What's the Bottleneck?

A reflection on angel network processes and what slows them down

This week, I attended a local pitch competition hosted by Greentown Labs in Houston. We heard several impressive pitches, and I learned a ton about some of the biggest opportunities in climate tech (congrats to John Jeffers with Revolution Turbine and Janice Tran with Kanin Energy for bringing home the top prizes).

After the event, I found myself speaking with another guest who had also worked as a student analyst at an angel network. After chatting about the day’s presenters, we found ourselves deep in discussion about common process challenges faced by angel groups. Our conversation centered around one core question: where is the most common bottleneck in the angel network process?

I’ll share my thoughts on that in a moment. But first, a new section I’m testing out:

Weekly Observations: 3 Lessons Learned

In this experimental section, I share 3 lessons learned from the prior week. Please consider responding to the quick poll at the end to let me know if you enjoyed this segment.

1. Authentic content does better.🌿

   I’m currently reading “Content Marketing: Mission Critical: A B2B CEO’s Guide to Growth through Effective Content Marketing” by Matt Bell, who I had the pleasure of meeting earlier this year through the Houston Angel Network. In the first few pages, he dials in on the importance of authenticity in the face of a marketing landscape overflowing with subpar and impersonal junk. Well, this week our team ran an A/B test on a small email campaign where the only difference was whether it came from “The PitchFact Team” or directly from one of our team members. Guess which one did better.

2. Less is still more. 📉 = 📈

   This week I was honored to spend an hour with a US Navy veteran who is managing a small specialty school in the far east. He’s preparing to return to the US in September to raise funds for his program, and we connected to work on his messaging and approach. His plan and content were extremely detailed and well thought out, but utterly overwhelming to take in - it felt similar to a lot of the startups we work with. His mission is to work out a 15s, 1m, and 5m version of the story, and we’ll reconnect in a month to assess.

3. Innovation is a long-term thing. 📆

   For most founders, just making it to the next step is a win. We’ve all heard the sobering statistics about startup failure rates within the first few years. But for universities, innovation ecosystems, and other larger-scale entities, the time horizon for innovation success is much longer. This week I spoke with a team actively working to transform the innovation ecosystem in their community. The wide lens with which they viewed the desired transformation and their strategy was very humbling. It was a reality check for me as I consider our company’s role in the broader entrepreneurship ecosystem.

Bottleneck🍾

In last week’s post, I walked through our position that every angel network is unique, but that a common thread binds them together. Each one must facilitate a similar process applied in a unique environment, as visualized by the Angel Ops framework.

This week, I’ll briefly share my response to the core question: “Where is the most common bottleneck in the angel network process?”

But first, what’s a bottleneck? A bottleneck is whatever process step constrains the overall capacity of the system. When a resource is loaded with demand that exceeds that resource’s capacity, excess demand builds up. When that happens, no matter how efficient the rest of the process is, the system cannot produce faster than the bottleneck resource. For more on this topic, I highly recommend The Goal by Eli Goldratt - it’s an easy read and is basically required reading for folks in the operations management world.

Think about the last time you flipped a bottle upside down. A literal bottleneck is a point at which liquid flows the slowest - whatever comes out at the mouth cannot flow faster than what passes through the bottle’s neck.

Photo by Bobby Donald on Unsplash

So what’s the bottleneck in the average angel network process?

The short answer? Diligence.

Allow me to explain.

Problems

Angel networks, like any organization, have no shortage of challenges to deal with. From sourcing great deals to making sure the coffee shows up on time, network leaders have plenty to consider each month. And, given the uniqueness of each network, it’s possible that the bottleneck could be something different at each one. It’s also possible that the bottleneck in any given process can change over time.

That said, however, it’s critical to note that many of these common problems are not directly related to the core operational process of the network, which is where a bottleneck becomes relevant. For example, a common challenge network leaders face is attracting more members. While this is a critically important issue and a network must have members to function, it is not explicitly process related.

I think about 2 basic steps to identifying where the angel network bottleneck lies:

1. Understand what a network is designed to produce.

2. Map the core process and look for places with the longest wait times and high stress.

1. What does an angel network produce?

An angel network is, at its core, a double-sided market. It serves investors by connecting them with one another and with investment opportunities. It serves startup founders by connecting them with investors. When thriving, networks function in a virtuous cycle - more investors join, which attracts strong startups to pitch, which inclines more investors to join, and so on.

So what does the network actually produce? Deals.

An effective angel network produces closed deals. By channeling time and energy through the network, both founders and investors can connect in ways they would not have been able to otherwise, and that connection is consummated when a deal is closed.

Yes, other factors may drive someone to engage in an angel network. But the culminating action towards which everything in the process drives is the closing of a deal.

2. What are the core angel network process steps, and where are the longest wait times?

I tend to think about the overall process through the lens of the Angel Ops framework, which I introduced last week. I’ve reproduced this framework below, but with the addition of a range of typical turnaround times based on our experience so far. One note - the Source and Monitor stages are ongoing jobs, so there is no direct timeframe assigned.

What stands out immediately is the timeframe at the Close stage, though all 3 of the central steps have nontrivial wait times. The job to be done at this step is to help members make a final decision on whether or not to invest, and the Progressive Outcome is the actual investment.

This step is where traditional “due diligence” lives, and I’ve had network leaders tell me it can drag on for months and months before members finally make a decision. Just a few weeks ago, a founder shared with me that he recently held 5 separate diligence calls with a network during this stage, after which they decided not to invest (let’s just say he did not feel this group did a particularly good job at respectfully declining).

When does diligence begin?

In my experience, most angel investors are familiar with the due diligence process. In traditional language, this begins after a deal is introduced through a shark-tank-style pitch event, and involves diving deep into a company’s financials and other documentation.

Perhaps it’s a contrarian view, but I believe that diligence begins as soon as a company’s application is submitted and decisions need to be made. Diligence certainly looks different at each step, but it is not exclusively reserved for the post-pitch stage.

Why do I believe this? Let’s look at the definitions.

Diligence: “steady, earnest, and energetic effort: devoted and painstaking work and application to accomplish an undertaking.” - Merriam-Webster

Due Diligence (business context): “research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities).” - Merriam-Webster, emphasis mine

Those 6 little words in the 2nd definition are critical to notice - the purpose of due diligence is ultimately to help a prospective investor make a decision regarding a transaction.

How Does a Deal Progress?

Once the deal has been sourced (i.e. an application has been submitted, either formal or informal), someone must decide to move it forward in the process. For example, to move from the evaluation stage to the engagement stage, a network committee decides to invite the startup to move on to the next step.

How do they make that decision? By performing the appropriate amount of diligence for that step and making a call. Perhaps the “analysis” is limited exclusively to comparing the company’s application details against the network’s stated screening criteria, but this would still be considered a form of diligence.

Therefore, the rate at which deals can progress through the center 3 steps in the process is limited by the speed with which a network can perform its diligence and make decisions. To say it another way, I believe that if it were theoretically possible to make the process of collecting, synthesizing, and evaluating the information required to make those decisions for all 3 steps instantaneous, it would be possible for a founder to receive funding immediately upon completion of his/her application.

Closing Thoughts

For the angel investment ecosystem to continue to grow, we must improve the efficiency of decision making at our angel networks. If the purpose of an angel network process is to consummate deals, I believe that the diligence process from Evaluate to Close is the general bottleneck stressing the system and limiting production. It will take deep collaboration and many iterations to arrive at a scalable solution to this problem, but awareness is the first step.

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What do you think?

Are there other problems that function as the angel network process bottleneck? How does this play out in your network? Leave a comment or send me a note - I’d be very interested to connect and learn more.

About Me

I cultivate flourishing.

I'm also the CEO of PitchFact, where we help angel networks conduct efficient and collaborative diligence. I'm a proud husband, aspiring father, and grateful friend. My love languages include brisket, bourbon, and espresso.

About PitchFact

PitchFact helps angel networks conduct efficient and collaborative diligence.
Learn more at pitchfact.com.