanks. You’ve got to give us *something* to work with.

Sneaking Someone In

You have specified someone to attend with you as your guest, and that person does not meet the established criteria (or does not appear to be associated with your venture). You wouldn’t believe the things we’ve seen. Thankfully, we’ve prevented a lot of them, but occasionally, someone manages to sneak in (or sneak someone else in).

How We Evaluate Investors

Track Record - Known Entities

All investor attendees must either themselves be an investor with a known track record of investing or work for a recognized private equity investment firm.

If you claim to be a venture capitalist, but we’ve never heard of you, and you have no web site - your application will most likely be rejected. VCs have web sites, and their investment histories are easily found through Google. Don’t apply telling us that you are a VC representing a $250M fund, if the only thing we’re going to learn about you via Google is that you used to play penny stocks.

If you claim to be an angel investor, and our due diligence on you does not reveal a track record of investment activity (including deal references, public records searches, references from angels we do know, Google searches, etc.) - your application will most likely be rejected.

If you are an “angel investor” who also sells insurance, you probably aren’t going to get in. We realize that a lot of angels have day jobs, too (most actually do). These are typically handled on a case-by-case basis.

If you have a known track record of angel investing, it gets a lot easier to overlook your day job.If you are already a member of certain (but not all) Angel groups (e.g. AngelLounge), this could help your cause. Being a member of an angel group that is dubious will likely hurt your chances, however.

No Brokers

Investment bankers, capital brokers/finders or other placement agents are excluded from attendance, with the exception of those entities that commit their own capital, and certain wealth managers that represent high-net-worth individuals desiring to make alternative class investments.

If an investor entity offers professional services, they must also have their own capital to commit in order to gain entrance to the event. This is handled on a case-by-case basis. While we (mostly me) do not prefer this model to a pure risk model, the entrepreneur has to decide whether or not to engage this type of investor.

Pay-to-Pitch Entities

If you offer “pay-to-pitch” events for entrepreneurs, your application will likely be rejected. We believe that access to capital providers should be as transparent as possible - we philosophically disagree with the middleman model.

How We Evaluate Observers

Observer slots are reserved for members of the media, academia, certain industry bloggers, government, certain non-profit organizations, and guests that we choose to invite at our sole and absolute discretion. If you apply for an observer slot, and you are not obviously representing one of these entities, your application will be refused.

The Appeal Process

We do have an appeal process in place for those whose applications are rejected, but feel they should still be allowed to attend. Details of this process are contained in the email itself. However, I will say this - repeatedly arguing with us if your application has been rejected is probably not going to help. We have been known to change our minds. We can (and want to be) be convinced.

Generally speaking, though - if you are rejected and you file an appeal, we’ll ask to review your executive summary, one-pager, etc. This is really the only way to really see what the business is all about. We have, in the past, initially ruled out an entrepreneur based on their one-line elevator pitch alone - because it didn’t sound like it would be a good fit for the event - only to reverse the decision after reviewing the executive summary. Several times, actually.

So if you do appeal, come strong.

Easy Ways to Get Rejected (or possibly Banned!) from CapitalLounge

1. Lie to us about something
2. Try to sneak in when you don’t get in on your own merit
3. Try to sneak someone else in
4. Treating our event as a sales platform
5. Signing up for our event, being accepted, and then not showing up without either notice or explanation
6. Screwing one of our investors or entrepreneurs
7. Repeatedly writing us nasty grams because your application was rejected
8. Make no progress in your venture in the 3 months between events
9. Whine about superficial stuff
10. Make NO progress… (worth repeating)

Closing

The selection process isn’t perfect, and we realize that. And we iterate it constantly. Any suggestions for improvement are obviously welcome!

Cheers.

Our next Capital Lounge event is next Wednesday, 8/27, and man is it shaping up to be a good one.

As it stands right now, this will be the best investor turn out to date (due I think in large part to the success we’ve had with our Angel Lounge initiative). Right now we have over 40 investors signed up, and that number will probably drive closer to 50 in the next few days. There is a slight edge in the number of angel investors, but it is pretty evenly split between angels and traditional venture capital firms.

Over 150 entrepreneurs have signed up as well, and about half of them are new deals. Very cool to see that trend continue.

Of course, we try very diligently to weed out service providers, job seekers, etc. in order to create an environment conducive to having substantive discussions between innovators and capital providers.

if you want to meet the movers and shakers in the startup community (ATDC, VentureLab, regional VCs, local angels, and a veritable army of fellow entrepreneurs), you need to be there. And why not? It’s free.

We’re going to be making some cool announcements there as well.

As a reminder, we are capping attendance (for entrepreneurs, at least). So if you haven’t applied, and you want to attend, you should probably apply sooner rather than later.

Cheers.

The crossroads — a place where two roads cross at or about at right angles, otherwise known as “the forks of the road” — is a metaphor used in religious and folkloric belief all around the world. From the legend of the delta blues guitarist Tommy Johnson (no, not Robert Johnson, as some believe), who sold his soul to the devil at the crossroads, in exchange for other-worldly guitar playing skills, to the ancient Mayans to Robert Frost’s “The Road Not Taken”, the concept of the crossroads has been used to depict a “deciding moment” or “turning point” in life.

I think we’ve arrived at the crossroads in Atlanta, as it pertains to the early-stage venture scene. This is probably going to be a long post, so be forewarned.

The Appcelerator “Thing”

Unless you have been under a rock for the past few weeks, you are no doubt aware of the whole Appcelerator “thing”. Short version: Jeff Haynie founded the company, reached the $1M revenue mark, and poked around for venture capital funding here. He ended up heading west to Silicon Valley, pitched his deal there, and accepted a term sheet from some Valley VCs. Of course, as most VCs like to have the founders within “strangling distance”, the company is relocating corporate operations to Mountain View as part of the deal.

If you don’t know Jeff Haynie, or know of him, he has been one of the “voices” of this new emerging wave of entrepreneurs in Atlanta. Jeff has been very involved in everything from SoCon to StartupLounge to Startup Riot, and everything in between. There is no doubt that he will be missed.

Yesterday afternoon, Jeff came over to our office and hung out for a while. We talked some geek speak for a while, then went next door to the pub to snag a few beers. I figured the least I owed the guy was a farewell beer or two, especially given all that Jeff has done here in the Atlanta community over the past few years. Of course, invariably, we talked about Appcelerator, Atlanta, funding, et al. It was a brief moment of quiet fun — an oasis surrounded by the sad reality that Atlanta is losing one of its best and brightest problem solvers.

But as I have learned the hard way (mostly by occasionally opening my mouth just wide enough to insert my size 10 and a half shoes), there are always multiple facets to every story - to every problem. It is easy to fall into the trap of “blame the VCs” or “blame the culture here”.  But that is a slippery slope that doesn’t even begin to explain “why” things like this happen.

Appcelerator tried to raise money here in Atlanta. In fact, it is my understanding that they had one initial commitment for a couple of million, and another Atlanta VC interested. But when the west coast guys got into the deal, things got interesting. Why? Because there is a marked difference in operating models with west coast VCs (as compared to here).

Sanjay Parekh blogged about this today (“Why I hate Spreadsheet Jockeys”) - it is a good read - brutally honest, but there are some truths in it. Lance followed up as well, and posed an interesting question.

It is my opinion that most regional VCs in the Southeast tend to be driven by more traditional finance-based approaches to investing. On the west coast, the approach is often different. Sure, they still bet on the team, the founder, the jockey, the traction, etc. - all of the standard VC investment cliches. But they are gamblers. They bet on trends. They bank on their ability to predict the future. A lot more so than here. And there is a lot more at stake there … the funds are bigger, and so are the pressures from LPs.

The result is that their vetting and due diligence process can be quite different. They don’t necessarily want to see pro forma financials - at least not right away. Per Haynie, the west coast guys didn’t even ask about financials until his 3rd or 4th meeting with them. Why? Because they know they’re going to blow through cash as they scale the company. They also realize that many of their investments exit well before any real revenues are even present (e.g. Ribbit which was just snagged by British Telecom for north of $100M).

The old venture model was simple. The founder started the company and began to execute (possibly with the help of an angel, friends/family, etc.). Traction became present at some point. An outside investor was sold on the business model, and came in with an A-round. That cash was used to ramp up sales/marketing. Another subsequent round would be used to do rollups, M&A, or go global. Eventually, the company either had an IPO or was bought by a big box player.

Every VC played by these rules - even on the west coast. Then, something happened. The Internet arrived. Technology ventures shifted from semiconductor plays to online portals, search engines, networking infrastructure, and eyeballs. The west coast venture landscape started to evolve. Most of the rest of the country didn’t (including Atlanta).

The new model is different.

You don’t necessarily bet on revenues - at least not alone. You bet on value creation. Can this team create something of intrinsic value that can be moved to someone within a logical pool of buyers? You don’t believe me? Read the headlines. The venture scene on the west coast is full of companies that get picked up well before revenue, or certainly well before substantial revenues.

But in the Southeast, we are still investing in a linear model of Xs and Os. There is nothing necessarily wrong with that, mind you.  In fact, it is a much saner approach, especially if you are looking at it purely through the lens of financial risk.  But keep in mind, that just as companies compete against one another, so do VCs - at least in a normalized market.  If you are a “methodical” or “conservative” investor in this day and age, you are almost certainly going to lose out on opportunities to investors that are making deals based upon a more aggressive set of criteria. And that, my friends, is at least partially what happened with Appcelerator.

I should also note that some west coast VCs openly say that they don’t prefer to look at deals where there is local (non-Valley) VC money in play already.  Why?  For the reason I just outlined above.  Valley investors are likely focused on creating value, while a VC in an underserved market will likely focus on the financials and metrics of the business. Apples and oranges.  Oil and water. 1.0 vs 2.0.

They say that investors are driven by one of two motivating factors: fear and greed.  With any equity investment, there is a balance between the two.  Investors in the Southeast are driven more by fear (risk averse) than greed (risk tolerant).  Obviously, out in Silicon Valley, the balance is different.

By his own admission, this decision was a difficult one for Jeff to make - he was born and raised here. I can only imagine. I know I speak for all of the Atlanta startup community when I wish him the very best success in his journey.  Jeff - go make a fortune, then come back to Atlanta and help continue to make a difference here. We’ll save a seat at the table for you.

The Crossroads

I started this blog post referring to a crossroads for Atlanta.  So what is it? It’s actually pretty simple.

The Atlanta community has a choice to make. We can continue to play second fiddle to communities with half of the innovation present here.  Or we can treat Atlanta as a greenfield opportunity and evolve. There are plenty of problems to tackle, and lots of work to be done - but it can, and will happen. But certain views, approaches, cultural hangups, and models will either need to evolve, or be pushed out of the way (this is already beginning to happen).

Change is afoot here. There are new funds emerging, some of which will have perhaps different investment drivers.  More and more tech ventures are getting off the ground without venture funding. Entrepreneurs and investors are increasingly coming together at places like StartupRiot, StartupLounge, and the various coffee/dinner gatherings being hosted by community advocates.  Some of our successful entrepreneurs are “getting back in” and playing the angel game (a trend that I hope continues).  New angels are being drawn out of the woodwork and funneled into the process. Middlemen are being disrupted, and bottlenecks are being removed. A shift is on.

No one wanted to see Appcelerator leave Atlanta - not even the venture community here.  This much is certain.  But I believe it could very well represent a watershed event for this community.  We will look back in the not-so-distant future and we may actually thank Jeff for leaving.  Because the whole affair will likely further the grassroots community initiatives already underway here - and push us closer to our collective goals.

A Parting Shot

Fair warning to those that are not embracing of change and/or do not care too much for the open sharing of opinions and views:  the grassroots movement that is happening here is becoming stronger, and is becoming increasingly more organized and influential.  Big things are on the horizon. This town will be unrecognizable at some point, and those that aren’t part of the solution are going to become largely irrelevant.  Thanks in large part to the emergence of social media, the Atlanta startup community has a voice now, and you should strive to be a part of it, rather than shun it - no matter what your role is within the ecosystem.

During the American Revolution, the British didn’t worry too much when a few rabblerousers were simply printing pamphlets and talking smack about King Georgie the 3rd.  But when the pitchforks turned into muskets, and the tea crates started flying, it became a “problem”.   The rest is history.

Cheers.