Quick Disclosure: I have written several articles over the past couple of weeks about the controversy going on between Jason Calacanis and the Keiretsu Forum. I really have no direct relationship with either one of them. I know them both and I appreciate what they do for startups. I am not now nor have I ever been a member of the Keiretsu Forum. I am an independent Angel investor that has invested in two companies that were later funded by the Forum. I usually invest in very early stage deals that are often just two guys and a business idea. This is way too early for the Keiretsu Forum.
With all the "Brouhaha" about Angel Forums over the past few week, I decided I would talk to some of the people that were directly involved with the process and see what I could learn. I called Keiretsu Forum and asked if they would allow me to interview some of their companies and angels. It was very interesting and I would like to thank everyone who participated and gave their insight.
First, let's review the angels. All of the Angels I interviewed said they were active investors and most of them were investing 2-3 times per year. Several had been in companies that the Keiretsu Forum had invested in earlier, and then later came to the Forum as investors. Everyone seemed very engaged in the process and liked how the process had been put together. Here are a few insights that I found:
•Most of the people said they specifically joined the Forum to get a good deal flow and to help in the due diligence process. They said because there are so many angels from so many disciplines, they were able to intelligently invest in areas that they had no background. Everyone seemed to really like the due diligence process, although they said there were some members that liked to monopolize the analysis. All and all, this seemed very valuable.
•One investor said, "One of the interesting things I found was that Keiretsu allows me to manage all the companies that come at me personally and asked me to invest. I just tell them I do all my investments through the Forum and then give them their contact information." By doing this, he said he knew a good process would be conducted and he could leverage his investment.
•Finally a large number of Angels said they just did not feel that they had the discipline to implement a thorough due diligence, and that before they joined Keiretsu, they would make investment decisions based more on emotion rather than a good business model.
For the entrepreneurs, I got different stories. For several of the entrepreneurs, this was their first startup and they went to the Keiretsu Forum because they had no contacts in the investment community and had no experience in raising capital. Others were very experienced entrepreneurs and were working on their third or fourth company. Here are a few highlights of some of these conversations:
•For the first time entrepreneurs, most said they were not Silicon Valley "rock stars" and did not know where to begin. They had tapped all their potential "friends and family" investors, created a good company with a repeatable business process, and need capital to repeat the process and expand. Keiretsu Forum had provided that access and they were able to raise $500K to $1M to get to the next stage of their business. Several said they would eventually go to traditional venture capital, but that they wanted to wait to negotiate with the VC's until they had established a strong value and would not get creamed.
•I spoke with two companies that had not yet been funded by Keiretsu Forum yet, but had engaged with them and were being mentored by members on how to reach a level that would be attractive to the investors. Candus Zanghi from New York said, "I met with the Keiretsu Forum and they said we were a little early for them to invest. One of the Angels had a very strong background in Marketing and spent several hours with me after the meeting. He then met me for coffee a week later and spent a couple more hours." This seems to be a strong value that the Keiretsu Forum provides and something I heard from almost every entrepreneur that I talked with.
•One entrepreneur, Keith McCall, said his company Enroute received $800K from the Keiretsu Forum and another Angel group in January 2009. He said, "This was due primarily to their ability to attract top tier angel investors, the rigorous business processes in conducting due diligence, and the ability to update forum members with progress over time. " He continued, saying, "I raised over $22 million from Venture Capital in my previous company. I was initially skeptical about spending $6k with the Keiretsu Forum --- but given the current capital markets and the reticence of the VC community to invest in new businesses at this time, the Keiretsu Forum was the right place at the right time for my early stage company."
It became very clear that for some Angels and for some Entrepreneurs, the Keiretsu Forum can provide a lot of value. There are some down sides and like all investors, with each good thing comes with some bad. The Keiretsu Forum does charge $1,500 for each Chapter that a company presents to and for startups this can get real expensive real fast. The "Group Think" of the due diligence process can be taxing, especially when one of the Angels is very dominant. Although the Keiretsu Forum does of about 30% of their investments in technology, they do not usually do pre-revenue startups that are just two guys in a garage working on a product. They prefer a solid team, a repeatable business model, and some form of feedback from the market that this is going to be successful.