Ep 19 – Straight Talk on Angel Investing




Susan Preston is the Managing Partner of SeaChange Fund committed to fostering entrepreneurial growth in the Pacific Northwest through early-stage investments, as well as Co-Manager for the Element 8 Fund, focused on cleantech investments. Susan teaches in the business school at the University of Washington focusing on entrepreneurship, finance and investing. She currently serves on six for profit boards. She was General Partner for the CalCEF Clean Energy Angel Fund, which focused on seed/start-up stage investments in clean energy technology. Susan also serves as immediate past chair and a lead instructor for the Angel Resource Institute, a global investor and entrepreneur education organization.

Susan is the author of numerous articles, white papers and books on angel financing. She is a contributing author to Impact with Wings. In addition, she authored, Angel Financing for Entrepreneurs, Early-stage Funding for Long-Term Success was released by Wiley Publishing in March 2007, and her first book, Angel Investment Groups, Networks and Funds: A Guidebook to Developing the Right Angel Organization for Your Community, a comprehensive guidebook on the establishment and operation of angel investment groups, for which she has received numerous accolades, was published by the Kauffman Foundation in 2004, and later adapted for use by the World Bank in emerging markets.

Susan is a world-recognized expert in angel financing and angel organizations. She is a national and international consultant and speaker on economic development, angel and venture financing for numerous countries and NGOs including the EU, OECD, USAID, South America, Saudi Arabia, Jordan, Australia, India and the Caribbean. She was an Entrepreneur-in-Residence with the Ewing Marion Kauffman Foundation for several years focusing on initiatives supporting the growth and success of women entrepreneurs and initiatives related to angel investing and angel organizations.

Susan has held more than 36 board positions with public and privately held corporations, and has served on numerous non-profit boards. She has been profiled in Red Herring, Inc. magazine, Smart Money, Worth and other local and national publications; and has contributed to numerous nationally published articles on angel investing.

Susan spent much of her earlier career in senior management positions in public and private companies, from general counsel to CEO. She was also a partner in two national law-firms, and is a licensed patent attorney.

Susan is a recent recipient of the Angel Capital Association prestigious Hans Severiens Award, given each year to an individual whose actions advance the role of angel investing, expand entrepreneurship and benefit the angel investing industry as a whole. In 2014 Susan received the Small Business Person of the Year for 2014 from the Small Business Council of America.  She was honored along with five Congressional representatives in the nation’s capital.  Susan also recently received Senator Cantwell’s Women of Valor award, which was presented by then Vice President Joe Biden.

Ms. Preston received her JD, cum laude, from Seattle University School of Law and her BS, magna cum laude, Phi Beta Kappa, in Microbiology and Public Health from Washington State University


How do you go from zero to sixty in mastering the angel fundraising game? What hidden indicators signal to investors that you’re a pro and not a rookie entrepreneur when it comes to your startup?

What’s the one thing angel investors look for in a pitch that most entrepreneurs miss? What small action will get you off to a great start with any angel investor?

In this episode, veteran angel investor and author Susan Preston talks about how she started the first group of women angels, the ABC’s of angel investing that you’ve always wondered about, how to decode investor responses to your pitch, get off to a great start, and much more.

Episode Highlights

  1. The steps you must have in place before seeking angel investment
  2. How to tell when your product is customer ready
  3. When to approach angel investors
  4. How to find the right angel investors for your stage and industry
  5. How to avoid wasting time with “tire kickers”
  6. Hidden sources of angel investor referrals
  7. How to estimate your funding needs realistically
  8. Angel investor must-haves: realistic projections, competitor awareness, bench strength, traction
  9. What angel investor due diligence looks like
  10. The many disguises of an angel investor’s “no” and how to move on quickly to your first “yes”
  11. The basics of angel investing: SAFE’s and convertible notes
  12. How to manage the post-investment relationship with angel investors
  13. Notes on valuation and how to go the extra mile
  14. Then one thing women entrepreneurs can do to become more successful

Links and Resources

SeaChange Fund : Early stage investment fund of which Susan is a partner

Kauffman foundation : Leading advocacy, research and support organization for entrepreneurship in the United States

Element 8 fund : Accredited angel investor group focusing on clean tech

Impact with Wings : Book on women angel investors co-authored by Susan

Angel Financing for Entrepreneurs: Book on angel financing for entrepreneurs, authored by Susan

Angel capital association : Trade association of angel investors

Golden seeds : Angel investor group focused on high-potential women-led businesses

The National Venture Capital Association : Trade group of venture capitalists

Astia: Investment network focused on inclusively led startups

Interview Transcript

Shubha Chakravarthy: Good afternoon, Susan. Welcome to Invisible Ink

Susan Preston: Good afternoon. I’m thrilled to be here.

Shubha Chakravarthy: We’re excited to have you here too. So can we jump in? We have so much to talk about today.

Susan Preston: Absolutely. Let’s do it.

Shubha Chakravarthy: So you had a pretty fascinating journey. You started off as a lawyer, and then you became an entrepreneur-in-residence at the Kauffman Foundation, and now you’re an expert on angel investing. What was that journey like?

Susan Preston: I’m an opportunistic risk-taker. I was a partner in law firms. I was also in senior management at companies for many years.

Most of my legal career was in senior management and companies. But I was a partner at a major high-tech Silicon Valley-based law firm here in the Seattle area. And during the “.com” boom, I was a corporate securities lawyer, so I was doing, not surprising during those days, a lot of private placements and a lot of IPOs and so forth.

And I would look at the list of the early stage investors, and it was all men. And that really irritated me.

So I started talking to other women I knew in the Seattle area and asked them, “Hey, does this kind of bother you as well?”

And lo and behold, there were a whole lot of people out there that thought it was really wrong, that all these early stage investors were all men.

They were all getting the advantage of coming in early and getting these big rewards. And these are women that are successful at their jobs and have worth and have wealth. And so we formed a kind of a cohort to work on it, and I sent out 225 invitations to the first meeting, and 175 women showed up.

That’s pent-up frustration. So that really told us right there that we really needed to move forward with this. So that got the sort of the media attention, a whole bunch of other things happened and that got the attention of someone at Kaufman Foundation who was leading the Kaufman Venture Fellows program at that time.

She brought me in and I started running all the programs for Kaufman related to women entrepreneurs. And that was just an amazing opportunity to meet these outstanding, engaging, wonderful, dedicated, driven women from all over the world who were there to advance women as entrepreneurs. It was very heady and a lot of fun.

I then started working at Kaufman because we realized we were missing a key component in the financial process. We were focusing a lot on the venture with the education program and the fellows program, but we weren’t even paying attention to the angel side. And that was the first time I really started working on looking at that angel piece.

And because I had started the first all-women’s angel group in the United States, here in Seattle, I decided that I would be working on that. So Kaufman actually published my first book on angel investing. And then a couple years later, Wiley Publishing, Josie Bass Imprint, published my second book. So it’s lots of fun doing that. Lots of work.

Shubha Chakravarthy: I love it.

Susan Preston: Thank you. That led to other opportunities for teaching and speaking around the world. So I’ve been to most of Europe, all over Europe and the Middle East. From Saudi Arabia to Jordan, doing programs anywhere from a few days to 10 days, programs and teaching in Australia, South America, and India.

I’ve been just all over. And then that led me to be hired and asked to come down and create a venture fund in clean energy in the Bay Area. So I moved down there and ran a venture fund in clean energy and missed the Northwest.

So I came back about a little less than 10 years ago to this area and started the SeaChange Fund. So investing up here doing venture investing up here.

Shubha Chakravarthy: Fascinating journey. It’s a whole other conversation by itself. You talked a little about what led you to angel investing. What keeps you there? Just curious.

Susan Preston: Oh, it’s fascinating to me. I just love great new ideas, new technology, and people thinking outside the box. It’s fun. It can be frustrating as well. But hopefully it’s financially rewarding as well. I’d like to think that I’m pretty good at picking potential winners and then working really well with those entrepreneurs.

It is important to support entrepreneurs. I want to make sure that the audience, as young female entrepreneurs starting on their journey, understands that they need more than money from their investors. They really need a partnership with them. And they need to use their knowledge, advice, and experience to benefit them as well.

I think those are really important pieces, but it’s just fascinating to me.

Shubha Chakravarthy: Just a great segue. Thank you.

Let’s start with the basics. To someone who’s new to the field and has never done angel investing before, what do they need to know? What do we need to know about angel investing? The 101?

Susan Preston: Angel investing has developed over the last two decades since I really started getting into this. I would say back in the late 1990s and early 2000s, angels were not nearly as sophisticated as they are today. There are a lot more groups around, and so there is more organization around education.

There’s more organization around due diligence. And I actually think groups are really good for entrepreneurs as well. Because they are people coming together that are looking collectively at making investments. So when you’re going out there as an entrepreneur and looking at angels to pitch to, I would advise looking for groups and doing your homework to find the group that matches with you.

There are so many angel groups now that are regional or industry-focused. And what I really love is that there are more and more angel groups as well as small investment funds that are focusing entirely on women.

Shubha Chakravarthy: So as an entrepreneur, how would I go about finding these groups?

Susan Preston: You start looking on the internet.

You research, you just start researching and you talk to people. This is a lot of work.

You’ve got to spend hours upon hours, starting doing your own search, going to every resource that you can find. The Angel Capital Association does have some lists of angel groups there, but it is not comprehensive in any way.

And then, find some of the women’s angel groups, like a big one in California, in the Bay Area in San Francisco, called Astra. They’re really big, along with another one called Golden Seeds. Golden Seeds actually has a number of chapters around the United States and they’re just, all these women are completely committed to investing in other women and supporting them.

That’s something that you want to look for. You don’t want to just randomly start going out there and talking to any potential angel. You have to be organized about this. You really do have to do your homework. So not only do you have to do your homework in understanding the audience, the angel that you’re going to pitch to, and whether or not they’re even mildly interested in what you’re doing, but also your homework and how you’re developing your company.

We could spend a whole other series of podcasts talking about how you properly prepare your company. And this is really interesting because I’m back at the University of Washington now in the MBA program. I’m teaching in their entrepreneur MBA program right now. And so I’m teaching classes for a couple quarters on finance.

So that’s just one piece of getting ready as an entrepreneur. And there are so many different things you really need to do, and I want these women to do their homework. One of the things I know about women is that, for some odd reason, they feel they have to know and learn everything before they do it.

Okay, let’s go out and learn everything we need to do before we do it. Let’s feel comfortable about it. I will guarantee you, as a woman entrepreneur, you can learn on the job. Really, you’ve done it before. You’ve made new recipes, you’ve done all sorts of things like that. You can do this too. But go out and get that background in education and learning.

Attend pitch sessions, do all that kind of stuff so you get to know and understand angel investing in angel investors better and what they’re about.

The other thing that’s really good is to get some advisors, and that includes advisors like It might be your lawyer that you’re going to hire someday.

And make sure you pick somebody that does a lot of early-stage work that does work with early-stage companies. Do not go to your uncle, who does estate planning. Please don’t do that. Okay?

Go out and find the right one and spend some time with them saying, I just need to understand from you what’s it like in Cincinnati, here we are. What is it, what’s the community like? What is the environment like for angel investing? Who are the best people to talk to? So I want you to prepare, and I want you to network a lot. I want you to get out there and speak and work and just listen.

And at the same time, learn, absorb, learn, absorb. And this is a never-ending learning process for sure. It really is. I’ve been investing for 23 years and I’m still learning stuff.

Shubha Chakravarthy: Great advice. It feels like there’s a certain stage at which it’s appropriate to seek angel funding versus maybe it’s too early or too late. What is the right time and how do I know as an entrepreneur that this is the time to go seek angel investing versus maybe not yet, or too late?

Susan Preston: So I do want you to have a few things in place.

There is a wide range of angel investors out there, some of whom will do very early stage. Not much more than an idea. Some groups will not do any investing until you’ve already gone a long way. So you have to figure out who you’re talking to and, again, who is your audience.

But I think that if you have identified your market, you’ve validated your market, which means you’ve gone out and you’ve spoken to potential customers or clients and described your product, and they say back to you, “Wow, that is a solution I’ve been looking for. I have this problem, I have this pain, and that is a great solution for my problem.”

You need to have an aspirin, not a vitamin. So you really need to have that and you need to be able to describe it in a way that the market can understand so that you can easily get that feedback from the market and make sure that it’s honest feedback, not somebody just saying, “Oh, that’s really nice,” or just, “That’s so cute.”

There’s a lot of people out there that just wanna make you happy. Make sure you get the honest view even if you have to say, “Really, honestly, I’m okay if you don’t think it’s a good idea, I just really need to know, do you think it’s a good idea?” So I want you to do that.

I want you to have your product far enough along that it is at least close to an alpha, possibly a beta stage. So you have put time and effort into it. This is not just coming up with the thing on the back of the napkin and going out and raising money. You have to put some effort, time, and your own sweat equity into it.

Most entrepreneurs start on the weekends and in the evenings, and they spend a lot of time doing that. And then you’ve started your team. It may be you. Investors want to see more than just you. They would love to see a co-founder or one person that you brought in as a very early stage member of your team.

I want you to surround yourself with two or three advisors that are knowledgeable in the industry you’re going into. I may be able to give you some advice on marketing strategy. You’re going to go on LinkedIn and you’re going to look for all sorts of people out there and find these really neat people that are in your market, and you’re going to think, “Oh, they would never talk to me.”

Oh, they would never help me. And oh my gosh, you’d be so surprised at people. They really find it a compliment when you say, “I really admire what you’re doing. I wanted to let you know you’ve just accomplished so much. I have this startup company. Would you be willing to give me an hour a month of your time?” Or something like that.

“But to be honest with you, here’s what I’m doing and here’s what I’m trying to do”. And you know what? It’s really amazing how many people are willing to say, “Oh, sure. You seem like a great person, and I really am interested in your product. Sure, I’d love to do it.

Shubha Chakravarthy: There are a couple of words you mentioned there for use by those of us who are not familiar with the startup lingo. You mentioned an alpha and a beta. How do I know which is alpha and how do I know when I’ve advanced far enough to hit beta status?

Susan Preston: Yeah, it’s a really good question. Alpha is internal testing, more internal testing. An alpha is something you give to really friendly testers, people who are way okay with it, not with it breaking in the first half hour, so that you can work out some major bugs. And a lot of times, it can be internal testing and so forth.

Beta is when you’re actually going out to some of those very early stage customers and giving it to them, and they’re going to do it for you because they’re going to get it free from you, or they’re going to get it at 10% of the cost you’ll charge everybody else or something like that, and they’re willing to work with you on it.

Those are your really early adopters and when you look at the curve, the adoption curve, they’re way down in that little teeny corner in the left hand corner there, and I want you to give them the most concierge-best service you’ve ever done before. If they call you, you’re answering the phone, you’re working with them, you are gracious and grateful to them for everything that they’re doing for you, and they will become good customers of yours.

But make sure you’ve got it to a point where it is working; that’s important to have that.

Shubha Chakravarthy: Which was going to be my next question. So it’s never going to be perfect, and obviously even beta is pretty imperfect. Is there a threshold over which you say, “Hey, I worked out all the kinks and it’s not good enough to put into beta?”

Is there like a flip switch, a binary test that says I can go to beta now?

Susan Preston: There really isn’t , it is a feeling. So it is really bouncing it off of those highly trusted advisors and so forth and saying, “What do you think? Am I ready yet? What else do I need to do?”

One thing I want to advise, I have a couple of my entrepreneurs that are doing this. They’re way over engineering and delaying going to market.

We want to do just one more thing. We just want to do one more thing. We want one more thing. That is not the right way to do it. Let’s look back to, let’s see, 1982, maybe 81, when Microsoft first launched, or maybe the late seventies, when they first launched. That was not a perfect time. It was not a perfect product, and there was a small market at that time.

Think about the fact that what you’ve got to have is something that is good enough that it works and meets those really crucial points that the market is looking for in your product and it can clearly demonstrate to even these friendly customers that it is solving that problem for them. That’s really important. So, it’s gotta be past that. The UI can be a little on the non-functional side, but the UX needs may be a little further along. But if it just says black and white screen, it doesn’t really matter at that stage.

Put your time and effort into it by working and working in a way that is relatively smooth for the customer. That’s important. Don’t make them just go through hoops and problems to get there, but be on the phone with them.

Shubha Chakravarthy: So if I had to play back what I just heard, Susan, it sounds like your trigger test is that there has to be a clear “before” and “after” picture from using what, whatever you’re put in front of. It may not have been great, but there was a clear difference in the before and after where they saw a transformation.

Susan Preston: Yeah, I like that. I like that because what you’re doing is clearly showing them that it solved their problem.

Yeah, I like that. Yeah,

Shubha Chakravarthy: Thank you.

Susan Preston: Let’s put that down. Shall we?

Shubha Chakravarthy: We put that down! Thank you.

So then you talked about getting angel investors and other things you need to be prepared for. Can you give a high level in terms of what that process looks like? So I’m gonna go out, I’m gonna do all this research, I’ve got my beta.

What are the steps I need to take to prepare for meeting with angel investors? What are the must-haves?

Susan Preston: I’m going to tell you that there are, what, a half a million angel investors or a quarter million, whatever it is now, angel investors out there. They’re all different, every one of them.

And you’re never going to find an answer that will fit all of them; you’re never going to be able to please them all. You’ve got to remember that angel investors probably invest in 10% of the companies they see.  VCs are at 3 to 4%. So remember, there are a lot more nos out there given to companies than there are yeses.

So, on that basis, not only do I want you to be prepared when you go out and think about going out to your first betas, and by the way, you can go to angel investing before you’ve gone to beta. It just depends on the stage that the angels are comfortable investing in. Some of them are pre-seed. I’m very happy to invest in the time period and understand how you’re going to get to your beta, which is fine.

Some are a little more risk-averse and want to be almost into commercialization or into commercialization before they’ll even consider investing. So that’s another thing to know about angels. So the process is highly varied. I’ve heard of angels that take two hours to make an investment decision and others that take 200.

So it really depends on the individual and it also depends on the group. Now I lean – obviously, I have a slight prejudice toward groups and venture funds. Small micro-venture funds are really, in some respects, just as they could be, more approachable and easier to work with than groups sometimes.

But with groups or small funds, you’re getting an opportunity to pitch to real-life investors, not people that are kicking tires. The fund is dedicated to making investments. And if you have a room of 70 people there, there are angel investors there that do invest. So you’ve got a better chance.

You just have to be careful about the people that are just nothing but tire kickers who are just coming there for their own personal enjoyment and entertainment. Make sure that you’ve vetted again; do your homework on your group. What do they invest in? Where do they invest? All that kind of stuff and get a warm introduction to them.

At least for venture funds, they don’t invest in things that come over the transom. They just don’t. It has to come through a trusted resource or some type of prior connection.

Shubha Chakravarthy: So that brings up an interesting point, because a lot of the research shows, and I’m sure you’ve seen this too, that access to networks is a big barrier for women entrepreneurs, especially if they have intersectionality.

They’re women plus women of color, or they’re women plus, I don’t know, age, or whatever barrier you want to throw in there. So when you don’t have access to those networks, how do you then facilitate that warm introduction or avoid that cold call with these people?

Susan Preston: A couple of different ways.

One of your lawyers can make ’em. You’re hiring the right lawyer, right? You’re hiring a lawyer that represents early-stage companies, and part of their responsibility to you, believe it or not, as a lawyer, at least I believe this as a recovering lawyer, is to help you with raising finances.

Frankly, it’s to their advantage if they’re not going to get any more fees out of you. Just think of it practically here. The other one is that a lot of these groups, particularly the ones that are focused entirely on investing in women, are really open. And they often have programs where potential entrepreneurs can just come and listen.

They have office hours where you can just sign up and say, “I’d like to just talk to somebody and see where I am. If I’m ready for you guys, what else do I need to do?”

And they’re very open about that. I know Golden Seeds does that. I know a number of the other ones will do just these office hours and be open to anybody that would like to speak to them.

And it’s no longer that seven degrees to Kevin Bacon thing. It’s about two and a half to anybody, so use LinkedIn, use your network, follow the trail. If you speak to one person, say “is there anybody else you can think of to speak to me”, you don’t have to be pushy about it.

It’s just saying, “I really enjoyed speaking to you. If you think of somebody else I can speak to that might help me or lead me to this, I really appreciate it”. And then attend events. There are a lot of times, open pitch competitions and things like that. And there are people there, and you can just introduce yourself and really, frankly, just introduce yourself and say, “I’ve got an idea.”

I would love to send you some information on It can almost be enough that they’ve actually put a face to a name. They know they have met you prior. You seem to be able to walk and talk and do things at the same time. You sound intelligent , you don’t look like an ax murderer kind of thing.

So those are the kinds of things. It’s really hard and I know it’s hard on women, particularly because we are balancing so many things in our lives. It always helps to have a great partner, which I’ve always been blessed with. But it’s still, we feel the sense of responsibility with children and home and all that kind of stuff.

But you’ve got to make time.

Shubha Chakravarthy: You already gave me like two sources and some ideas that I hadn’t thought of. So those are excellent. How do you then figure out how much you should raise? Do you have any kind of rule of thumb, heuristics? Any advice on what’s a good way to figure out how much you need to raise?

Susan Preston: Yeah, You need to take my class on entrepreneurial finance is what you need to do.

No, it’s really hard. It is really hard. I want every one of those female entrepreneurs out there to learn something about finance. I want to make sure they understand that. I know finance. I’m teaching essentials of finance and entrepreneurial finance at an MBA level this quarter at the University of Washington, which is a pretty decent university.

I had no background in finance. I was a microbiology and biochemistry major. I went to law school, and then I started working at companies, and I had to learn on the job. And then I started being an investor 23 years ago. I had to learn on the job. I knew nothing about finance, but I knew I had to learn it and understand it in order to do my job well.

So you’ve got to just dig in and learn it. And there are lots of books out there on basic finance and how to read financial statements and how to build. And so what you’ve got to do, and even if you’ve got to go out and hire somebody to help you for a few hours, you’ve got to build some basic financials because you need to ask your question yourself.

Your question is, when can I possibly start generating revenue? How much will it be? What are going to be my costs? What are going to be my expenses? What are some strategic milestones that I need to hit in order to grow?

And I want you to do that for a couple years. I want you to look at a couple years and then look back and say, “How much money do I need to get there?”

That’s going to help you. This is something that every single entrepreneur does, so don’t feel bad if you do this. I have this little “two-sy” rule that when I look at financials says that entrepreneurs are the highest and most wonderful optimists in the world, and I love them for that. And you have to be an optimist to be an entrepreneur.

But here’s the practical side. I almost invariably find that entrepreneurs fail to understand when they give me their financials. I look at ’em. I’m going to say it’s gonna take you twice as much money as you say, it’s gonna take you twice as long as you say to make half the revenue that you say.

So there are some really important rules of thumb when you’re building your assumptions and building your financials. One simple one is that you hire a salesperson, you have it scheduled for the 14th month out, and so you get the salesperson coming in, and then you start showing sales from them the next month.

How many people think that’s realistic?

Shubha Chakravarthy: You probably have a lag of a few months at a minimum.

Susan Preston: Yeah. Oh, at least. They’ve got to learn the product. They’ve got to learn the market. They should already have the background, so you don’t want to hire somebody that doesn’t know anything about it.

But they’ve got to work their network, they’ve got to work. The connections you give, this is a process to get in there and expect that a customer will write a PO like that. It’s just not realistic. You’ve got to be realistic about this, and it’s okay to ask for more money.

Don’t try to think this, and this is something else women do. They shortchange themselves on the amount of money they need almost every time. And then, guess what? They stretch that money like nobody’s business. A woman can stretch more out of a dollar than anybody, so that’s great. But don’t get yourself backed into a corner where you have to do unrealistic things just to make it realistic about the money you need.

I cannot emphasize that enough. And if you want, bounce it off some people. Bounce it off some entrepreneurs’ experience. That’s one of the advisors you want. You want somebody that’s been there, done that. You show ’em the financials and they go, “You’re going to do what?”

They’re going to be like, “Oh my goodness, okay, you’re really sweet, but let’s double and triple these numbers along the way”. That kind of thing. Again, it’s okay. It’s okay to need 2 million instead of a million. There is nothing wrong with that. That is not saying that you’re a failure. It is not saying you aren’t capable.

It’s actually saying you’re realistic.

Shubha Chakravarthy: So what I heard was really two things. One is this weird dynamic where women undersell themselves and yet could be not conservative enough in terms of the 2X rule, right? You might still be underestimating the amount of time it takes for you to get your revenue to become cash flow positive, whatever.

And the second thing, which is very interesting, is that what I’m hearing is that if you’re uncomfortable with the financial aspect of things, I almost heard you lay out a scenario where you’re playing out in your mind how each of these steps you’re going to take is going to play out in the real world so that you can imbue a sense of realism into the numbers that you’re doing.

That’s the easy way to get the numbers to be real, to say, “Okay, I hired Joe or whoever to become the salesperson. What’s happening in February, right? I hired him in January. What’s happening in February? And that helps you think through, okay, can I really put a sales number for my February projections versus March or April?

Is that fair?

Susan Preston: Yes, it is fair. I will say that the “two-sy” rule applies to every walking human entrepreneur on the face of the earth. So that is a universal rule. I don’t care who you are.

Shubha Chakravarthy: So you’re not seeing women as any less misled?

Susan Preston: No. This is the optimism. This is the enthusiasm.

This is the beauty of the entrepreneur. They truly feel that their product is better than anything out there. And everybody is going to rush to buy it because you have just come up with the thing.

It’s fine. It’s great. I want that. Fair enough. And you want that driven, tenacious kind of individual, but you also want somebody that’s realistic about how you get there.

Being an entrepreneur is not easy. I’ve started funds, so I’ve gone out and raised money for my venture funds, and it’s not easy. I think one of the ways that I had a very high hit rate in getting investors was that I was extremely prepared when I went out.

There was not a question that was thrown at me that I couldn’t answer and answer intelligently. That makes a big difference that you can know the answer to every question, and that’s including your financials. So when an investor is asking you about what your CAC is, what your unit volume pricing, you have to have the answer to all those questions, even if somebody has helped you build the financials.

Shubha Chakravarthy: Fair advice. So you’ve found the right fit, you’ve got the right investors that you’re talking to. You’ve done your homework, you know how much you raised, you’ve mastered your financials and your story.

I’ve heard a lot about due diligence and I’ve heard about term sheets. Can you explain at a high level what that due diligence process looks like for angels and then how that leads into a term sheet and what an investor should look for in a term sheet?

Susan Preston: Again, sometimes due diligence for angels is two hours because they just go by their gut feelings.

I’m not that kind of investor because I don’t think that’s the right way to do it. I’ve got a pretty good hit rate. My existing funds right now have an average of about a 60% IRR on average. So we’re doing okay. But it is an involved process. It’s a rapid due diligence because it’s a lot of hours that are put in behind the scenes, but we’re still going to go through all the steps.

So we’re going to spend a lot of time talking to the entrepreneur and the team. We’re going to do our own market analysis. We’re going to talk to our own market experts. We want them to thoroughly explain to us the product, their go to market strategy, and their business model. the competition. And by the way, everybody has competition.

Shubha Chakravarthy: Heard that one .

Susan Preston: That is a massive turnoff for an investor. If somebody says, “Oh, I don’t have any competition”, and it’s just, it’s okay, you need to come back to the same planet that I’m on and figure it out because you’re clearly, competition is not in your eyes. It’s in the market’s eyes. So in the market’s eyes, who else would they be looking at when they’re looking at your product?

Who would they line up next to you? And it’s true! Everybody has competition. So even if it’s status quo, even if it’s not doing anything, that’s still competition. So I need to know that.

And then there are the financials. So we’re going to go through each one of those pieces and break them down. We’re going to look at the team. We’re going to look at the back of the team.

We’re going to ask you who else needs to be hired because you clearly don’t have and shouldn’t have all your team right now. So I want to know who you are bringing on and when. What are those positions? Where are you most weak and most vulnerable at this time? What do you need to work on and what are you doing?

What an investor’s doing in diligence is assessing the risk profile of the investment. So we’re asking the question, “I’m identifying these 10 risk factors that this company has. These are possible avenues of failure. Now, Mr. or Mrs. Entrepreneur, I want you to go through with me and tell me how you’re going to mitigate or eliminate every one of those risks”.

Now, I’m not going to say it that succinctly and that straight-forward, but that’s what we’re doing. We are judging all these different pieces that go together to make up a company and the high risk of failure, the 70, 80% risk of failure. How are you going to be one of the 20% that makes it, and if these are all your risks, how are you going to eliminate them?

Shubha Chakravarthy: Which is fantastic. Two questions Yeah, I love this.

Question number one: When you reject someone, someone comes to you, they’ve done their homework, and you reject someone. The first is clearly intrinsic, right? The business story isn’t adding up. Either they haven’t considered the content or whatever the case might be. That’s a clear reason why you would reject it.

What are some of the buckets of procedural, like the hygiene factors, that you would reject a deal even if it had the intrinsics? Are there any, and are there other buckets of reasons why you would reject a deal? And I’ll come back to risk in a minute.

Susan Preston: Oh, there are a myriad of reasons why you’ll reject the deal. Sometimes it just doesn’t pencil out from an investment return. It doesn’t have an investment level return potential. The market is too small. They are unrealistic in their approach. They have the wrong business model, and they won’t listen to other opportunities.

There’s too much competition, and there’s no real way of differentiating. They may be just too late. Market timing is the biggest reason companies fail. Either too early or too late. When we reject a company, and obviously we reject the majority of the companies that we look at, we always give a reason. We always give a reason.

And it depends on the stage at which the rejection happens. So the rejection happens at the initial review of the submission. It’s usually written communication.

If the rejection comes after they’ve gone through some initials, they’ve presented to us, and we’ve decided after the initial pitch that this is just not a fit for us, we’ll do a write-up and then offer to do a discussion to get more in depth

If it’s after the in-person session where we’ve gone through some questions and sort of the initial process and everything else, we will always have a sit down and have a conversation with them. Now, that’s unique. There are many investors out there, angels and venture, that will never give you one iota of feedback.

And part of the reason is that they don’t want to ever put themselves in the corner of saying, “No”. You’ve got to learn as an entrepreneur that when an investor says to you, “Oh, that’s interesting.” Yeah, Okay, that’s a no.

A “Why don’t you get back to me a little later when you’re a little bit further along?” That’s a no.

“I’m really busy right now. Let me check with you in a little bit, and I’ll let you know how I’m doing”. That’s a no.

You need to figure out what her no is.

Shubha Chakravarthy: What’s a yes?

Susan Preston: “Wow. Let’s keep moving forward.”

Shubha Chakravarthy: That’s the only yes, basically! Okay, fascinating.

So then you talked about this fast concept of risk.

I was talking to another entrepreneur the other day and she said the same thing. She said, “You need to understand that when you’re pitching to an investor, that you need to lay out for them what the risks are and your whole pitch, how you’re de-risking it, what are the ways in which you’ve seen or that you would recommend an entrepreneur identify the risks, help the investor understand that they understand the risks, and then de-risk those risks.”

Susan Preston: I love entrepreneurs that start their pitch with, if they can, if they have enough information, one really quick summary slide that is, they spend 20 seconds on it. It’s the elevator pitch, “this is our brand, this is our product. This is the accomplishment we’ve made so far”.

Okay, next slide. Here is the market’s problem. And you stated it in such a manner that everybody goes, “Oh yeah, that’s right. That is a problem”. Even if they’re not in that market, they can connect with that and they can understand.

And then the next slide is, “Here’s a solution for us, and here’s what we’re doing to provide the solution to this massive pain in the market. We are that aspirin, and now here’s the size of the market. Here’s how it’s divided up. Here’s where we’re going to go first”.

So you’ve answered the question, is there a market issue? Yes, you are a preferred solution. You’ve convinced me of that. You’re now telling me that it’s a sizable market and you’ve got a way of going into it, understanding the silos and so forth.

Now give me a couple things about the product. So I got an idea of where you’re at in the development of the product. You can show me where you’re going, where you’re at right now, your timeline, a little bit on your financials, so I can get that picture of the story from your financials, something on your team, a little bit on the investment and how you’re going to exit ad that is good.

Oh, and use of proceeds. That’s, when you’re just talking about the round, do not try, please, especially if you’re a scientist. I know you love your product. You don’t have to sell me on how it works.

All I have to know is that the market wants it. I want to know if the market is sizable. I want to know how you’re going to get to the market.

I want to look at your financials, your high level financials, and your team right now. How are you going to build out this team? Those are the things that I want to know in that pitch that you do not need. There are so many entrepreneurs out there when you’d say, “You’ve got 10 minutes. They go, “I cannot do it for less than 30.”

And I go, “Yeah, you can. Because if you can’t do it in less than 30 minutes, you’re never going to win a customer”.

This is what you’re pitching: you’re selling yourself, you’re selling your company. This is a sales pitch. So think of it in the way of a sales pitch. What do you need to do to initially hook me so that I say I want to learn more?

That’s what that initial pitch is for, to bring me to that point where I want to learn more.

Shubha Chakravarthy: To that point, you talked about the IRR that your funds are earning. You talked about the fact that this is an investment, basically. I’m not marrying the entrepreneur, obviously, as an investor.

Susan Preston: A little bit, yeah.

Shubha Chakravarthy: A little bit. But it’s really about the investment, right? It’s really about the returns.

Is there anything that the entrepreneur needs to do to explicitly address what the returns would be for an investment that an angel investor would make? Or is that something that’s outside of their competence and they should let the experts deal with it?

Should they even bring it up?

Susan Preston: Oh yeah. If they can do that, that’s fine. Particularly when they’re talking about their exits, they can have – I love market examples and most companies exit by acquisition. So give me some examples of companies that have bought other companies similar to you or in the larger industry.

So I can see that ABC Company bought X, Y, and Z for 250 million. Be sure that you can show those things. Because one of the other bad things is that if you are developing a product into a market that already has a few incumbents, big incumbents in it, and they’re all, they don’t acquire companies, they only do internal development.

How exactly are you going to grow? What are you going to sell? And so, just really understand those things. It’s as complex as I remember when I was doing clean energy work and I had a couple of people come to me and were talking improvements in HVAC systems, so heating, ventilating, and air conditioning systems.

And they were talking about this new way they’re going to do it. And yes, it’ll be priced at 10% more, but it’ll use one tenth of the power and all that kind of stuff. And since we’re priced higher, everybody’s going to want it because of that.

First of all, that’s not true, unfortunately. But the other thing is, I said, do you understand how the large incumbents make their money?

“Yeah, they make it off of selling these systems”.

I said, “Nope. They don’t. They put it on maintenance”.

If you don’t even understand how the market works that you’re trying to sell into, you’ve got a big problem.

Because what that tells you is that those big incumbents out there, and this is true in a lot of industries, will sell that product itself for a 5% margin because they have to have a 70% margin on the maintenance.

So you have to know and understand how your market works. And there are a lot of entrepreneurs that just crash and burn because of that.

And they’re not going to make it because they don’t understand the realities of how their market actually functions. Are they working through distributors? Now I want you to do direct sales to start with. It may be the reality is that you’ve got to go through distributors and third parties and it’s just not feasible and most markets have that.

So it’s really tough to try to get people to understand that it’s not simple. It’s not just hold up and go.

“I’ve got a great product. I’m now going to go out into the market”.

It just doesn’t work that way.

Shubha Chakravarthy: And my sense is that if you do look at exit options and strategies and comparables, you’ll find out a lot of these things because you’ll have to understand who bought them and why.

Susan Preston: Yes.

Shubha Chakravarthy: Almost like another benefit of having to find that, it sounds yeah.

Susan Preston: And every entrepreneur out there, every woman’s going, “Oh my God, one more thing I have to do”. And yet, it’s true. You really do have to do all these things

Shubha Chakravarthy: To run a business, regardless of whether you need an investment or not.

This is, to me, the basis of running a good business, right? So you have to be doing it anyway. It just gets packaged in the investment process versus the fundraising process versus “I’m running a business” process. You have to do it. I get it.

So then, okay, so you’ve done all of this. You pitched, you got the investor. Can you talk a little bit about how deals are typically structured and what the term sheet looks like in an angel investing round?

Susan Preston: Sure. Oh, of course. So there’s these two sides and there’s these notes and convertible notes and things like that on one side.

And then there are what we call equity rounds on the other hand. And those are the two kinds of traditional, basic ones.

And now we’ve got these convertible equity things called SAFEs that have come in. Y Combinator came out with them early on. The original SAFEs just raised the hackles of my legal background.

And they were written in such a fashion as to be very entrepreneur-friendly. And so, up until a couple of years ago, if I got an entrepreneur bringing me a SAFE, I’d say “okay, you’re interesting, I really like your company, but by the way, we’re gonna do a side letter and I’m gonna get all these other things”. Because  I do want a maturity date.

Otherwise, what does this mean? And I do want conversion in there. I want a cap. I want this because, from an investor standpoint, the original SAFEs were an agreement for some future equity. But I had nothing in my hand. I had no obligation from that entrepreneur back to me as the investor, nothing.

So it was really frustrating to be in a situation in which I could not control anything about that investment. They now have what they call “Post money SAFE’s”. And those are much better. They have dialed in a lot of these pieces that I’m talking about. They’re fairly straightforward. They’re fairly simple.

Entrepreneurs like them because they’re cost-effective and they’re pretty darn standard. Now, there are other standard things like Series Seed. There is a website that does the series of seed financing documents, and those are developed by a few different lawyers that are really active in this area.

That can be good. And those are pretty straightforward documents. The convertible notes are ones where really what you’re doing is that you’re quite early in life and it’s very difficult for you and the investor to come to some level of agreement on what you are really worth. So that’s, it is a good thing, and it’s short.

There’s a purchase agreement. Simple, very simple. Those of us who have been investing for years don’t really find the equity series seed all that much more complicated. But I know it can be daunting for young entrepreneurs to try to deal with that, unfortunately.

So that’s okay. That’s okay. We can figure that out together.

Shubha Chakravarthy: Then what do entrepreneurs need to know at a high level about the whole valuation issue?

Susan Preston: Be realistic about your valuation. Look at the market trends. What are the valuations out there? There are a lot of places that you can go and look for information on what the market valuations are in your region for the stage of your company.

Look to your advisors, your lawyer, your accountants – those folks should know that information. Some of the law firms will publish periodically, I think quarterly, updates on where terms stand and where trends are in valuations.

The National Venture Capital Association does that. There are lots of sources out there, so this is every single thing that you’re going to do and everything that you’re making a decision about. Go research and get some information on it.

Don’t just walk into it blind. That it is worth the research. It is because, really, a lot of times, it just raises more questions that make you sound intelligent. And that is one of the other things I want to make sure that all of our ladies out there do.

This is that when you’re standing in due diligence, one thing you can do that will just wow your perspective investors is have your deal room already set up and have it set up with your articles and your bylaws and your board minutes and your marketing analysis and all those kinds of things. Have it already in there, have it already set up.

So if they say they can, when can you get me a deal room? And you can say, “Oh, I can just give you a link I’ve already got set up”.

And they’ll go, “Wow, now you’re organized. That’ll impress people.

Shubha Chakravarthy: Thanks for that tip. We’ll make sure we highlight that.

So you go through this process. You talked about a lot of the structures and evaluations, and I know that you have to have a good advisor, so we won’t go too deep into that. There are professionals who deal with that.

But let’s say you’ve nailed down your funding, you’ve gotten the money, and everything’s going along. What tips would you give in terms of maintaining that relationship with your angel investor post-funding?

Susan Preston: Yeah, They want regular updates. They may want to be more involved. They may say, “I’d really like to work with you as an advisor. They may be a board member for you. But if they’re just a relatively passive investor, I still want you to do quarterly investment updates for them.

The best way to keep them going as a follow-on investor for you, because you will need more money, is to talk to them about how it’s going, and you can talk about the good and the bad. Please don’t send out investor updates that just say, “We’re wonderful. Everything is peachy”.

If there are some challenges in teaching, one of the best things to do is to say, “We faced this challenge and here is how we addressed it.”

That is great. Those are entrepreneurs that we want to keep around because there is nothing wrong with having challenges. There is nothing wrong with having an experiment go bad, as long as you’ve learned from it. And as long as you’ve taken the right steps to move forward, that’s what really counts.

And if you’re having issues, reach out to one of your investors and say, “I’d like to talk through this with you.” Know your investors’ backgrounds so that you can reach out strategically to them and ask them

Shubha Chakravarthy: Is that something you would also discuss or put down in your agreement when you get the funding to say, Hey, you’re an expert in, I don’t know, aeronautics or whatever, and include like X hours? Is that part of a deal or is that more informal?

Susan Preston: It’s informal. It’s not part of the deal. That’s a side thing. And if you want to set up a formal advisory involvement and relationship, that’s a side thing. You might even get to the extent of doing an advisory agreement with them.

That’s all separate. Keep the financial documents just about the financials.

Shubha Chakravarty: Perfect.

So, moving and changing gears very slightly. I was just fascinated that you founded the first women’s angels group in the United States. That’s fantastic. Is there anything different or any advantage for female entrepreneurs reaching out to women angels? Is there anything noteworthy there that you’d like to talk about?

Susan Preston: Yeah. I think it is great. In 2004 or 2005 we did an assessment at Kaufman on the number of groups out there supporting women. And there were like 10. And I did an assessment a few years ago for a program I was doing and I was working at, and I kept, I just kept going. When I got to 60 logos, I went, “Okay, I think I don’t, can’t fit anymore on the page”.

So there are lots and lots of groups out there and amazing women that want to help other women and are interested in understanding how women entrepreneurs think and how to support you. and also a lot of times, understand your product and your market better.

Shubha Chakravarthy: And is there a central resource that you know that a woman entrepreneur can access for a full listing of these kinds of women’s groups?

Or is that something that they’d also have to do as part of their homework?

Susan Preston: Yeah, I don’t know of any. The Angel Capital Association has some, but they don’t differentiate between men and women. They do have a women’s-focused investor group there. But Astia is huge. It has been supporting women entrepreneurs for a long time.

And then there are the very active groups like Golden Seeds and others.  Wall Street Broads. There are just a lot of them out there. And actually, I think that if you do a search, just say women-focused investment angel investors, there are enough articles that have now been written following a lot of these groups that I think you can come up with a list of 20 or more.

And that’s a great start. And they will also know because they’re active. They’ll also know some others that are not necessarily in your region where you are. But also, that may be focused entirely on the market you’re in. So one venture fund, and don’t forget, it’s not just angels, it’s ventures, small venture funds as well.

One of my investors has started her own venture fund, along with a friend of ours out in New York. They focus entirely on women’s health issues. That’s it. Female health issues and entrepreneurs developing products around them. What a great, perfect day! Unfortunately, there’s no shortage of issues for us.

Shubha Chakravarthy: So then you’ve seen a lot of entrepreneurs, women entrepreneurs throughout your career.

You’ve advised them, you’ve evaluated their pitches. What are the top things that you would counsel entrepreneurs to succeed in terms of things that may have held them back or things that you see that prevent them from being more successful? What have been your top, I don’t know, three or four, observations about women entrepreneurs?

Susan Preston: I think the biggest thing that women do is underestimate themselves. Women think they can’t do something unless they’ve already done it. It’s the old adage that you give a job description to a woman and there are 15 things that she says you need.

If they don’t have all 15, they won’t apply. A man looks at and has half of them and says, “I’m perfect”.

So stop underestimating yourself. You’re just as capable. You’re just as smart, and frankly, you’re smarter. Believe in yourself deeply. Believe in what you’re doing. Don’t let things get in the way.

And one of the biggest things for me personally, for women, and I’ve talked at women’s programs about this, is to stop thinking about yourself as a woman, stop.

When you walk into a room, and this is one of the things I realized many years into my career that I was doing that I didn’t even know I was doing because I didn’t know there was another way to think. I mean, my first career in-house was in large timber industries, and I was the corporate legal counsel on environmental issues, walking into places in the Midwest and the southeast, and this room full of 25, 30 men smoking and cigars and everything.

I walked in. I was the only woman in the room, and not for a second did I even think about that. So you have to put aside the fact that you’re female. Okay? You’re female, so what? You are competent. You are capable. You are experienced, you know your stuff, you are driven. You’re just as worthy, and you walk in with that belief in yourself and, somewhere down the way, oh by the way, you happen to be female and you use that to your advantage.

But don’t walk into the room and go, “Oh my God, it’s all men”.

Who cares? You’re there to pitch your company. It really doesn’t matter. It does not matter. You’re going to make them walk away there wowed by you because you’re not acting like you’re intimidated. So somehow, I don’t know how you do it, but you’ve got to get over yourself.

So that is the biggest piece of advice I can give any woman, because I am truly astounded. Every day that I work with women and I work, I do big conferences, I do events, I do all these kinds of things. And invariably, I have a woman say to me, “How do you go into a room with all those men”? And it’s, “Who cares?”

Who cares? They really aren’t any different than you, and yeah, okay. They’re a little different. But but up here, I would say you’re better than 90% of them because you’re using both sides of your brain because you’re thinking about not just business but people. You’re doing all sorts of things that they don’t even know how to do.

So give yourself massive amounts of credit for that too.

Shubha Chakravarthy: If there’s one thing that we can leave our audience with in terms of a tactical, actionable thing to do tomorrow morning, what would that be?

Susan Preston: Network. Find places to network and learn. How do you find learning? Where do you find those advisors?

Go out and find that stuff. Do that. Okay,

Shubha Chakravarthy: Thank you very much, Susan. This has been an awesome conversation and a very instructive one. So thank you very much for joining us today.

Susan Preston: I’m thrilled. Thank you.