 for joining our Adventures in Commercialization. This week we have Juan Arango, Executive Director with Rocky's Region for Karatsu Forum, one of the largest angel investment networks in the world. Hi Juan. Hey Zoe, how are you? So good to see you again. It's been a while. It has. Let us know a little bit about what you guys have been up to lately with the angel investment world. Yeah, okay. For those that don't know us, Karatsu Forum is an angel investor network. We have 65 chapters all over the world, over 3,500 accredited investors that are angel investors and are members. My region, the Pacific Northwest and Rocky's, we have 390 investors last year. Well, 2020 we're gonna end up, 2021 we're gonna end up with more than $60 million in investment into 78 companies. And we've been rocking and rolling during COVID, open for business, funding, fantastic companies left and right. Lovely, that's some amazing numbers. I love to hear it and that we're funding the future here. What exactly does account for an accredited investor? What it is an accredited investor? Okay, so as per the SEC, only accredited investors are able to invest in startups and are able to invest in certain real estate, real estate funds and real estate deals. An accredited investor is a person that earns more than $200,000 a year or more than $300,000 a year with his or her spouse, has been doing so for the past two years or has over a million dollars in net worth without including their primary home. These people are allowed to make angel investments. And so what kind of things do you look for in a company when they're coming for angel investments? You know, what's the benefits between being with angels versus crowdfunding? In our last show we talked a little bit about go fund me and some of these awesome resources that are out there for young entrepreneurs. But what kind of gets them ready for an angel investment? Okay, well, first off there are, let's say there are two types of companies. There's lifestyle companies. You know, your bowling alley, your corner store, your movie theater, you know, all these things that are heavy like in brick and mortar and do not scale commercially without the additional assets. And then there's tech companies, like the ones you guys see in Shark Tank and all this buzz about unicorns and all this stuff. Those are the companies that we invest in. Now, benefits, I would say it's more about what stage your company is at. You know, typically you start out with an idea and then you go to prototype. Typically you're bootlegging it, how we call it. You know, you're spending your own money to fund the company. Then you get to, after prototype stage, you get a minimum viable product, which is something that people will actually buy. Typically that phase you have what we call FFFs, funding you, friends, family and foolish people that kind of believe in you in the beginning. It's a little funny. I don't mean to be mean, but that's what they're called in the industry. Once you're ready to commercialize, you can approach angel investors that do early stage, or you can do some venture capital firms that do early stage, there's a lot of them. But here's the trick, here's the trick. If you don't have sales, you will be less attractive because there's a lot of risk in commercializing, you know, whatever it is that your idea, you know, or your company produces. So the more revenue you have, the more appealing you are to investors. Our group particularly invests in companies that have north of $500,000 in revenue. And I would say that's a sweet spot. Any angel group will definitely talk to you and start due diligence on you if you go above that hurdle. Awesome, I think that's great information. When would you kind of advise somebody to sign, for example, an NDA if they were gonna come into an angel group like this? You mentioned, you know, minimum viable product time, is that, because some of these entrepreneurs are coming in very early stage. So when do you recommend something like a piece of paper like that? Okay, so that's a really interesting question. When you have this hot new idea and you are certain that you're going to revolutionize the world and, you know, you're gonna become a billion dollar company and all this stuff, you tend to wanna protect whatever it is that you have, right? Well, you protect it, honestly, through, you know, through an IP attorney, somebody that does intellectual property, right? Now, if you're gonna have angel investors look at your company and look at your stuff, not many will sign an NDA. Angel investors, especially now in this day and age, they get bombarded with ideas every single time. Entrepreneurs that are gonna change the world. 10, 20, 30, 50, 200 offers a month. Imagine signing NDAs for every single thing. It's impractical, it's impossible, nobody's gonna do it. So instead of having people sign NDAs, the strategy is to share enough information that, you know, that people understand what you're doing without revealing your secrets. So any material that you can share that is, you know, safe and sanitized enough should be better than having people sign NDAs because they just won't talk to you. Awesome, interesting. And what, you know, what kind of advice would you give for new companies? If a company was gonna come to you, you mentioned, you know, having $500,000 in revenue. Are there other criterias that you look at for a company coming in? Yeah, we look for many, for many, or not many, you know, several different things. I do wanna take a little step back though and give, you know, a really, in my worldview, a really good recommendation to everybody that's out there that's starting a company that's looking for funding. I would say the best thing you can do with, you know, without any type of comparison is learn how to sell, learn how to sell. You have to be an expert salesman to be a startup CEO. You're the person that, you know, that makes, you know, that makes it rain. You're the person that brings in the big sales. You're the person that brings in investors. So you really need to learn how to sell. There are many outfits out there that will make you a professional salesman. That would be the first thing because think of it this way. If any human being cuts a hundred thousand dollar check in return, they're gonna get a bunch of something. They're gonna get a bunch of widgets, a bunch of service, something that can take home. They're gonna get a bunch of something. So you're exchanging money for something tangible or intangible, but, you know, that you can actually, you know, that actually exists. With a startup, a startup CEO is trying to convince somebody to give him or her a hundred thousand dollar check for a piece of paper that looks a lot like this piece of paper, except that with a signature on it, you know, a contract and a promise of execution. So it's a heck of a hat trick to convince somebody to give you a check for, you know what? I can do this and I can give you money back. So become an expert salesman. If you are not the expert salesman, partner with one. Okay. And to answer the question fully, what else do we look for? We look for experience talking to angel investors, experience negotiating. When, you know, when you talk to individual angels or with accredited individuals that just like you a lot or your family members, you need to start developing skills, developing, you know, understanding the jargon, learning how to convince people before you come to an angel group. An angel investor has typically, you know, invested and lost more money than many people will make in a year or in five years or in 10 years. So they can size you up. Like instantly first five seconds, they know if this is your first, if this is your first rodeo. So you don't want it to look like your first rodeo. If it is your first rodeo, get a COO or get a founding partner that has been there and done that because, you know, honestly, why would I give somebody who is doing this for the first time ever? Why would I give them my money? Does that make sense? Yes, 100%. Okay. And so what would you say, you know, what kind of things do these companies have to give up for these angel investors? So you said it mentioned a promise, a piece of paper. Is there an expected return? Do these angel investors get equity in the company or how does that work? Okay. Yeah, so angel investors, angel investors, they are investors, like, you know, investors in real estate, investors in, you know, in the public markets, investors in gold and whatever, they put money into assets because they want a healthy return. They want a return, a return on their investment. This can, you know, this means they're gonna buy some kind of security from you, whether it's stock or sometimes what they do is, you know, is they lend you money on what they call convertible notes, which is you're paying them interest and at a certain point this loan becomes equity and they end up owning part of your company. For angel investors, you know, when we're talking about initial commercialization, your first 500,000, your first two million bucks, they expect to receive anywhere from 15 to 20% of what your company is worth. So that's what they expect. And in terms of return, they expect that in the next five to seven years, you're gonna give them back five to 10 times their money. Okay, interesting. And what do you think the success rate of some of these companies are? Because they are startups, they do have revenue, but how successful do you think these companies are? So companies, they go through a life cycle, just like technology goes through a life cycle. You know, the Betamax was really big in the 80s and then, you know, Betamax's don't exist anymore. And the same thing with everything, like your flip phone and, you know, your iPad. iPads are kind of, you know, last generation. You know, they don't exist anymore. They're not really all that useful. So according to studies, according to Robert Wilkbank, who has many, many articles on investor, angel investor returns, he says that out of 20 companies, two companies will produce 10 to 20 times what you invested in them. About five companies will produce close to five, close to five times. That makes it nine, about, you know, then the rest will produce zero to one, zero to one times what you put into them. Most companies, you know, they start and eventually they grow a little bit, they stall, they become what we call zombies and then they either, you know, they pitter out or, you know, they just keep coasting. I'd say, yeah, five to 10% actually make it and give some kind of return. And are these companies looking to, you know, finish out a life cycle or are they looking for exits or are these angel investors curious about, you know, this five to seven year return? Okay, that is a really interesting, that's a really interesting question. So my experience is that angel investors, they're gonna tell you, you know what, I wanna invest in companies that have a really good team. They say team, team, team. Team, team, team means that people can execute and they can grow their companies, right? They can grow their companies. Once, you know, as a CEO, you are $5 million in revenue, my question is, will you wanna sell or, you know, and give your angels return or will you wanna try to hit 10 million? And when you hit 10 million, here's my question again, are you gonna sell or are you gonna try to hit 50 million? And here's my question again, when you hit 50 million, you're gonna wanna sell and give investors back their money or you wanna hit, you know, 300 million and so on and so on and so on. There's a certain point, you know, when angels will not be able to tell you what to do and you're on your own. But what really needs to happen and what makes, you know, angel investment something viable and something sustainable is if you actually stop at $20 million in sales give your investors back their money so they can invest in other people just as good as you are that have dreams just as good as yours. You know, you take your 10 million bucks, you know, and take a year sabbatical then come back again with your next idea which will probably produce twice as much and half the time. And then you become a serial entrepreneur. That's what we wanna accomplish. But that is rare. Entrepreneurs do not wanna exit. Angel investors don't know how to force or to motivate entrepreneurs to exit and give them the money back. Interesting. So you mentioned team, team, team and, you know, having enough revenue but what other things would you like to see in a pitch deck from an entrepreneur? Okay. So other things. For example, well, he has to be a good leader. He or she has to be a good leader, a good communicator. An angel investor has to be able to work, you know, comfortably with the entrepreneur. Imagine you having a relationship, you know, with somebody for five to seven years, right? You guys are gonna work together. You better get along. Some people say it's, you know, an angel investor in a relationship between an entrepreneur and an investor lasts twice as long as a marriage with half the love. So you better, you better know. Yeah, you better be able to work with your investors in. Yeah. You mentioned contact information, making sure that that's on their pitch deck you see. Yeah, that's interesting. So I am passionate about tactics and strategies on how to raise money from angel investors. As a matter of fact, eventually I'll finish writing a book exactly on that, like tactical funding of startups or how to get money from angel investors. And what brought it all on is a personal pet peeve. Imagine that I'm an investor and I receive an email from somebody or a pitch deck and I'm thinking about it. I get up in the morning, I say, you know what? I really like this company. Maybe I wanna put $50,000 into it. And then I go to the email, there's no phone number. And I go to the pitch deck and there's no phone number. There's nowhere to reach the person. That is incredibly frustrating. To me, it screams amateur. Is this really your first time? Are you really serious about investing? About talking to angels, you can't even put your contact information on your pitch deck. Yeah. Right? Now, if I'm an investor and I have another five deals just as good as yours, what am I gonna do? I'm gonna say, you know what? I'll send them an email, but I'm probably gonna move on and talk to my next potential investment. Right? I'm definitely just like when people don't have their contact information in there, even in their email, like the battery. In their email, it's crazy. You gotta scroll down like 50 emails to see what that number is. And you need them because you wanna introduce them to 50 angel investors, you know, next week and you can't find it. It's horrible. It's horrible. So I collect these. I collect these tactics and strategies. I'm up to, I believe 89. Wow. And that is what I coach my entrepreneurs on. How to raise money from angels. Awesome. Would you recommend, you mentioned expert salesmen or sales women that would you recommend that a CEO find somebody in order to present their company to angels? Maybe that has done it before or would you say the CEO is the person that needs to be doing that? I would say angels in general prefer the CEO because the CEO is the front person. The person that they talk to, the person that clients talk to, that other, you know, distribution channels or other partners talk to. So definitely develop your commercial ability. If it's not natural to you, maybe your position is CTO, no chief technical officer or chief operating officer, right? But maybe not CEO. CEO is the sales guys, the consummate complicated sales guy. Okay. Interesting. And Karatsu forum, did they invest, you mentioned real estate, you mentioned some, like how does it differ from say, Shark Tank and what you guys invested in yours? Okay. We're less silly than Shark Tank. And instead of having five, you know, seasoned investors type A personalities with a serious, serious investment thesis. We have 393. Wow. You know, that's the big difference between us and Shark Tank. But basically we're a pretty friendly group. We're a pretty friendly group. We welcome every type of investment from real estate to, you know, to rocket, to solid rocket fuel. You know, to everything. I joke a little bit and I tell my entrepreneurs and my investors, you know, I will take a look at anything that sells 500 grand or more. You know, if you figured out how to sell nail clippings and you have 500 grand in revenue, I am instantly curious because I have no idea what that business model is like. I'm curious and I'm sure my investors will be curious. Now, is there a business model and there's monetization and is there an exit there? I don't know. We'll check it out. But as long as you have 500, anything, life science, pharma, material science, anything you want. I used to joke with Koretsu Forum that we did everything from kitty litter to cancer research, which I think we literally did. We did. We do. Yeah, kitty litter. Kitty litter. No joke. Everything, you know, these automatic feeding devices for doggies. Love it. Yeah, to everything, to machines that extract ozone, you know, that extract ozone and reduce fuel. Out of thin air. Yeah, we do all that. Cool, well, we're almost out of time here. If you had one last piece of advice for young entrepreneurs, what would you give them one? Okay. Now, here's the deal. If you are a young entrepreneur and this is your first time, imagine yourself being an artist. You're an artist. You're creating a work of art. Now, this work of art is gonna, you know, you're gonna figure it out eventually. And you're gonna produce something that's, you know, that's pretty cool. Now, as an angel investor, who wants to invest in works of art? In somebody that's just figuring things out. Wouldn't you rather invest in somebody that has done this five or six times and instead of an art project, it starts looking like an automated, you know, an automated machine that produces startups and startups and startups and startups every five years? I would say the latter instead of the former. So, if you are in this first time gig, partner up. Partner up hard with people that have done this many times because you can't look like an art project. You gotta look as pro as pro comes for people to give you a hundred grand for a promise. That would be my biggest advice. Awesome. Partner up and look pro. I think that's great. And I think Karatsu Forum definitely brings that sense of networking, place to find. People who have done this before, I know that a lot of the members are serial entrepreneurs themselves, which is just amazing. That's how they got to be those accredited investors that they are today. That's right. Awesome. Juan, well, thank you so much for joining our show of Adventures in Commercialization. This was super informative and I hope you have a wonderful week. Thanks for being here. All right. If anybody that's watching the show needs more information, my email is really easy. It's Juan Juen at Karatsu, just like you see right in the back of my screen right here, karatsuforum.com. Juan at Karatsuforum.com. And that's it. Love you. Thank you so much.