Wednesday, September 4, 2019

Startup-People of Seattle: Nate Doran (Business Angel, VC)

The blog-series “Startup People of Seattle” introduces some of the key personas in the ecosystem to learn more about what they are doing, to share their thoughts and ideas, and to promote networking.

In our fifth interview, meet Nate Doran:
“I think angel funds are important because without them, for many angel investors, to be able to build a big enough portfolio, they can’t make enough individual investments.”
Nate Doran is the Business Director at SWAN Venture Fund. He manages the investment process there.

Q: Could you tell me a bit more about your background, especially when it comes to entrepreneurship?
A: During my MBA at the University of Washington, I started a company through a business plan competition. However, the business model was flawed, and the team didn’t work out, so we shut the company down after one year. Following this experience, I volunteered with Northwest Energy Angels (renamed Element 8 Angels) for two years while finishing my MBA. I helped them with due diligence and the screening of companies. From there I was recruited into Keiretsu. After 2 years, I was talking with Jim Reed about a fund and we started SWAN Venture Fund with 23 investors.
Q: It is interesting that you have been on the investment side very early on. How did that come?
A: Four years ago, I strongly felt like there was a gap in funding in the Seattle startup ecosystem. There were many articles about this at the time. Additionally, while working with Keiretsu, many of the more successful-in-fund-raising entrepreneurs hit a ceiling at $2.000.000 and could not raise any more money here. Some of these companies were VC-class companies that could be funded if a VC had a fitting investment thesis. I recognized this problem as an opportunity and decided to go on the investment side rather than founding a company, which was an alternative for me at the time.
Q: How do you think the investment situation looks like today in Seattle’s startup ecosystem?
A: There has been a lot more VC activity recently. We have Pioneer Square Labs, Flying Fish, Unlock, Founders’ Co-op and a few others. A lot of them are focused on specific software themes though. Therefore, I still think that there are holes in the local private capital markets infrastructure, especially as the market changes. As far as the angel market goes, some names in town are Alliance of Angels, Puget Sound Venture Club, and SeaChange Fund.
Q: Could you talk some about the SWAN Venture Fund?
A: Our first fund was very small. We are talking about a million-dollar fund. Therefore, the structure was atypical. One company died already, and we have a few zombie-class companies, but we also have six or seven companies that still show potential with two seeming very promising. CurvaFix ( is a medical device company and we hope to return our fund from that investment. DefinedCrowd ( could be a unicorn. So, I think the first fund is doing very well. As a result of this success, 16 out of the 24 investors invested in our second fund again. In the second fund we had a total of 35 investors, and it ended up being a $1.085.000 fund. We are still investing into companies through our second fund. The third fund that I am working on with Jim Reed, Richard Samuelson, and a few others right now will be a Venture Capital fund. However, we will probably form another angel fund in the future, too, as this is good for our ecosystem. 
I think angel funds are important because for many angel investors, to be able to build a big enough portfolio, they can’t make enough individual investments. As an angel is starting out, it is tempting to write a lot of big checks quickly. There are two typical stages of attrition, where angels run out of money. The first wave of attrition happens about 2-3 years in when angels run out of money because they weren't disciplined enough, they ran out of cash, or just get distracted by other things. The second wave of attrition happens about 7-8 years into their portfolio, where they are tapped out, illiquid and little to no returns are realized. Some research shows that the angels who last longest spread their risk by investing 1.5%-3% of their net worth into ~10+ companies each year. But, if the minimum check size to get into a deal is $25k and you can only invest $10k into each deal to diversify, the math doesn't work in this case. Therefore, if your wealth doesn’t allow you to invest in enough companies individually with this approach, angel funds are the way to go.
Q: What is SWAN’s investment thesis?
A: The thesis is that there are a number of opportunities in the Pacific Northwest that are overlooked or dismissed by other investors. There are a lot of investment opportunities in the seed/pre-seed stage. We are looking for diversification and rely on the expertise of our members when making investment decisions.
Q: You mentioned diversification as being important. What do you think is the trade-off between investing in fields you are familiar with and diversification?
A: There are two fundamentally different strategies. Some invest in an idea that a specific market is going in a certain direction. Sometimes, these investors are experts who may become very involved in the companies that they invest in (Active). Others are generalists who invest broadly (more passive). Some may pursue a blend of these strategies.
You should also consider that there are many ways to diversify a portfolio. Industry is one of them, but you should also think of opportunities to diversify across time, geography and stage.
Q: What do you think about how involved an angel should be in startups he or she invests in?
A: Sometimes an angel has a vision for a company that is not consistent with what the customers are doing. That can cause problems in the relationship between entrepreneur and investor. I think if an investor wants to be hands-on, he or she should help the startup through making introductions. The angel can also help get resources and give advice to the entrepreneur. If an investor tries to run the business, however, most of the time the angel is crossing a line. As an investor you need to believe in the founders when you invest in them, so you should trust them with the execution.
Q: How would you recommend someone interested in angel investing to learn more about it?
A: I think you should start reading books. I recommend Josh Maher’s book called “Startup Wealth – How the best angel investors make money in startups”. This book highlights some interesting strategies. I think reading some papers from Robert Wiltbank is also helpful. Take-aways from his work are that you must do due diligence and that you should have expertise involved in the process. I think you must understand portfolio theory and investment strategies to be able to develop your own strategy. You should also understand risks and how to mitigate them, and you should at least conceptually understand the importance of check size (Kelly vs Martingale) and exit strategies.
Aside from reading books you must do hands-on work, meaning I’d recommend joining an angel group and participating in some deals before writing a first check. Some angel groups offer training opportunities, which can be helpful early on.
Q: How does a typical due diligence process look like?
A: There are a lot of due diligence checklists out there, but I’ll point out some aspects that investors look at during due diligence. Also, keep in mind that only an ideal due diligence process covers all these aspects, but the reality in angel groups is that due diligence is volunteer work performed by members and sometimes they are not perfectly thorough. Anyone investing off of someone else's due diligence without doing their own homework can get into trouble.
So, during due diligence investors want to make sure to understand the risks involved in a company and to know what they get themselves into. They also want to make sure the entrepreneur understands these risks and is prepared to address them. Investors will evaluate whether there is a product-market fit, whether the entrepreneur solves a significant problem and whether the claims of the entrepreneur are correct. To find these things out, investors do market research and talk to customers. Another important aspect to consider is the scalability of the business model. Often entrepreneurs overestimate the scalability, which leads to overoptimistic predicted revenue streams. Another thing investors are looking at is the technology and whether it works.
Investors typically also want to visit a startup in their workplace to meet the team in their element. The personal fit is very important, so investors must feel like they can work well together with the founding team of a startup. Founders must have a sense of integrity and the team should know each other for a while. It also supports the valuation of a startup if the founding team has startup experience and has successfully founded and exited a company before.
Lastly, the terms of the deal are important and whether those terms fit the investment strategy of an angel investor. Because of terms, a great business isn't always a great investment. In the end, angel investing is also about returns, so the terms of a deal must make a company investable. 

Here are some things I learned from this interview:
  • Angel Funds offer the opportunity of investing smaller amounts of money in many companies, allowing angels to diversify their portfolio. Given that a fund collects “small” amounts from many investors, investments are still meaningful for startups, but this approach allows angels to increase their portfolio diversification given a certain budget. Granted the riskiness of angel investing, this budget should not exceed a certain percentage of the net wealth of an investor. Therefore, Angel Funds are particularly important to angels who are just accredited and couldn’t make enough meaningful individual investments to still diversify enough to mitigate risks.
  • There are two fundamentally different investment strategies when it comes to industry: Focus and diversification.
  • To learn about due diligence, you must understand some theoretical background, but additionally you must do hands-on due diligence before writing a first check.
  • Due diligence is a complex process in which a lot of ground needs to be covered.

In the interview Nate mentioned some resources and organizations he finds helpful, find out more about them here:
Pioneer Square Labs:
Unlock Venture Partners:
Founders’ Co-op:
SeaChange Fund:
Pudget Sound Venture Club:

About Seattle Angel:
A strong ecosystem creates an environment that allows startups to thrive. Seattle Angel’s goal is to strengthen Seattle’s startup ecosystem by increasing the access to funding for entrepreneurs to push their ideas further.

Seattle Angel Conference:
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About the author: Sven Goepfrich

Sven Goepfrich is currently finishing his MBA in Syracuse. His studies focus on technology, innovation and entrepreneurship. At his school, he is working for the department of finance. Sven was actively interning with the Seattle Angel Conference in summer 2019. He is currently looking for full-time career opportunities in this field.

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