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Choosing Ventures that Might be Valuable: Lightning »

 

In the new venture world, being struck by lightning is not always a bad thing. In fact, it’s exactly what we hope for. In my last post, I talked about what distinguishes effectual startups from causal startups, and why we believe effectual heuristics help a new venture survive. But what happens after a company successfully starts, survives, and grows effectually? In order for the Willamette Angel Fund to make money, the venture needs to be struck by lightning.

Lightning and Liquidity

Angel investors rely on what we call “liquidity events” to realize a return. A liquidity event can be an acquisition, a management buyout, an  initial public offering, or even a bankruptcy — any event where current investors are cashed out. Angel investing works because a minority of successes make up for a majority of failures. Around 10% of ventures in an investor’s portfolio make up 90% of the returns. However, because angels invest so early in a company’s life cycle, it isn’t possible to accurately predict which companies will be superstars. The best we can do is determine that every investment we make has “lightning” potential. But what makes the magic happen? It often comes down to being in the right place at the right time. But there are key markers we look for to see if we’re in the sweet spot.

Scalability

An important element we look for is scalability. Does the company have the potential to explode in growth? This is easiest for companies with a low variable cost per unit sold (which can be restated as a high marginal profit per unit sold). An easy example is software — once a piece of software has been coded, the cost to duplicate it is negligible. Making ten thousand copies is as costly as making ten copies. This makes it extremely easy for the company to sell lots of product without requiring additional outside capital.

Industry Multiples

If you remember my post on the Power of Multiples from back in November, we looked at the effect of industry price-to-earnings ratios in the context of angel investing. Although we are far-removed from the public markets, these multiples offer us an indication of which industries are more likely to be struck by lightning. In highly-valued growth industries, companies don’t have to work as hard to achieve high valuations. In my November post, we saw how tech and pharma companies achieve far higher valuations per unit of earnings than companies in consumer goods industries, resulting in higher exit values for tech and pharma companies. This doesn’t mean we should never invest in lower-valued industries — it means we need to consider company valuations to ensure the price we are paying for a share of a venture matches the possibility of that venture being struck by lightning.

Comparables

In addition to looking at industries generally, we can look at specific companies that are similar to a venture we are considering. This provides us another indication of whether our particular venture has lightning potential. It is not enough to be in a high-value industry. A venture’s lightning potential increases in a segment where acquisitions are common and valuations are high. Looking at comparables lets us identify milestones required to reach a liquidity event and gauge the size and timeline of such an event. As with industry multiples, comparables provide us information regarding a venture’s valuation.

Betting on the Probability of Lightning

As angel investors, every investment we make needs to have lightning potential. With an uncertain future for our companies, our best estimate of this potential is to look at what has happened in the past to similar companies and industries. As they say, history tends to repeat itself.

 


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

Choosing Ventures that Might not Die: Effectuation »

 

Being in an MBA program and encountering the concept of “effectual entrepreneurship” for the first time can be jarring. Effectuation is everything corporate finance is not. We are used to the “causal” thinking of large and established businesses, where deep pockets require extensive planning and oversight, and obviate the need for a more flexible approach. In large, established businesses, causal thinking exists to protect managers from making poor decisions. However, in a startup, this type of corporate thinking all too often distracts from the core issue facing an entrepreneur – survival. In order to be successful, a venture must first achieve the more mundane and pragmatic goals of finding customers, bringing in more money than the venture spends and delivering a valuable product or service. Effectuation encourages those more pragmatic goals, so we look for ventures that use effectual logic. To see where the differences lie between effectuation and corporate/causal thinking, let us walk a hypothetical bakery through the five core concepts of effectuation.

Bird in the Hand

Effectuation tells us to look at what we have to determine where we can go. Causal thinking tells us to look at where we want to go to determine what we need to obtain to get there. An effectual baker will see they have flour, milk, sugar, eggs, and chocolate — and decide to make chocolate cake. A causal baker will decide they want to make carrot cake — and will go find the missing ingredients. The effectual baker produces a cake less expensively and more quickly than the causal baker. While the causal baker is out looking for carrots, the effectual baker is already working on customers for the chocolate cake, and because of lower investment has less to lose if potential customers do not like the chocolate cake.

Affordable Loss

Affordable loss is all about minimizing downside, rather than focusing on the potential for profits. A causal baker will project they can sell so many cakes per oven per hour, and buy as many ovens and ingredients as they can afford to scale as rapidly as they can. An effectual baker will begin with a rented oven and minimal ingredients while they test demand. If the causal baker fails, they lose a significant amount of capital. If the effectual baker fails, it is easier to learn from the less expensive failure and pivot to try again.

Crazy Quilt

“Crazy quilt” describes the patchwork of stakeholders around which an effectual startup forms. Effectual entrepreneurs build their business around stakeholder pre-commitments to minimize risk and ensure demand exists. An effectual baker will pre-sell cakes to raise money for supplies and determine which type of cake to bake. A causal baker will rely on market research and analytical models to determine what and how much to make. Not only does the effectual baker reduce risk by ensuring revenue before spending money, the effectual baker also improves the likelihood of market acceptance by involving stakeholder customers earlier in the venture development process.

Making Lemonade

Effectual entrepreneurs treat surprises as new opportunities — when faced with lemons, they make lemonade. If both bakeries order cake tins but receive muffin pans, an effectual baker will make cupcakes. A causal baker will return the muffin pans and wait for cake tins to arrive, because their model tells them to bake cakes. While the causal baker is sitting idle, the effectual entrepreneur is busy selling cupcakes and possibly discovering a new market.

Pilot in the Plane

Entrepreneurship is all about control. Effectuation emphasizes controlling the present, rather than trying to predict the future. A causal baker will predict carrot cakes will sell well next week, and order carrot cake ingredients. An effectual baker will avoid making a prediction by relying on the other four principles — they will look at what they already have and pre-sell cakes to ensure demand actually exists.

These five concepts together embody effectual entrepreneurship. In the Willamette Angel Fund, we search for ventures that use effectuation (whether they know it or not) because we believe the approach improves their chance of survival. And once a venture survivies, then it has the potential to be hit by lightning (please see my next post).

 


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

Follow-On Investing and the Dilution Bogeyman »

 

Many of our angel partners are surprised to learn the Willamette Angel Fund typically avoids follow-on rounds. Investors use the term ‘follow-on” to describe subsequent investments into a company you previously invested in. When the subject comes up, many investors can’t believe we don’t participate in investment rounds after our initial seed investment, in order to protect ourselves against ownership dilution in these later fund-raising rounds. But… is dilution anything more than a bogeyman? Research shows the danger is overblown and investing in follow-on rounds may actually hurt returns.

Dilution occurs when a company issues and sells new shares of stock, thereby reducing the ownership percentage of pre-existing shareholders. For example, imagine a company with 50 shares of stock — each share represents 2% of the company. If the company issues and sells 50 new shares, an original share now only represents 1% of the company. The pre-existing investors’ ownership just got diluted. To avoid this, pre-existing investors participate in follow-on investment rounds, buying some of the new shares to maintain their “pro-rata” overall ownership in the venture.

Given the financial importance of this issue, academic research has investigated the relationship between follow-on investing and overall investor returns. A 2007 study by Wiltbank and Boeker found investors who participated in follow-on rounds saw lower return multiples and waited longer for returns to occur. On average, follow-on investors experienced returns of 1.4x on their investments in 3.9 years, whereas investors who avoided follow-on rounds enjoyed returns of 3.6x in 3.3 years. Why does this occur? One explanation might be investors are not as rational as they might think. The sunk-cost fallacy is powerful, and investors may pile money into failing investments in an effort to prop those investments up and avoid admitting defeat. A second explanation, as found in a 2014 study by Wiltbank et al, might be the decreasing marginal returns of subsequent investments. This study divided companies into two categories: “burners” raised a lot of investor capital to fund growth, and “earners” funded growth organically using company revenues. On average, the burners raised $25,000,000 and returned $58,000,000 in 7 years; the earners raised $95,000 and returned $24,000,000 in 13 years. Although earners had to wait an extra 5 years, the sheer scale of the returns compensated for lost time. Investors in both burners and earners realized similar profits, but investors in burners had to spend 263 times as much.

Faced with this data, why do rational, sophisticated investors continue to participate in follow-on rounds? There may be a few explanations. First, there’s the sunk-cost fallacy mentioned above. Second, there may also be a fear of missing out if an investor sees a new round of financing being enthusiastically greeted by their peers. Third, if the extra investment allows companies to avoid bankruptcy or be acquired sooner, investors may be better off preventing a total loss or realizing a faster gain. For example, venture capital funds are evaluated on their internal rate of return, which is extremely sensitive to the timing of cash flows. For VCs, spending more to realize faster exits makes sense. Finally, perhaps investors are simply giving in to peer pressure. “One and done” investors are often seen as adding less value to companies. Raising money is difficult and companies concerned with having to raise more in the future prefer investors who are known for repeat investing. As a result, investors who avoid follow-on rounds may not be introduced to as many investment opportunities.

In the uncertain world of angel investing, it is clear a logical, grounded approach is needed when it comes to follow-on investing. In the right situation, it may be appropriate — but as a general rule, the data just doesn’t support it.

References:
2007 Study – Wiltbank, R. and Boeker, W. Returns to Angel Investors in Groups (2007).
2014 Article – Wiltbank, R., et al., Investment and returns in successful entrepreneurial sell-outs. Journal of Business Venturing Insights (2015), http://dx.doi.org/10.1016/j.jbvi.2015.02.002i.


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

A Decade of Success »

When the Willamette Angel Fund was started nearly ten years ago, the idea was met with skepticism. Could a group of students successfully integrate themselves into the opaque world of angel investing? Could yearly cohorts of students possibly compete with dedicated seasoned professionals? Ten years in, our research indicates the answer is “yes.”

Each semester, we dig into our portfolio companies to evaluate the fund. Since inception in fall 2009, we invested a total of $630,586 into a whopping 67 companies. 51 of these companies are still active. The rest have either achieved liquidity or failed. We directly invested in ten companies, with the remaining 57 positions coming indirectly through our participation in larger funds, such as Oregon Venture Fund, Angel Oregon, Willamette Angel Conference, and Bend Venture Conference.

The real fun of a portfolio review comes when we compare ourselves to the professionals. There are three seminal studies of angel investing returns, conducted by our own Professor Rob Wiltbank in 2007, 2009, and 2016. These studies, encompassing different economic cycles and geographic regions, show professional angel investors typically see a return multiple of 2.2-2.6 on their initial investment, with an internal rate of return (IRR) of 22-27%. For the non-finance reader: a return multiple of 2.2-2.6 means for every $1.00 invested, an investor received $2.20-2.60 back; and an IRR of 22-27% means the investment grew, on average, at a rate of 22-27% per year.

To achieve these returns, professional investors make dozens of investments each year to diversify risk and maximize what finance people term “the portfolio effect.” In contrast, the Willamette Angel Fund typically makes only one significant direct investment each year, and that one investment is generally only a fraction of the total capital the startup is raising at the time. Even so, our returns are comparable with the professionals. Looking at all 67 investments, and valuing the 51 active firms at “book” (the amount we initially invested with zero growth taken into account), our overall multiple is 1.44 and our IRR is 12%. However, if you consider only realized investments (those either sold or failed), we have a multiple of 2.45 and an IRR of 21% — remarkably on par with the professionals.

Further research into our own portfolio exposed a surprising result. Our direct investments significantly outperform our indirect investments. Our direct investments have a multiple of 1.71 and an IRR of 17% — but our indirect investments have a multiple of 0.85 and a negative IRR. If you exclude the 51 companies still active, our direct investments have a multiple of 2.92 and an IRR of 25%, compared to our indirect investments with a multiple of 0.09 and a negative IRR.

We may be “just students,” but our fund compares with the professionals, and our own direct investments outperform the larger funds we participate with. I’d call that a decade of success.

 


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

The Power of Multiples »

If you follow financial news, you probably notice how much attention price-to-earnings ratios receive. For the uninitiated, price-to-earnings is a company’s share price divided by its earnings (profit) per share. As of November 10, 2018, the average P/E ratio for the S&P 500 is just under 16. This means that the share price of an average company in the index is worth about 16 times that company’s annual profit. Consider, then, the oft-touted FANG stocks (Facebook, Amazon, Netflix, and Google). These firms enjoy P/E ratios of 22, 96, 108, and 42, respectively. Similarly,  biotech and pharmaceutical companies Amgen, GlaxoSmithKline, and Merck have P/E ratios of 52, 42, and 60. Both categories enjoy multiples far above the market average. Contrast those with consumer goods companies such as Kroger, Macy’s, or Ford, with P/E ratios of 7, 7, and 6 — far below the market average.

As an angel investor, the public markets often seem like a far-fetched fancy, given the rarity of IPOs. However, because data on the seed stage ventures where we place our investments remains largely opaque, public company valuations provide useful comparable data when we evaluate a given company. Inferring from the multiples above, we learn investors in a tech or pharma company can anticipate far greater value per unit of earnings ($22-108 of value per $1 of profit) compared to investors in consumer goods companies ($6-7 of value per $1 of profit). Fundamentally, this means a consumer goods startup will have to work harder than a tech or pharma company to achieve the same terminal valuation at liquidity. If a tech startup earns profits of $5 million, it might be valued at $500 million. If a consumer goods startup earns profits of $5 million, it might be valued at $35 million. Said another way, the consumer goods startup would need 14 times the profits of the tech company to achieve the same valuation. Thus, tech and biotech startups are often acquired for hundreds of millions of dollars, where consumer goods startups tend to sell for only tens of millions of dollars.

All that is not to say consumer goods companies represent a poor investment, or tech and biotech are good investments. For example, the recently infamous Theranos proves that not all biotech is worth the sticker price. Rather, this split emphasizes the importance of understanding how companies are valued, so we can make more informed investment decisions. It may be true that consumer goods companies tend to garner lower valuations — but that also means we can buy larger stakes for the same size of investment. All else equal, we would rather buy 20% of a company that will sell for $35 million (20% x $35 = $7) than 1% of a company that will sell for $500 million (1% x $500 = $5). Angel investing is all about risk and reward, and although a larger stake increases risk, it also increases the counterbalancing reward.

 


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

Ahead of Schedule and Deeply Technical »


Although the Angel class operates as a partnership of students, setting its own agenda and deciding which opportunities to pursue, there are checkpoints built into the schedule which usually determine the pace. The most notable are our board of advisor meetings. The class has a wonderfully experienced and supportive board, made up of local entrepreneurs and business leaders, that meets in December and April, coinciding with the end of the two school semesters. Historically, those meetings have served to focus the class on pitching an investment at one of those end-of-semester meetings.

Not this year.

It’s only October and this class called an exceptional board meeting to present our first major investment. After a six-week sprint of dedicated due diligence, the students running the Willamette Angel Fund invested $50,000 into a life science company on the front line of combating blood cancers. Lynx Biosciences, based in Southern California, is developing a patented method of culturing patient biopsies and testing different drug regimens to identify the treatment most likely to combat myeloma. Without Lynx’s breakthrough technology, patients diagnosed with myeloma undergo a live trial-and-error process as doctors test treatment after treatment until one works. The old process can take weeks or months — an eternity when facing fast-moving multiple myeloma. Lynx reduces this to days and saves patients from the side effects of treatment trial-and-error. This is our second investment through the Pasadena Angels since our partnership began last year, underscoring the value they bring to our group (for the curious, I have an entire post about our Southern California partners).

Pursuing due diligence on this investment put us to the test. Along the way, we relied on all the skills AGSM and the College of Law taught us. Our accounting and finance classes enabled us to create cash flow models. Our marketing classes empowered us to identify comparable companies and research the scope of the blood cancer market. Our legal classes made it possible to evaluate patents and digest dense legal agreements and term sheets. Seeking to understand the technology underlying Lynx, our networking skills drove our conversations with other investors and industry experts, such as researchers at Oregon Health & Science University and board members of other life science companies. It was an enormous amount of work, but was worth the effort when we faced scrutinizing and thoughtful questions when we presented our diligence findings to the Willamette Angel Fund Board.

With one investment under our belt, the hard work has only just begun. With the bar set high — our first investment a mere two months in — we have a lot to live up to over the next six months.

 


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

How to Capture the Attention of People Richer than You »

In the Willamette Angel Fund, we see hundreds of entrepreneurs over the course of two short semesters. Often, we can’t help but sympathize with them. These are people who have spent countless sleepless nights and double-mortgaged their family homes to pursue a dream. In fact, many of the students in our fund are entrepreneurs themselves. Yet, when we sit down to discuss a deal, we often decide whether to pursue it in a matter of minutes, or even seconds. Quick and fundamental decisions make or break even the best deals.

This is valuable information whether you stand in the shoes of the entrepreneur or the investor; or indeed if you stand in different shoes altogether. The speed with which we must sift through those hundreds of deals illuminates the challenges we will face as innovators, as well as the pointed questions we need to ask as managers. Knowing what questions matter ensures our time and resources, and those of our organizations, is well-spent. This brings us to our three simple rules of deal-review.

1. Don’t bury the lead.

Last spring, while reporting on a company from Seattle, a pair of students began by explaining the product — a multipurpose hook for use while camping. At that point, Professor Read left to refill his coffee, indicative of the overall level of interest in the room. Nonetheless, the students persevered — and eventually clarified that two million of these hooks had been sold through REI’s national distribution channel. Those of us still in the room were instantly riveted — and upon his return, Professor Read was aghast he had missed such crucial information. Investors are not known for their patience — when an aspiring entrepreneur buries proven revenues deep in a slide deck, most investors have long since stopped paying attention and gone for a cup of coffee. This takes us to our second rule…

2. Traction is always the lead.

Nothing is more valuable to a young startup than actual, paying customers. Until customers arrive with cash in hand, the business model remains in doubt. The reason is simple — a company is only as valuable to potential acquirers as the revenue it ultimately generates. When angel investors are looking for 1,000% returns, early traction is absolutely critical.

3. Where there is doubt, there is no doubt.

People like to brag about their own success. Skilled entrepreneurs love to highlight what makes them better than everyone else. If a founder has paying customers — they will tell you. If a founder is talking to national distributors — they will tell you. If a founder has a venture capitalist lined up for the next round of funding — they will tell you. If you have not been told that a given fact is true, it is almost certainly not. In this world, if you have reason to question an assertion, it is almost certainly not worth betting on. This is useful to remember in any business dealing. (And for you movie trivia buffs out there, the “when there is a doubt, there is no doubt” quote is attributable to Ronin, 1998).

Conclusion: Embrace Short Attention Span

As a matter of necessity, investors do not tend to be patient individuals. They are CEOs and managing partners whose time is worth hundreds of dollars an hour and billed in six-minute increments. They are used to short bullet points carefully tailored to what they most care about. If you want their attention (and money), they need to know upfront why they should care about what you have to say.

Don’t bury the lead.

Traction is always the lead.

Don’t leave room for doubt.

 


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

A Partnership of Angels, in the City of Angels »

Himalaya Rao-Potlapally and Liz Hartman after a breakfast meeting with the Pasadena Angels.

Anyone thinking the Willamette Angel Fund is a sequestered student activity should have been with us earlier this month, where class kicked off quickly by taking three of us to Southern California for a delicious dinner and rousing breakfast meeting with our regional partners. A mere two-and-a-half weeks into the semester, our first trio of students flew down to Los Angeles to attend their first mid-week breakfast meeting with the Pasadena Angels. The Pasadena Angels proved an extremely valuable partner last year, generating three of the four deals the Willamette Angel Fund seriously considered, and we are extremely excited to be working with them again.

The trip started with dinner at the North Italia restaurant in El Segundo, where Himalaya Rao-Potlapally (pictured left), Liz Hartman (pictured right), and I got together with David Cheng. David is a former Willamette alumnus who now works for K1 Investment Management, a private equity firm based out of Southern California. K1 Investment Management specializes in enterprise software companies. Thanks to the success of our previous students in selecting great startups, K1 was involved in the purchase of at least two companies the Willamette Angel Fund has invested in.

Then, it was off to the hotel to rest up for the breakfast meeting the next day, where the Pasadena Angels were bringing a strong start to the year by showcasing life science technologies, travel management software, and a gaming social network venture. Los Angeles and the surrounding metropolitan areas generate an astonishing amount of entrepreneurial activity in the software, biotech, healthcare, mobile app, consumer goods, and financial services space. Every month, Pasadena takes several dozen applicants and whittles them down to just two pitches at each breakfast meeting, ensuring we see top-quality companies.

As we kicked off the tenth year of the Willamette Angel Fund, we returned with our first potential investment of the year — a life science company that has developed a new drug efficacy test to aid in treating blood cancers. Whether we write this company a check or not, remains to be seen. Either way, the power of partnerships is clear. Working with an angel investing group in Pasadena to launch startups that may grow to be acquired by a private equity firm in Los Angeles, one of the most important jobs for us is building the relationships that make it all happen.

To learn  more about the Pasadena Angels or K1 Investment Management, check out their websites:
http://pasadenaangels.com/
https://k1capital.com/


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.

Why We Don’t Vote »


The easy answer? Because Rob Wiltbank says so. But that’s only the start of the story.

It’s the second day of class, and we’re discussing our investment methodology — how we screen companies, how we evaluate the companies we select, and how we decide to write a $50,000 check. With nine students in the class and the ominous threat of having to sift through hundreds of companies over the next eight months, the obvious question arose: “so… how do we vote on each company?”

The answer, perhaps surprisingly, is that we don’t–and in fact we shouldn’t–vote. We all enrolled in a graduate management program to learn to be leaders, partners, and innovators. That means we are learning to be comfortable with sharing our ideas, professionally debating with our colleagues, and making difficult decisions without the simplicity of hiding behind a vote. If eight students are in favor of a deal, voting lets the ninth off the hook and absolves them of responsibility. The lone “no” vote is allowed to keep quiet, because in a vote people focus on the results, not the reasons. And then when the deal goes south, the “no” votes can simply say “I told you so,” and walk away clean.

If you take away voting, you take away that protective shield. Each person is required to explain why they like or dislike a deal. They can’t hide behind a one-word answer. That lone “no” vote is required to point out to the rest of the class that the company is hemorrhaging cash and has a CEO who can’t sell. Perhaps the “yes” votes already knew that, in which case nothing changes. But, perhaps they had overlooked those concerns in their enthusiasm, in which case everything changes. In these situations, it is better to regret saying too much, than regret saying too little.

At the end of the day, the no-voting system works because it relies on the ambition and enthusiasm of each individual to drive deals forward. We have just three hours each week to discuss the hundreds of deals we see. If the opposition is too great, the deal naturally falls to the wayside and more popular deals take center stage, no voting required. Prioritization doesn’t become a political issue. And we learn how to move the fund ahead when the decisions are not easy “yes/no” binaries, but commitments to early stage ventures with uncertain futures.


Nathan Foos

Nathan Foos is an MBA/JD candidate at Willamette University, and is an alumnus of the WU College of Liberal Arts where he studied history, mathematics, and economics. With a strong interest in the provision of capital to growing firms, Nathan has actively engaged in the experiential course offerings at AGSM, including the O’Neill Student Investment Fund and the Willamette Angel Fund. In particular, Nathan enjoys angel investing because he can engage on a personal level with investee companies, obtain real-world insight into a plethora of industries, and learn from the mistakes and successes of hundreds of startups.