Early stage investing in startups is essential

Last week, after I wrote about valuation — the negotiation that happens between entrepreneur and investor over what the startup company is worth on the day the investor writes a check — I got a little goodnatured kidding from some of my friends. You sound just like a venture capitalist, they said.

Mea culpa. We are investors here at i2E, and we have a fiduciary responsibility to manage and create a return on the more than $60 million in funds we have under management.

But there’s another reason that we take an investor’s point of view with the entrepreneurs we support. We want to be their partner and help them to really understand how venture capitalists and angels think because we hope someday their capital needs will outgrow our funding capacity.

Startups must have capital to succeed. Most early stage capital comes from angel investors and smaller venture capital firms like i2E as the company tests its viability in the marketplace (a stage we call proof of concept). Entrepreneurs are dependent on these investors for critical early capital to get their products to market. That’s true whether the startup is in Oklahoma, Texas, or Silicon Valley.

Once a company makes it through proof of concept, it needs much larger capital rounds to scale and grow geographically, as well as across new product lines and market segments.

Entrepreneurs must understand investors’ investment criteria and the expected rate of return a larger VC targets when it considers investing millions of dollars in a company whose ultimate market share and profitability are nothing more than a guess on a spreadsheet. It’s critical not to inject a valuation that is so high or terms that are so atypical that potential syndication partners or potential later-round investors will turn away from the deal.

That becomes especially important for Oklahoma entrepreneurs as a significant aspect of our capital strategy is to attract capital from outof-state VCs and angel funds through syndicating investments.

Typically, venture capitalists and angel investors have preferred to invest close to home. They want to be able to see the company on the ground, get to know the entrepreneur, and to leverage their own networks to help the company succeed. Increasingly, experienced VCs and angels are considering investments outside their regions as valuations are becoming over-inflated in places where there is an overabundance of capital competing for deals.

Syndicated deals must be structured with standardized terms. We use the model term sheet and the model closing documents from the NVCA (National Venture Capital Association). We follow the Angel Capital Association’s best practices for due diligence. We have a reputation for professionalism and trust that has repeatedly attracted national capital into Oklahoma deals.

Tech Coast Angels (California) invested with us in WeGoLook, MidAmerica Angels (Kansas City) invested in D6 Labs, OCA Ventures (Chicago) and Mayo Clinic Ventures (Minnesota) in Progentec. MPM Capital (Boston and San Francisco) invested in Selexys and Tetherex, Prolog Ventures (St Louis) in Moleculera, Day One Ventures (San Francisco) in Monscierge, and S3 Ventures (Austin) and General Atlantic (Connecticut) in Alkami to name just a few.

We’ve proven that standardization and syndication are high-impact ways to expand capital exponentially for Oklahoma deals.