Nathan McDonald of Keiretsu Forum // a global community of angel investors with 53 chapters across four continents [CC064]

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Jay Clouse 0:02
I’m here again with Casey Allen, the founder of the Enterprise Rising Conference. Casey, what is your favorite piece of feedback that you’ve heard over the years about Enterprise Rising?

Casey Allen 0:11
One thing founders give me a ton of feedback on every single year. Now that we’ve done this five years, is the talk in which I bring up founder up on stage, who startup crashed and burned. And they deconstruct why they think of crashed and burned, what went wrong and what they might have done differently. And these are often very high profile founders who had everything going for themselves, but they still couldn’t quite turn the corner. And so those are the kind of toxic quite honestly, founders give me a ton of feedback on they loved it. They want to hear more about that, because it’s really educational.

Jay Clouse 0:43
How is Enterprise Rising different this year?

Casey Allen 0:46
If you’ve ever attended online event, you know, networking sucks, slack and discord really just don’t cut it. So we have custom built for Enterprise Rising 2020, an online platform that’s like startup masterclass, meets the Sims, where every attendee has an avatar, you’re in a building, you’re sitting in chairs, you’re sitting in couches, you’re having real video chats with the people next to you. So what we’ve done is we’ve recreated an actual virtual environment where networking happens, just like it does in real life.

Jay Clouse 1:11
Casey, when is Enterprise Rising? And how can people get involved?

Casey Allen 1:15
Enterprise Rising is the end of October, the 20th and 21st is two full days is all online. So you can dip in and out for as much or as little as you want. Go to enterpriserising.co that’s enterpriserising.co. And you can use discount code Upside to score 20% off as many tickets as you want. So discount code Upside at enterpriserising.co. All the details are there, the entire conference is online, it’s going to be a great time.

Nathan McDonald 1:43
The thing about raising angel raising retail funding is that, you know, it’s not like you just raise a big VC round, and then you go back to work. I mean, you’re always raising money every month when you commit to raising, you know, retail capital from angel investors and family offices.

Jay Clouse 1:58
The startup investment landscape is changing. and world class companies are being built outside of Silicon Valley. We find them, talk with them and discuss the upside of investing in them. Welcome to Upside.

Hello, hello, hello, and welcome to the Upside podcast, the first podcast finding upside outside of Silicon Valley. I’m Jay Clouse, and I’m accompanied by my co host, Mr. Podcast Network himself. Eric Hornung.

Eric Hornung 2:37
Jay, we’re, we’re doing it, man. We talked about this, what, two and a half years ago?

Jay Clouse 2:42
You’re doing it.

Eric Hornung 2:43
You’re doing it too.

Jay Clouse 2:44
You talk about this, too.

Eric Hornung 2:45
Yeah. Well, less so. This has been. this has been your baby? Yeah, I think that we have a unique perspective, and a unique setup compared to other podcast networks. So dear listener, if you have not heard or seen or follow us on Twitter, @upsideFM, where we’ve announced this, what you’ll soon be hearing on the Upside channel is that we are launching two beta podcasts, beta podcasts. No, podcasts, full fledged podcasts.

Jay Clouse 3:17
Just new podcasts.

Eric Hornung 3:18
New podcasts, to test a concept that we can make a network of geographically localized podcasts for the early stage business space, the first two are going to be in Cleveland and Cincinnati, and the Cleveland ones called Lay of the Land. And the one in society is called When Pigs Fly. So we’ll be talking more about that in the future.

Jay Clouse 3:44
Really fun, Intro music, great album art, great co hosting teams. Really a lot of work went into this, Eric seems seems easy conceptually. But there are a lot of steps.

Eric Hornung 3:58
There really are. I started interviewing for this in April of 2020. And now we’re just getting going. But a lot of this is going to get better and smooth out over time. Once you get the talent selection, then you have a process that’s run where we were taking what we did with Upside. We helped out with Tech.MN and a few other podcasts that we’ve kind of helped get off the ground. Taking all that taking all that knowledge, taking everything that’s in Jays head, because really that’s where all the brains are Mr. valedictorian. And

Jay Clouse 4:28
You remembered.

Eric Hornung 4:28
Yeah, it only took me eight times of remembering me writing me. And we put all of that into these two podcasts. And we’re building out a way that we can scale this to do hopefully 30 to 50 cities into the future.

Jay Clouse 4:41
Quick plug. If you’re listening to this, and you’re like, I’m in a city. I like making podcasts and you think that you’re city is the podcast, hit us up, email us. hello@upside.fm let us know. But Eric, speaking of.

Eric Hornung 4:52
Yeah, because I think one of the things that needs to be done in cities is just have more, just more, I guess more exposure, right? Like, we started Upside, we thought, oh, maybe these companies outside of Silicon Valley aren’t getting enough exposure. And then we had 200 plus episodes or whatever were right now. And we realized that 60% of the founders on our shows, haven’t ever been on a podcast or haven’t had an article written about them. Now, if you ask the same group of people in San Francisco, in New York, it’s going to be completely different. Every single founder is getting that kind of exposure. So if we start with exposure, and hopefully that will lead to more of a recognition around the community that there are funding opportunities that there are founders that they can help that there are things they can do to grow their local business, infrastructure, create jobs and make their city a better place to live. And a lot of that’s through things like angel investing.

Jay Clouse 5:46
Speaking of angel investing, speaking of different cities and different chapters across the country. Today, we’re talking with Nathan McDonald, the CEO and managing partner of Keiretsu Capital, or talking specifically about Keiretsu Forum, a global investment community of accredited private equity, angel investors, venture capitalists and corporate or institutional investors. Keiretsu Forum was founded in San Francisco East Bay in California in 2000 by Randy Williams, it’s a worldwide network of capital resources and deal flow with 53 chapters on four continents.

Eric Hornung 6:22
Jay, we’re diving back into the world of angel groups here. It’s a different style of angel group, but we haven’t been around a an angel group since we talked with Todd Fetterman of North Coast Angel fund.

Jay Clouse 6:34
Yeah, it’s a good time to dig back into it. I’m interested to hear more about it. Keiretsu Forum seems to make the angel investing process a lot easier for a lot of these angels helping them live the best angel investing life that they can Eric.

Eric Hornung 6:48
Just like our friends at Ethos Wealth Management, who can help you dear listener, live the best life you can the best way possible. If you want to learn more about Ethos Wealth Management, you can go to upside.fm/ethos, that’s e t. h. o. s.

Jay Clouse 7:05
Let’s dive in. Let’s talk to Nathan McDonald of Keiretsu Forum interested to hear his perspective and we’ll get to that right after this. Let’s bring in our friend Rob McDonald, a partner at Taft Stettinius and Hollister to teach us about private placements and fundraising. Taft Stettinius and Hollister is a law firm known for assisting entrepreneurs across the Heartland. As a reminder, the following remarks by tapped attorneys are for informational purposes only and are not legal advice. This information is not intended to create in receipt of it does not constitute an attorney client relationship. No person or organization should act upon this information without first seeking professional counsel. Rob, welcome back to the show. Happy to have you here. How are things at Cincinnati?

Rob McDonald 7:46
Fantastic. Great to be back on upside.

Eric Hornung 7:49
What are the preferred instruments for raising capital for example, convertible debt safe equity and are there others.

Rob McDonald 7:57
Honestly, the preferred instrument is whatever instrument the lead investor wants to use. These days, it’s very common to see all three tools used. Safes are generally viewed to be more friendly to a company as compared to convertible debt. And of course, equity is seen as the most basic place to start negotiating. However equity rounds can be quite expensive in terms of fees to complete because it’s a lot more paper and a lot more negotiating and convertible notes and sage.

Jay Clouse 8:21
Super helpful. Rob, if people want to learn more about Taft or yourself, where should they go.

Rob McDonald 8:26
They can check us out at www.taftlaw.com or my Twitter @RWM.

Nathan McDonald 8:37
Born and raised here in the Seattle area, originally from Bainbridge Island, and then went to the University of Washington. This was during the late 90s got out at the height of the .com craze at the end of ’99. So it was quite an interesting time and I had the good fortune of doing research on angel investing was out the Foster School of Business, the University of Washington entrepreneurship, and finance undergrad, I was just always fascinated by their technology companies and our local community. And, you know, how did investors and entrepreneurs get together and really the fascinating history of the Northwest around entrepreneurship and that frontier mentality and so love the Seattle area wanted to learn more about it. I did a research project with a group of students and we went and had a chance to interview 25 what they called business angels. So I got a chance to learn about who an angel investor was and what they did. And then it was just fascinating as a college senior to be able to go out and actually talk to them and hear their stories and hear how they interact and how they found deals and this and that. And it really got me hooked and I loved being able to hear the stories and the personalities that were involved in the serendipity that was involved in angel investing and finding great opportunities and how impactful was on changing people’s lives and how much connection here there can really make a big difference and who wins and who loses when it comes to technology and backing companies. So from that started to do events during the, again, the middle of the .com craze, there was a lot of fun, a lot of activities the demo days, demo nights and all the things people take for granted, then you do today, we just kind of invented that stuff back in the in the .com craze. So I cut my teeth through that. And then you know, the ups and downs of a lot of tough times, economically, we kept going, we kept persevering. We did about 45 events from 2000 to 2005, and then rolled everything into the Keiretsu Forum. From there, we’ve grown last 15 years to be a large global angel investment group. And five years ago, we started Keiretsu Capital. And so I’ve been investing in the companies and becoming through that her Angel backed as well here the last five years. So that’s kind of a 20 year thumbnail and a couple minutes, but happy to dive in deeper. But I’m one of the unique folks out there that’s really spent their whole career studying researching the formation of formal informal Angel groups, how they work, how they come together. And now how family offices are joining the mix. So it’s it’s a lot of fun and great to be with you.

Jay Clouse 11:04
When you when you talked about we did 45 events from 2000 to 2005. Who is we was that a company that you are running at the time?

Nathan McDonald 11:13
Yeah, so out of my research project, it became clear there was a need to bring together all the different siloed groups here in the Northwest region. And so I joined with a consortium. You know, everything I’ve ever done has been in partnership with others. But we formed a group called the investment forum, which organized the first early stage investment forum here in the northwest that brought together 300 investors and 15 companies, we end up raising like 30 million within a couple weeks after that, that was in March of 2000. So out of that initial event that I helped produce and put together we formed an organization that went on to do the venture all stars in the venture map and private pitch sessions and all kinds of different things to try and make the Northwest a vibrant and active place to live work do business that was our mission, and also to connect Seattle with the rest of the ecosystem on the map. So everybody would come to Seattle have a different idea about what was going on. When they left town, they seem to be more confused them when they came to town. So we tried to provide an entry point where folks could get connected, understand the landscape, entrepreneurs could help with capital raising. And when investors came to town and they were looking for deal flow, you know, we’re able to connect them up and point them the right direction. So that was the organization I worked with prior to getting Keiretsu Forum launched here in 2005.

Eric Hornung 12:26
Can you tell us more about Keiretsu Forum and its history before we get it into the Northwest.

Nathan McDonald 12:34
So Randy Williams, the founder of Keiretsu Forum, he started about the same time I did in terms of working with angel investors. So September 2000, which was just after I graduated from college, he was forming the first Keiretsu Forum chapter down in East Bay in San Francisco. Randy was fortunate to retire in real estate and like many angel investors, you know, was being pitched solicited, it was a pretty crazy time back then, for deal flow and investment opportunities, money being made also money being lost very quickly. And Randy was frustrated with just kind of the lack of discipline in terms of angel investing and the lack of a formal process. He came from a real estate background, which obviously is, you know, has a much more formal due diligence and underwriting you know, way that they go about doing things. So Randy got together a group of his buddies that were a lot smarter than he was in looking at technology opportunities, Randy would bring in some real estate deal flow, and together they would form the first forum, which was a way of sharing each other’s experiences around investing, we call it mind share, we call it swarm intelligence. And that’s really the basis of Keiretsu Forum, it is community it is mindshare. It is, you know, collaboration based investing to help everybody be better investors help avoid losing money. And so what began in the East Bay in San Francisco at the time that we joined in 2005, they had I think, six or seven chapters. And then there was some organizational updates from there that allowed us to be able to grow to where we are today. So Keiretsu hallmarks have always been our membership, who the members are, and then the process we put the companies through that originate the deal flow in a way that can syndicate across the network of investors that are participating with us.

Eric Hornung 14:17
What structures does Keiretsu have in place to make sure that mindshare and swarm intelligence don’t become groupthink?

Nathan McDonald 14:26
Yeah, that’s a great question. The herd mentality is definitely there. When it comes to investing. It really is hard work. And so there’s no shortcut to it. People have to put in the time. And by applying the proper people with the proper expertise for 80 to 100 hours per company, and then writing everything down. It sounds kind of simple, but it’s amazing how many groups we go to that, you know, they fund a company and you say, All right, good. Well, can you send us over the notes, the DD report, and they still don’t have anything actually documented? You know, so you don’t know whether some guy just like the deal and that everybody else went along with it. So we write everything down. And then we let everybody make their own investment decision. And so ultimately, our folks are generally not herd mentality investors, everybody’s very independent. They’re successful entrepreneurs themselves. You know, most folks don’t invest in most companies, it’s a small number of the folks that end up backing any one company of the whole chapter or the whole organization. And so we maintain that rigorous kind of intellectual independence as a facilitator, you know, trying to ensure that there’s not too much hype, there’s not too much shortcutting of a of the process so that by following the process, we get a predictable, productive result.

Jay Clouse 15:37
So if I’m reading between the lines here, and we’ve only had a couple of angel groups on the show, we’ve recently been talking about syndicates on angellist. It sounds like what you’re describing here is you have a large group of angel investors, when a company comes in, you have some number of those angel investors do a total of 80 to 100 hours of due diligence, you send those notes out to the entire forum or membership, and some of those members will individually invest in that company, you’re not investing as an angel group.

Nathan McDonald 16:08
That’s right, everybody individually invests and then Keiretsu Capital is a top off fund. So we’ll come in at the tail end of the DD process. Once the members have invested, they have momentum, and they finished off the majority of the round, we do have our Keiretsu Capital co investment fund. But that’s a very small percentage of the overall investing that happens. So it’s everybody making an individual decision to write that check. Obviously, on the DDT, me hope you have folks with experience with expertise in the market that then drive credibility with the rest of the investors, they look at it. And then this gets in front of, you know, hundreds and hundreds and hundreds of investors it’s and these traditionally would be in person meetings physically getting together versus the online platforms, which it’s all, you know, digitally driven without a face to face meeting, which I think has its own pluses and minuses when it comes to addressing the issue that you’re you’re talking about, you know, it can be tough, if you’re not able to really that the company and look them in the eye and chat with them and get that in person interaction is very critical to everything we do. You know, having the angels actually integrate in with the company provides support beyond the board advise, if we don’t believe the angels can materially impact the success of the company, it’s hard to get a lot of traction. But you know, upfront we’re screening 70 to 80, deals a month, seven to 10, come through our deal, screening, two to three go through the full forum process, those companies then go on for due diligence, of which the majority of those do complete due diligence and get funding. But we’re working with these companies for a pretty extended period of time. So our driver is traction in the marketplace, seeing that customer uptake. And we also do a lot of life science opportunities. So having the expertise in life science, the folks that are able to dig deep and understand the science, right, everything’s a cure for cancer. But, you know, do they really have what it takes to get through all the different regulatory and clinical milestones that they need to in order to deliver return for investors. And Keiretsu is so diverse, whether it’s consumer products, technology, life science, that’s the thing, you’ve got to have lots of people that can look at lots of different areas. And that’s one of the fun parts of our job is trying to identify the top, you know, three or four people, we would think that would want to take a look at any new opportunity coming in and, and getting that due diligence team built out, we just had one coming through this month that’s doing offshore wave energy, which we’ve seen a few times we’ve had members be very successful with offshore wind projects historically. So we’ve been doing clean tech investing since 2006. So that was a fun one, because we had had one in a while and I was able to go back and look at some of the earlier you know, Ocean Energy opportunities we looked at previously. And, you know, we’ll be recycling that expertise for this particular opportunity. And, you know, hopefully, the time has come for us to harvest the energy of the ocean, that would be a big positive. But historically, there’s been a lot of challenges to doing just that. So that’s kind of a little bit of a thumbnail of kind of how we work with the opportunities and avoid that, you know, groupthink challenge that can really cause a lot of problems with other investment organizations if they don’t have a robust process.

Jay Clouse 19:04
And it sounds like you’re putting together due diligence teams around each opportunity. There’s not one dedicated due diligence team, you’re sourcing from your membership, the best group of some number of them on each deal.

Nathan McDonald 19:17
Yeah, some folks are much more active with due diligence than others. And that’s part of the art of the process. But by having many members eight to 12, per DD team, it makes the individual effort, you know, nobody’s looking for a full time job. Nobody wants to lead a new deal, right. So by many hands, making light work, and then we have full time due diligence directors and their job is to manage the process and they’re very experienced in terms of helping to draft the reports and organize and follow up and being the chief cat herder of the process. And that can be a lot of work just to keep everything moving forward, keeping the momentum going during the due diligence process, because it’s typically you know, six to eight weeks from the time they go through and present initially to the time the DD reports done and then they come back and do an update. So just sustaining that communication In that engagement throughout the processes is an also another, you know, screen of the entrepreneurs ability to execute on the due diligence process from their end and generate interest and engagement from the members, they have to sustain it for a long period of time. So it’s not like it has come in present, and then checks are written, it’s an extended engagement, which again, goes to your first point as to, you know, how do we avoid that kind of groupthink situation, it’s just there’s, there’s a lot of energy that needs to be sustained for an extended period of time for people to get fully comfortable and invest. But then once the momentum builds and get over the hump, then you get into the the other end of the curve, and it picks up quite quickly. And capital can, you know, we had over a million dollars raised for one company in one week, last week, email went out on Monday, and by Friday, they had commitments of you know, over 800k on our way to a million I couldn’t believe it. But this is a company that is so Angel backed in the United States, I mean, they they’ve been every Angel group out there, they’ve got backing from pretty much all of them. So if there’s anyone that could do it, it was them. But it was, it was really cool to see, you know, that many people supporting an opportunity that’s gone through that much challenge for a long period of time, and they’ve earned the trust of their investors. And so, you know, when they put out the word that they’re at the five yard line and need need more capital to get there, you know, people are willing to invest in. And that’s what’s so key to angel investing, it’s all about relationships, all about trust. It’s not about hype, and it’s not about, you know, just trying to catch the next hot deal. You know, this is a lot of hard work over a very long time. These are each marathon journeys. And, you know, it’s our privilege to support the entrepreneurs that are that are running the races.

Jay Clouse 21:35
What’s the length of time or arrange the length of time that I’m an entrepreneur coming to the forum? How long should I expect this process to take from initially entering the pipeline to getting the point where you’re sending out the email.

Nathan McDonald 21:47
So it can be, you know, we typically work for companies for three to six months in advance of them coming through the process. So the earlier we have an idea, and most of our deal flow we originate from within our group, that’s kind of another misnomer, probably two thirds of the opportunities our members actually going through the process that we participate in. But if there’s a brand new opportunity, and again, it’s well organized, and it’s Angel backed, and it’s a serial entrepreneur, you know, sure, come right in, go through screening, and then right into presenting and DD, and, you know, you’re off and running. And so if you’ve got experience with the process and raising capital from angel investors, you know, we’re a terrific additional distribution point for getting access to this that many more potential check writers, for those who are kind of working through the process and trying to understand it, you know, take your time and really understand the the meaningful parts of it and how it works. From the time folks present, it’s it’s typically, you know, two to three months to funding, again, six months to screen and present another couple months to get due diligence done. And, you know, obviously, companies are always raising money, and we encourage them to always be raising money, if that’s they have around open and, you know, continue to pursue that at the same time as they’re working for their longer term capital goals. The thing about raising Angel and raising retail funding is that, you know, it’s not like you just raise a big VC round, and then you go back to work, I mean, you’re always raising money every month, when you commit to raising, you know, retail capital from angel investors and family offices. So as long as you have that mindset, and you’re ready to go, and then it works out very well. And just trying to match up our process. And the capital raising process and the calendar with the entrepreneurs is a lot of what we do every month trying to connect the dots and give people you know, good direction on where to start, and what the likely kind of best outcome versus the most realistic outcome is going to be so they can plan accordingly.

Eric Hornung 23:36
How do you think about competition for deal flow? Given? I guess, two trends, one seems to be this enhanced focus on speed of clothes? And then the second one seems to be that there’s institutions who may be used to be focusing on a be kind of crawling down to seed presea

Nathan McDonald 23:56
Yeah, you know, we don’t run into a lot of that kind of Silicon Valley mentality out in the rest of the rest of the world that we operate in, you know, the entrepreneurs we work with. I mean, for folks who are in the good fortune of getting multiple term sheets, and being able to set their VCs up for speed to close, God bless them, you know, God bless America. You know, have at it boys and girls, you know, that’s not the game we play, we can move quickly. Obviously, we all got checkbooks, we can write checks quickly. You know, we’re more professional than that. We believe every entrepreneurial idea deserves to be vetted thoroughly, and you’re an entrepreneur, you’re going to spend a lot of time working on this company, I think you want to know as well as we do. Is this like, they’d be successful. And I think that benefits everybody. So for those that decide they’re gonna, you know, take a little bit of time, they want to be Angel back, they want to bring on the expertise, the resources that angels bring, then you got to go through the process to understand well, what are those areas that Where are those blind spots where can angels you know, put in capital and also helped me with building the company. Whether It’s technology or, or customers or whatever comes with it. In terms of the later round investors come in early, you know, I haven’t seen it. I mean, maybe they throw a check out here or there, but they don’t actually spend any time or at any value. Beyond that, as far as I’ve seen, the biggest phenomenon, we’re seeing his family offices, and that’s what we’re most excited about in terms of later stage capital for our Angel back companies. It’s Angel back plus family office back is an extremely strong foundation for an entrepreneur to build off of. And so that’s much more of our mentality these days is going that direction, the VCs have gone so far downstream, so big unicorn chasing, and they’re, you know, dilution orientation associated with how much money they want to pack into these companies is just doesn’t have any alignment with our individual investors in terms of what we want to do. And if occasionally, we get one that works out like that. Yeah, we had mission bio, this last week raised 70 million. So that’s fantastic. But much more commonly, we’re seeing our our B rounds and C rounds funded in a combination of corporate and family office and continued Angel syndication, you know, and they’re raising, you know, 12, 13, $16 million doing that. So, and also online platforms are also participating in these syndications as well, that we’re doing for some of the later stage opportunities once they’ve hit their milestones. So so yeah, not much impact from the later stage funds, setting up their their seed funds and kind of speed to close, I would say at the Y Combinator, kind of at the accelerator Demo Day level. Sure, you know, there’s participants that come to that. But those are usually too early stage for what we would typically look at for our process, because there’s just not enough information to be able to do due diligence, yet at that point, usually, it’s another six months to a year beyond that, when we start getting involved.

Jay Clouse 26:52
What is that sweet spot for Keiretsu, in terms of stage of company, size of company, size of market opportunity, what really hits the sweet spot for you guys?

Nathan McDonald 27:02
Yeah, let’s go to market funding. So it’s a half a million to three to 5 million to take your product to market build distribution. So that means you got to have your product down your pricing done, you know, your go to market plan, your team assembled, and good information that we can do due diligence on to try and validate as many of those points as we can. And then with the angels coming alongside that opportunity, hopefully, they’re able to fill in the cracks. So that’s the ideal opportunity for us. Obviously, Life Science companies generally don’t fall into those nice little buckets from them. It’s much more of a regulatory data driven model. And so we have a whole write up in terms of the life science opportunities that we like to look at in the stage. And, you know, whether it’s a medical device, or it’s a diagnostic or therapeutic, there’s different applications of principles that are Life Science Committee, which is much more educated than me in terms of, you know, what do we want to bring through the group, then they’re a terrific screen for us is this appropriate to bring it through. So we rely on their expertise, highly to provide that upfront screening and costs will then point those entrepreneurs in the right direction if, if we’re not a good fit at this time, but we’re, we’re fortunate with the amount of life science deals that we’re able to get involved with, and then syndicate because they’re always raising money for the whole lifecycle of commercialization of the technologies, and obviously, a lot of our tax dollars at work, you know, creating these technologies, and only a small percentage of those are, are VC fundable, but many of them are very valuable. So there’s a big opportunity there for angel investors. That’s why it’s, you know, such a great time to be an angel investor, because of all the challenges with our healthcare system. And obviously, we’ve seen technology even further move up the curve here in terms of its importance in our economy. And so to be able to be actively investing in these areas that you know, the future is coming quicker, every day. So being able to be in touch with those trends and FinTech and blockchain and impact opportunities. It’s it’s a very exciting time.

Eric Hornung 29:03
Can you help me understand how chapters work? How are they incentivize, or disincentivize to work together? How do you set one up? Or how do you find one there’s crowds are Keiretsu Midwest, there’s Keiretsu Chicago, like, what am I looking at when I’m looking at those as an entrepreneur?

Nathan McDonald 29:21
So Angel groups at a high level, you know, there’s 250 individual Angel groups across the country, maybe even more now, about the 10 plus million accredited households, there’s a few hundred thousand that made an angel investment last year, so it’s less than 3%. Make 1 10 k investments. So if you think about their traditional Angel, somebody writing 25, 50, 100k checks, you know, that’s really the one half of 1% of the accredited population in the US. So it’s a huge potential where more folks could be involved with Angel groups are doing angel investing, but few do so Angel groups are set up to provide that organization support but you know, they’re not broker dealers. So they’re not taking a percentage of the transaction. And so there’s very limited economics to create sustainable Angel groups. And that’s what I’ve studied my career on. Keiretsu Forum is set up, where we have a built in syndicate to be able to share the best deal flow with each other, and then also be able to build membership together. And that creates a lot of synergies, which allows us to become much bigger. So we have tech coast angels down in Southern California, there’s golden seeds, there’s a few other syndication oriented Angel groups, but everything we look at Keiretsu , we want to syndicate by definition, we’re syndicating within our region. And within our region to region network, so Keiretsu Forum local chapters are kind of each like any regular local Angel group that you’d have. It’s the chapter of members within Seattle or Vancouver, BC, or Denver, or Boulder, or Chicago or, or New York, it’s a group of members in that geographic area. And obviously, we used to do monthly forum meetings in those geographic areas. Now everything’s virtualized. So you know, that’s created a lot of opportunity for an angel investors to participate from wherever they are. And so we have a lot more cross chapter jumping into meetings. So yesterday, we had our Vancouver meeting today, we have our our Bellevue meeting tomorrow, we have our Seattle meeting. But realistically, anybody can attend any meeting now that the geographic boundaries have been dropped. So that’s been an interesting transition here the last six months. And then the regions are like, we run the Northwest and the Rockies region. And they’ll just the way that Keiretsu was set up, originally, when we organize the structure was basically by geography. And so each regional president would have a certain level of geography and then have chapters within that geography in order to be able to syndicate the deal flow. And then each month, we report on the progress and which companies are doing well, which ones are done with due diligence, which ones are ready for funding. And then the best opportunities, obviously, with syndicate, once they get DD done, they’re raising capital, then it makes it really easy to go from one region to the next. And that creates a real quality deal flow effect, because we’re always pulling in deal flow, not just from Seattle for the Seattle chapter, but the Seattle chapter is pulling in from the whole Northwest and Rockies region. And then we’re also pulling in from the whole rest of the rest of North America, and sometimes International, additionally, so that helps out with the deal flow quality, syndication and kind of evens it out month, a month, depending on what amount of deal flow that we have. So that’s kind of how the chapters work, the region’s work. There’s also cultural differences, obviously, West Coast versus East Coast, in term sheets, and in due diligence practices and things like that. So we’re always kind of, you know, sharing best practices with each other, what works, what doesn’t work. And that’s what it’s allowed us to be able to, you know, navigate the challenges the last six months and the last 20 years and continue to get better at what we do and helping the entrepreneurs and our investor members that were, you know, fortunate to have the chance to serve and, and also working together with all the local Angel groups in our regions, typically, we syndicate deal flow very often and have about 10 angel groups as part of our Keiretsu syndication network now is it’s been a big priority here this year to try and support as many other Angel groups as we can, because it’s really important to have an angel ecosystem, you know, these groups were in tough shape to begin with, and a lot of cases, and now with COVID, it’s made it even more difficult for them. So we’re trying to do everything we can to help and provide deal flow and support.

Eric Hornung 33:30
I want to ask just kind of one clarifying question there. If I’m sitting here in Cincinnati as a Keiretsu Angel, do I see deal flow from Detroit as well as Phoenix?

Nathan McDonald 33:42
Yeah, so the deal flow is selected by the screening committees within each region. And then the deal flow syndicates around. So just this month, here in the northwest, we’ve got deal flow from the northwest, as well as the rest of the United States. We don’t have a chapter in Phoenix. So if we had a company from Phoenix, it would probably go to Denver, or go to Northern California. Again, now everything’s virtual. So even the entrepreneurs, they don’t have to travel, latest have to get on zoom, and they can go to any of the different virtual Angel groups that are out there. So that’s been an interesting phenomenon. So we usually have the companies start wherever we think they’re going to get the most traction the fastest. So we have a consumer products opportunity, we’re going to send it to Cincinnati, because we’ve got such a P & G presence there. And, you know, if they if they like it, then it’s likely to do very well. But we’re limited on that here. You know, if it’s like science, it’s gonna go to Mid Atlantic or the Northwest, obviously, if it’s software technology, and it’s not 100% like that, but we do try and, you know, think about where where we can get a company started working to get the most momentum, the quickest if they’re outside of the geographic proximity where we have an existing active group,

Jay Clouse 34:47
As an angel group, and as a syndicate, it seems like you would want as many members as you could who have money that they can invest in and get around full, but I imagine there’s probably a power law or an 80-20 of people in the network who are actively investing or actively participating in the DD process? Is there any downside to having somebody in the forum who just isn’t actually very engaged at all?

Nathan McDonald 35:16
Well, yeah, you know, inertia kills most Angel groups, they’ve become social clubs as they evolve, you know, over their life cycles that, you know, I’ve studied for 20 years now. And so if you’re not constantly adding fresh capital, fresh energy, angel investing has its own life cycle, people sell a company, they’re excited, they’re going to make some angel investments. And then it gets tougher, you know, they lose some money, they get burned, an entrepreneur lies to them. Like, why am I doing this? You know, I got, I can do anything, I don’t need to do this, you know, what am I doing? And so there’s a lot of reasons why 97% of the credit households don’t do any angel investing. It’s cuz it’s hard, and most people lose all their money. So her setup to try and help that. But you got to be, you know, again, if you want to be passive, that’s, that’s fine. But what are you contributing? Are you able to help out with due diligence? Are you able to invest? Are you are resource? Are you connector? Do you have that passion for wanting to help entrepreneurs, I mean, if you have that passion, we’ll find a way, you know, we’re happy to have you involved, even if you’re a small check writer, or if you’re a family office, and you just want to see the deals and write checks, hey, that’s great, too, you know, because that’ll come in later on down the road as those companies get bigger, you know, so everybody can participate. But, you know, if you don’t have people pay a membership fee, if it’s just free to join, if there’s no expectations around participation, then eventually, the inertia builds up. And the entrepreneurs get very frustrated, because if the investors aren’t responding to due diligence aren’t responding, you know, to the phone calls. And it’s hard enough to get the entrepreneurs, you know, they get a list of 50, 60, 70 interested investors. That’s a whole nother Well, how do you follow up with 60, 70? investors in two weeks, right? I mean, it’s, we’ve got a whole process for how to do that. But if you’re not ready to do it, and as an investor, you know, we need you to pick up the phone, we need an answer. If you indicate interest in a company, you got to respond, it’s okay. If you say, Hey, I’m not interested, but you know, don’t be ghosting people, right. And, you know, we call a couple people every month, and we’re like, you got to respond. You know, if you want to be play ball, these entrepreneurs are working their tails off trying to follow up, they don’t need you sitting there, just not responding after saying you’re interested, you know, and obviously, stuff happens, people travel, life happens, you know, that’s fine. We have a lot of flexibility and empathy for those situations. And we try and help support the entrepreneurs in that. But it’s definitely a yin yang, if you don’t have the angel engagement, the entrepreneurs aren’t going to be able to get the momentum and the traction, it’s just, there’s so much wealth, there’s so much off, you know, how do you create that middle ground, recreate that momentum, it’s definitely a delicate art and balance to do so. and managing the the angel group at the chapter level, the regional level, you know, we’re excited to add, you know, six to 10 members a month, we renew, you know, 60 to 70 folks each year, but it’s a constant game to add fresh capital, fresh energy, fresh due diligence resources, because, again, there’s volunteer activity, people don’t have to do this, they don’t have to write checks to support entrepreneurs, and they don’t have to volunteer to do due diligence, they have to want to do it, they have to have a passion for doing it. And if that’s not there, then it’s it’s really hard to deliver on the on the value proposition that we offer both the investors and the entrepreneurs in terms of the process that we facilitate.

Jay Clouse 38:28
You said, You’ve been studying this, since you were in college, you’ve you probably have as much knowledge of angel investing, generally, as anybody else out there. What are some of the major misconceptions in your mind that people have of angel investing or working with Angel groups like Keiretsu?

Nathan McDonald 38:45
Well, there’s the pop culture, Shark Tank, you know, version of angel investing. And I would say, that’s probably the biggest misconception, you know, at least we have that pop culture kind of reference point now, though, you know, whereas before, you know, he talked about angel investing, well, what’s that, you know, and then it’s like, well, it’s like Dragon’s Den, or it’s like Shark Tank, okay, you know, so at least, there’s kind of broad knowledge about what it means to be an entrepreneur to pitch for money. And they do a good job of the show. And, you know, most of the products are relatable in those types of things. But actual angel investing is not entertainment, it’s not a show. And, you know, most of the people doing in art are billionaires already. So it’s much more, you know, benign, I guess it I mean, there’s certainly a level of excitement to it, but it’s not made for TV in that regard. So I’d say that’s kind of one thing, you know, just because he’s watch Shark Tank doesn’t mean you know how to do angel investing. angel investing is very complex activity to manage. Most folks, they have a career, they’re very successful in business that creates wealth. And just because you have wealth doesn’t mean you know how to do angel investing. And that’s kind of the other misnomer. It’s like, just because you’re a wealthy person, doesn’t mean you have any idea how to structure and invest in a company. And that’s where having a group that has a lot of folks that are excellent variance. So you have our new members come in, and they join a mindshare forum with a group of older members who’ve been more experienced. And so they’re able to share those experiences with each other. That’s one of the new innovations we’ve done. Since we can’t have physical meetings where that used to happen in the back of the room during the cocktail hour, we’d introduce people and they talk to each other, and they build those mentor relationships. So angel investing is just like any other entrepreneur activity, you know, you got to really study it, you’ve got to have a structure around and a process around it. And then you’ve got to have an investment thesis, you know, you’ve got to make an allocation, you’ve got to commit to do it. Because if you just make a couple investments, of course, we’ve all heard about, you know, the person who made one or two investments, and, you know, hit, hit Amazon, or hit whatever it was, and, you know, they got lucky. And that’s, that’s fantastic. You know, again, God bless America, but that’s not the typical situation that happens, you know, most of the time people lose all their money. And that’s not the story that they tell on Shark Tank, you know, so, you know, being able to be honest about that, like, look, you know, this is high risk activity, you got to be diversified, you got to make 10, 20, 30 investments, if you’re gonna have a good chance of putting the the the law of large numbers to work for the benefit of your portfolio. But this can be a very productive way for people to participate, invest in technology, invest in life, science, invest in things that are meaningful for them, to get a lot of, you know, psychic and other value besides just financial return. You know, because most of the angels that we work with, again, they’re, they’re not in it to hit the next unicorn. That’s not why they care about these companies and show up. They care because people cared about them, and, you know, help them along their journeys, and they want to get back. And I think that’s what America is all about. How do we help each other be successful as entrepreneurs and as investors, and it’s not this, you know, win lose thing is not this big negotiation, it’s a lot of hard work. And so to be able to support these companies, on these long journeys, where they need capital, they need support, you know, they have health problems that we talk about the mental health of our entrepreneurs in the United States right now. And it’s not good. The antidote to that is having six, you know, supportive investors supportive fellow entrepreneurs to share challenges with, and having a strong cap table, that’s an asset to the company, that supporting the company is, you know, I think, another area that can be very, very helpful. So, you know, when entrepreneurs decide to work with Angel groups, you know, they think about, oh, I need, I need a half million to build my product I need I need money for marketing. And so the other misnomer is, no, you’re getting a relationship with a lot of very successful people who want to see you be successful. And so how do you manage that relationship and get the most out of it. So what starts off as a financing transaction, you know, that’s really at the end of the, at the end of the day, you know, that’s just the paperwork. But it’s all the trust and everything that’s built up in the meantime, to make sure that we’re doing everything we can to set ourselves up for success, and be able to obviously, achieve our financing goals, but then to be able to, you know, reinforce our business and our technology, and whatever it may be with the extra network effect that, you know, really pays big dividends when, you know, things like this happen, you know, historically, the world’s been a real challenging place, we’ve had it kind of easy to last 10 or 20 years, but you look back over the history of time, and the history of entrepreneurship and exploration, not for the faint of heart, you know. So it’s I think we’re getting back into kind of more of what we would typically have experienced historically here and that entrepreneurial times are now it’s very challenging. And, you know, you want to do everything you can to set yourself up for success. And to have that support network.

Eric Hornung 43:37
You mentioned kind of this diversifying your portfolio, you need to have an investment thesis, you need to be committing to 30, 40 deals, whatever it is. I’m curious as Keiretsu or Keiretsu. Man, I told you, I’d mess it up, Keiretsu. How do you compare kind of aggregate returns versus fun. So there’s an inherent opportunity cost of investing in all 30 to 40 Keiretsu deals versus putting a $300,000 to $400,000 investment into a private equity firm or a VC firm. How do you like look at IRR, whatever it is.

Nathan McDonald 44:14
So yeah, investing in like the Keiretsu Capital co investment funds or the other Angel group sidecar funds or accelerator funds, you know, that’s a that’s a great part of the portfolio. And it gives you access to more deal flow again, access to more relationships. And that can be a great way, again, if you’re going to be passive. So where are you going to be active, we’re going to be passive where you allocate your time we’re going to allocate your capital. And so to be thoughtful about, you know, where can I invest, get access, and then where can I put my time where it’s going to have the biggest impact. And I’m going to get the most value return on that for you know, wanting to spend the time and do it, feel good about it. Feel like I can have a positive impact all the things that we want to do as entrepreneurs and as business people. So that’s kind of the trade off is it’s not necessarily around financial return. People generally aren’t optimized for financial return, they want to get a return, the return they’re trying to optimize is to avoid losing money, which, you know, again, no matter how much capital you have, you lose 50, 100K, it stings, that hurts, you know, because you bet on that company, and you lost. We all want to believe in entrepreneurs, right? And unfortunately, when it comes back around that they weren’t being truthful, or that it just didn’t work out for whatever market conditions, or they are, the worst thing is like, Oh, you know, you invest, and then and then the entrepreneur gives up a month later, or two months later, or something, you know, it’s like, what do you mean you give up? What do you mean, you know, I didn’t give up, how do you think I made the wealth I had to invest with you, it wasn’t by giving up, you know, so that’s, you know, quite frustrating. So just being able to, you know, allocate your time your capital in a way that you know, is going to be sustainable for an extended period of time, because we all want to travel, we have different things we want to do, our lives evolve and change. And we might find another entrepreneurial idea that we want to jump on to. And so you’re always benefit from building your network, building your relationships. And that’s one thing as entrepreneurs exit, they’re looking for what’s next, you know, becoming part of an angel group, investing in some investment funds that’s going to build your relationship network is going to increase your opportunity cost of the people you get to know and the opportunities that they’re looking at. So while investing in a fund can kind of dilute your returns on one hand, the more companies you have in your portfolio, the chances of you losing all your money, you know, go way, way, way down. And you’re likely to get the market return the kind of mid 20s IRR that historically has been projected. And obviously, you know, your chance of loss when you’re investing with a big group of investors is much less than if you’re out on your own with, you know, making your own investments or with just two or three people because then it’s very binary. And the company’s not in control of its fundraising, you know, they’re looking to you as the rich uncle to manage the fundraising, which is not a position you want to be in either, that’s, that’s not a fun spot to sit in. I’ve done that a couple times, unfortunately. So to be thoughtful contributor is part of your angel impact portfolio. I mean, most of our members want to pull the trigger themselves. I mean, we’ve had our credit and capital investment funds available to all of our members for a few years now. But it’s really only like 3% of our members that actually participate in the funds. And the ones that do they love it because they get the automatic diversification into 40 companies over two years. But really the rest of the members, they’re there because they want to, they want to pull the trigger. And they want to pick the companies and they get a lot of, they get a little bit of an adrenaline rush every time they write that check or sign the docs and send it off. So but they, you know, they fully support, you know, whatever mechanism people feel is the most productive for them for for their investment, how they want to do it.

Jay Clouse 47:43
My last question relates to this period of time that we’re in right now, I know a lot of angel groups, probably a large part of the reason they get together is to get together, and it’s partially a social activity. So with everything being virtual now, do you think that has any long term or permanent effects on how Angel groups will operate? And is that for the positive or potentially a risk?

Nathan McDonald 48:07
Well, I think there’s a lot of silver linings to it, you’re exactly right. Angel groups is a social investing activity, by definition. So now without that we’ve all had to innovate the new frontier is, you know, how do we create as much interactivity as we can through zoom through all the other follow up events and committee meetings, and socials and thought leadership and all the other activities, but everyone gets zoom fatigue, right? So we’re always trying to, just like you guys innovate, try and see how we can be more interactive and, you know, honestly be a little more produced, you know, have an event like Shark Tank would kind of move it a little bit the media direction, because now we’re all media companies, since we’re not putting on in person events. That’s how the contents being delivered. As you guys, I’m sure have been on plenty of meetings where it’s not done very well. And it’s a little frustrating, particularly for the Type A entrepreneurial personalities that we deal with. So it’s important to be very good at organizing, facilitating the meetings, Angel groups have to adapt to this new online investing environment. And we had the question in March, you know, will angels invest based on online interaction with entrepreneurs? And it was a great question, because for 20 years now, the idea of online investing has been a very small percentage of the actual investing that happens. So but it has happened. I mean, obviously, the angel investing community folks with high net worth have done extremely well, in the current situation, if you look at the market caps, and the public markets and folks that have capital invested are doing terrific, so there’s plenty of liquidity out there. And people are actively aggressively supporting their portfolio companies and we’re seeing large capital being placed in the companies we’re supporting, which is terrific. But for folks who are brand new, just getting started if you’re brand new entrepreneur trying to go out and network or do you go I mean to try and you know, work your way from the bottom up through meetups and things. Like that, like, I mean, at least you used to be able to go and network and build relationships. Now it’s all online, I mean, that’s going to be interesting to see how that works itself out. But even those mixers and networking activities have evolved to be able to provide some support and function and about the network you have is the network you built. And there’s no shortcut to that, as an entrepreneur, you know, it’s one of your biggest assets. So I think angel investing will be permanently changed from this, I think Keiretsu Forum, we will maintain a significant virtual presence going forward, even when we can return to doing in person meetings. But just the benefits are very high. Again, a lot of sunk cost and effort to put on an event and to travel to do it to print all the things involved. The the virtual technology is certainly able to bring in more people to participate without people having to get in their cars and drive over there. Of course, you lose the benefit of the in person interaction. So we’re doing what we can to replace that in the meantime, but it’ll be some hybrid version thereof. And this is going to be around for a long time. So again, most of our investor group is, you know, in their 50s, 60s, you know, they’re in that higher risk population, potentially. So we obviously want them to feel comfortable. But you know, angel investing is risky enough as it is people don’t want to risk their health, you know, to go to a meeting. So it’ll be interesting to see so far as we survey our members every month, they’re very happy over 80% very happy with the online format, they see more benefits than drawbacks. And we think with the mindshare forums, and the small group activities that we’re doing, to supplement that in person connection and build those trusted relationships, we think that’ll further push that along. And we think there’s just a lot of opportunity for more online syndication, online support, we think there’s an opportunity for the angel community now that we’re not worried about putting on physical events, how can we focus on the deal flow, focus on liquidity focus on bringing in more family offices, and more coordination, we’ve seen an openness to more syndication in coordination with all the top most active Angel groups in the country. So we think that’ll be very healthy long term as well, just to bring more capital into the ecosystem, it’s also a lot easier for family offices to zoom into our meeting, whereas they may not necessarily be comfortable showing up in person. So it does open up a whole investor audience much wider for us to go after and market to than we had before. So I think those are all big positives that will continue to drive the virtual, you know, evolution of things. And it’s been fascinating here, as someone, as you mentioned, to study this for 20 years, and it’s kind of one way of doing things. And then the internet came and then a little bit different way of doing things. Now, with this virtualization, it’s had a big impact. And I think, ultimately, it’s going to be the positive. And it’s a great time to be an angel investor for for all those reasons. So I encourage folks to, you know, check out your local angel investing organization. And, you know, we’re happy to have folks as guests to participate and come check out some of the deal flow and the opportunities and let everybody, you know, determine what’s the best fit for them, and what’s the best, the best thing to allocate for their time and capital. But I really appreciate the opportunity to be with you guys. And, and happy to answer any final questions you guys may have.

Eric Hornung 53:10
The first time I heard about Keiretsu was actually it was more of a pessimistic tone coming from the pay to play, pay to pitch criticism perspective, I’d be curious to hear your thoughts on it from Keiretsu. side, on both why that exists philosophically as well as from a business model perspective.

Nathan McDonald 53:35
Yeah, we could do a whole show on that topic. And maybe we should I actually did a whole podcast on that topic a couple weeks ago. You know, it’s a real challenge for the angel community, kind of the, you know, pointed criticism on one hand for the groups that all you’re doing is entrepreneurs are getting up for five minutes and pitching and, you know, that’s it. Right. Obviously, we’re the furthest thing from that, you know, we’re putting in hundreds of hours of work. And, you know, just like any business, we’ve got customers and clients and, you know, our business is successful if we take care of them, and with a funding rate of well over 80% and, you know, funding 200 deals a year and being the largest, most active group globally, you know, we’re pretty good at it. We encourage other folks to get involved and help support it. So, you know, it’s a pretty easy kind of dismissive things for for someone to say, you know, I think it kind of demeans the entrepreneurs like they’re victims, like they don’t know what they’re doing with their business. You know, you pay for your attorney or pay for your accountants who pay for your CFO, you know, if you’re an entrepreneur and you need capital raising support, you know, you can hire an investment banker, you can go find finders, you know, you can look at Angel groups, and we each have a different way of paying our employees and sustaining our business and it’s up to us to deliver on the value proposition. There certainly, you know, different varying, you know, quality levels and service levels, even within the Keiretsu network as there is within an angel organization, and some folks are gonna have a great experience. And unfortunately, some folks, you know, may not and that’s always something we’re competing and we’re working hard to make sure everybody has the best experience they can to get the most value out of their time and their capital contributed. And we’re fortunate to have, you know, many, many, many, you know, very happy customers, but it’s not for everybody. So, you know, for entrepreneurs that have zero fundraising budget, good luck, you know, going out and raising capital, it’s not free to go raise money. And just because you’ve got a great idea doesn’t mean, you know, capital just floods in your door, you know, anybody telling you that, that capital raising should be free, you know, I’m not sure what their agenda is, you know, but it’s, it’s not very helpful for you, everyone’s got to be aware of what they’re paying and what they’re getting for the services that you’re contracting for. So, you know, and angels, again, most of the time, they’re, they’re losing all their money. So you’re out raising money, I think what’s not often talked about is the fact that most the time when these companies get funded, you know, they return zero to their investors. So who’s on who’s on the right and the wrong end of the coin there? I mean, no one’s gonna fault the entrepreneur for going out and raising the money. But then just when the, you know, on the background, and the due diligence isn’t done, it doesn’t work out for whatever reason. So it’s a, an interesting conundrum that the angel community is face for 20 years is, you know, how does it create a sustainable model? How does it have employees? How does it hire talented people to provide support for entrepreneurs and investors? And if you have no funding model to, you know, charge for your services, I don’t understand how, how do we support entrepreneurs? How do we create capacity? How do we recruit more angels and train more angel investors if there’s no way to pay for it. And I assure you that, you know, the angel investors aren’t any better than the entrepreneurs are in terms of, you know, the membership fees that they want to pay. So carets, who has a model where we charged the members, you know, and we charge also the entrepreneurs as they go through the full process, there’s no charge to come to do screening, there’s no charge up front. It’s only when we believe and they believe and have a high confidence level, that there’s going to be success here. Because, again, we’re buckling up for three to six months of work. And that service, and that support is not, you know, something we can charge for on the back end. Unfortunately, it’s not legally able to do that, with our international chapters. and international Angel groups are under a different regulatory framework. And that and they, in fact, can charge and it’s more part of the norms in Israel and in Sweden, and in India, they can take success fees. And so they have a bit of a hybrid model. But unfortunately, in North America, we’re precluded from doing that. And so while it’s, it’s easy to take potshots, you know, it’s hard to actually get in and do the hard work that’s necessary to build the capacity to fund these companies and to provide the support that we do. So again, we could spend the whole show kind of going into the nuances of, you know, should you pay to raise capital or not, and the budget and all the different ins and outs of that, and it’s a great topic to dive into. But, you know, as a cheap shot for folks, I mean, anybody who’s working to help entrepreneurs, you know, my hat’s off to them, you know, cuz it’s, it’s hard to do. And I don’t think it serves any of us. Well, we all need to hold each other accountable for doing what we say we’re going to do and delivering it. But it’s a very deep topic that again, we could spend probably a whole show on so I’ll stop there for now, cuz I know we’re running out of time.

Jay Clouse 58:15
This has been awesome. Nathan, thanks for being here. If people want to learn more about Keiretsu Forum, where should they go?

Nathan McDonald 58:21
So you can check us out online at keiretsuforum.com. Also, the Northwest region is k the number four Northwest. k4northwest.com for our event calendar and details about what we’ve got coming up. And then Keiretsu Capital is our investment advisor with our co investment funds, so you can check out keiretsucapital.com we also have all the angel research papers that we’ve accumulated over the last 20 years posted up on Keiretsu Capital. So folks are just interested in learning about the history of angel investing. And some of the research that’s been done. We’ve got a great resource there as well on keiretsucapital.com.

Eric Hornung 58:58
Alright, Jay, we just spoke with Nathan of Keiretsu Forum. I said it wrong in the interview, I told him beforehand, I was gonna say it wrong in the interview. Alas, here we are.

Jay Clouse 59:05
And in fact, your inability to pronounce Keiretsu made me question in real time, my ability to pronounce Keiretsu. And I think I mispronounced it a couple times in the interview.

Eric Hornung 59:19
You know what he says? Everybody mispronounce it. So maybe he was just being nice to us. But I will say that every founder that I have heard from in relation to Keiretsu Forum calls it Karatsu Forum. So it’s not just me. Or maybe it is I don’t know.

Jay Clouse 59:27
We didn’t touch on this in the intro. But Keiretsu is a Japanese term. Do you know what it means Eric? I have it right in front of me. But let’s see if you know it.

Eric Hornung 59:44
It means, that tingling sensation you get when you have hot tea.

Jay Clouse 59:50
Not even close. It’s a Japanese term describing a group of affiliated corporations with broad power and reach. So far of what you’re saying.

Eric Hornung 59:59
I think there some parallels there.

Jay Clouse 1:00:01
Well, this is our first dive back into Angel groups since Todd Fetterman, what stuck out to you.

Eric Hornung 1:00:09
I like that they kind of embrace the process, the diligence, the slowness, the things that people say we don’t like about Angel groups, they say, that’s what we are. So if you want to be part of this, here’s the expectation up front. It’s not, yeah, it will be really fast. And then they’re not fast, it’s look, you’re going to get access to retail investors who want to be helpful, who are really going to buy into this vision, and it’s going to be a different type of capital. And if you want something fast, and you want to compete on speed, probably not your guys or girls.

Jay Clouse 1:01:09
This angel investing Angel group investing, I should say, feels like an inherently difficult model to marry, like all of the incentives between founders, investors, the angel group itself, like, it’s just really hard to perfectly align all those people. Because inherently, if you’re an angel investor, putting money into startup companies, like you’re already taking a risk that, like it’s a net positive for humanity and entrepreneurship, but it’s not necessarily like, guaranteed to be good for you. Like there’s, there’s a little bit of altruism involved in this. And so naturally, you want to be able to have a little bit more process and vetting behind this. But you also probably don’t have a ton of time to do it yourself. And you don’t want to go through all these companies. So you have the group trying to streamline this process, but it takes time. Meanwhile, it’s gonna piss some founders off, because the time that it takes but it’s tough, how do you solve this puzzle.

Eric Hornung 1:01:44
It’s an interesting trade off, because if you didn’t want to put any time in it, and just capital and get the returns, you would put it in a fund. But obviously, these, these angel investors want to put some time into it, they want to have some decision making power, they want to be somewhat active, maybe they don’t want to be fully active, like a solo GP would be. But I also think it’s interesting that Nathan mentioned, look, if you’re going to get in, you also have to have a plan for diversification, you have to understand what angel investing is you have to make 30 investments, it’s not just a one and done scenario. So it is it is this kind of middle ground between a fund and just kind of a solo Angel. I think one of the things that does best is it aggregates deal flow as a solo Angel you couldn’t see and review 70 to 80 deals per month, especially if you’re working a full time job and everything else. So you get to see more, you get to make ideally, or theoretically better decisions, because you get to see more. So I think it’s a good thing. Angel groups in general, are a good thing to get people interested in angel investing to get them actually deploying capital into ecosystems and founders that otherwise might not receive it from funds for whatever reason or from other sources. And I think if done, right, it sparks kind of a lifelong interest in actually doing the investing into the future. And maybe that happens through a forum like Keiretsu. Or maybe it happens through an angel group, or maybe they just go out on their own and do it. I think it’s definitely a good starting point. For most people who are not steeped in this space.

Jay Clouse 1:03:11
I’m really interested to learn more about the due diligence process and committees within Angel groups like this. So we’re gonna try to get someone from the due diligence team within Keiretsu Forum, but at least someone within an angel investing group to talk about their due diligence process, because that’s something we haven’t really dug into on the show here, Eric.

Yeah, like a deep dive into startup due diligence. And what does that mean?

It’s one of those phrases that we tossed around all the time, like, Oh, yeah, we know, the due diligence as part of the investing process. But like, we’ve never really discussed exactly how that looks.

Eric Hornung 1:03:44
And there’s also just a difference between private equity due diligence and venture capital due diligence. And where does an angel group sit on that kind of scale of due diligence. I mean, on the venture capital side, a lot of times you’ll hear an investor hears about a deal, and they pretty much commit the money and they’re in within weeks, sometimes in a hot deal. There can’t obviously be that much due diligence done there. So you’re kind of taking the lead investors, me mean, sometimes it’s even like a lead investor who will do that and just kind of take everything at their word and do it a little bit of a review period. But it feels like there’s less diligence and maybe a traditional high speed venture funding versus a private equity funding, which can take months and have a 45 diligence day deal diligence period plus have a data room plus have consultants plus, you have this thing called the quality of earnings. Plus you have these third party diligence reports that are written on the it and all this. So I don’t know what end of the spectrum it is when you’re looking at Keiretsu. But I would love to hear about how they think about how much diligence is necessary.

Jay Clouse 1:04:46
We need to do more due diligence on due diligence. We are due to do due diligence on due diligence.

Eric Hornung 1:04:52
Done.

Jay Clouse 1:04:53
Well we’d love to hear what you guys think about this episode with Nathan. You can tweet at us @upsideFM or email us Hello@upside.fm. If you have thoughts on Angel groups in general, let us know @upsideFM or Hello@upside.fm. Maybe Eric would be cool to have a founder come on to talk about their experience to the angel group. And maybe we can get a little saucy and talk to a founder who has had bad experiences with Angel groups. Generally, if you are a founder and you’ve had good or bad experiences, the angel group set us up to tell a story. That’s all for this week. Thanks for listening. We’d love to hear your thoughts on today’s guest. So shoot us an email at hello@upside.fm. or find us on Twitter @upsideFM. We’ll be back here next week at the same time talking to another founder in our quest to find upside outside of Silicon Valley. If you or someone you know would make a good guess for our show, please email us or find us on Twitter and let us know. And if you love our show, please leave us a review on iTunes. That goes a long way in helping us spread the word and continue to help bring high quality guests to the show. Eric and I decided there were a couple things we wanted to share with you at the end of the podcast. And so here we go. Eric Hornung and Jay Clouse are the founding parties of the upside podcast. At the time of this recording. We do not own equity or other financial interest in the companies which appear on this show. All opinions expressed by podcast participants are solely their own opinion and do not reflect the opinions of Duffin Phelps LLC and its affiliates on your collective LLC and its affiliates or any entity which employ us. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. We have not considered your specific financial situation nor provided any investment advice on this show. Thanks for listening and we’ll talk to you next week.

Interview begins: 8:37
Debrief: 58:58

Nathan McDonald is the CEO and Managing Partner of Keiretsu Capital as well as the Chairman of the Keiretsu Forum Northwest.

Keiretsu Forum is a global investment community of accredited private equity angel investors, venture capitalists, and corporate/institutional investors. Keiretsu Forum is a worldwide network of capital, resources, and deal flow with 53 chapters on 4 continents. Keiretsu Forum members invest in high-quality, diverse investment opportunities. Keiretsu Forum and Keiretsu Capital (the exclusive worldwide fund partner of Keiretsu Forum) are ranked as the most active venture investors in the USA. The Keiretsu community is also strengthened through its involvement in social and charitable activities.

Keiretsu Forum was founded in the San Francisco East Bay in California in 2000 by Randy Williams.

Key points:

  • Keiretsu Forum’s beginning 12:34
  • There are no shortcuts to investing 14:26
  • Angel investors on Keiretsu 15:37
  • Due Diligence teams 19:04
  • Timeline for entrepreneurs 21:35
  • Competition for deal flow 23:36
  • How chapters work? 29:03
  • Downsides of an unengaged network 34:47
  • Misconceptions of angel investing 38:28
  • Angel groups in the time of COVID 47:43

Learn more about Keiretsu Forum: https://www.keiretsuforum.com/

Follow Nathan McDonald: https://www.linkedin.com/in/nathanmcdonald1/

Follow upside on Twitter: https://twitter.com/upsidefm

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