This is not the first post I’ve done that mentions Tech Coast Angels, one of the largest and oldest angel investing organizations in the country, which is of course in Southern California. (Here’s another good one from about 10 months ago.) Interesting that the term “angel” originated in the entertainment business, but TCA has little to do with Hollywood. It sure has a whole lot to do with funding technology startups in that part of the country, though! (I also had the good fortune to do an extensive interview in early 2007 with the founder of Tech Coast Angels, the late Louis Villalobos, which was later published in The Angel Journal.)
This organization is actually comprised of four networks of angels covering a large part of the SoCal geography, from Santa Barbara down to San Diego. One of my favorite places, Orange County, is where the largest and oldest of these networks is situated. And that’s where the subject of this post hails from.
Frank Peters, a successful, now semi-retired software entrepreneur (he marketed his product to Wall Street firms starting back in the ’80s), has been active as an angel investor for 10 years, and at the time of this post he’d been with Tech Coast Angels for five years. On the side, he produced a great podcast for a few years called “The Frank Peters Show” — subtitled “Startup Stories in Angel Investing and Venture Capital.” He was prolific — averaging about 60 podcasts per year for a while. Pretty amazing! These episodes provided some great listening for both entrepreneurs and angel investors. He had some excellent interviews with really interesting subjects. It was a podcast that definitely helped people better understand angel investing.
Frank did one great episode that was an interview with two experienced fellow TCA angels: Dave Berkus (how many angels do you know who’ve done 60 deals?), and Sid Mohasseb, who runs Venture Farm, which he described as “an equity funding source that adds hands-on experience to the execution process.” The topic of the podcast was “20 Ways to Fund Your Startup” — a list that Dave Berkus developed, but which all three guys discussed in this one-hour+ episode. Here’s a quick rundown of the gist of that discussion:
THE BIG LIST: 20 Way$$ to Feed Your Startup Habit
Of the various ways to raise startup capital, angel financing is about in the middle of the continuum, Dave said. Some founders, however, try it too early — they don’t bootstrap enough first. If you do, say the panelists, you’ll have a better chance of getting an audience in the first place to be considered to receive funding. So, here’s the rundown, courtesy of Dave, with some points noted by him and the others as he went through the list:
1) Credit cards – this can be $20-30k, even $50k in some cases, which will require a personal guarantee (but not mortgaging your house).
2) Securing arrangements with suppliers to slow down payments – assuming the business is started – or seeking deferred payment – lawyers typically do that – many even do pro bono work as a way to give back to the community.
3) Take out another mortgage – scary for many, perhaps, but rates remain quite low; it shows the founder has significant belief in what he or she is doing.
4) Wealthy relatives – “if you were born lucky” – they’re more likely than others to invest.
5) Friends – “means you’re getting lucky, if you have good ones!” – can be on your board of advisors, too, which costs you nothing.
6) Take on consulting work – even let your company be both a consulting and product development business at first.
7) Affiliate with an incubator – whether physical or virtual – they can help build your management team and more.
8) Well-connected attorney – angels listen to their recommendations.
9) A “Rented” CFO – they don’t get paid for just getting the money, but for the financial systems they set up – the analysis of the data is what they deliver, and credibility.
10) Recruit a professional CFO – angels feel much more comfortable then.
11) Get prepaid licenses for your technology – a combination of selling service as well as product – maintenance agreements can be part of this (16-20% of list price of software) – recurring revenue – customers are essentially paying for the engineering and product development – helps refine the value proposition – you don’t need to give it away for free.
12) Accelerated payments – of course, you have to have a revenue stream first.
13) Royalties for very specific projects – let those fund your product development – seek out anyone that can benefit from the technology (not just your main target customers).
14) Angel financing – “later the better” to approach them, because you’re then more likely to get funded – however, can be anywhere on the continuum – the later it is, the more likely you’ll get funded (angels will look at what you’ve done so far – how many of the above you’ve taken advantage of) – if you go to angels earlier, your valuation will be lower.
15) Bank line of credit – $50k is available to almost anybody with good credit (with personal guarantee).
16) Strategic partnerships – customer or supplier, helping to develop, promising to distribute, etc – helps to define channels for later sales and distribution.
17) Venture capital, pension funds
18) Private placements
19) Professional restructurers
20) Investment bank, public offering
Dave pointed out again that angels are more in the middle of this continuum — they aren’t where you start. “They’re an avenue for the sophisticated entrepreneur that understands all the other sources and where the risk is, and how fast they need the money.”
In the closing discussion, Frank commented that TCA was ten years old at that point, and was getting more sophisticated. Yes, the others agreed — and “more prudent, cautious, and jaded.” But Dave added that it was certain they were much more powerful as a group than as individuals. Frank noted that the angel financing business, at least for TCA, things slow down towards the end of the year — until around mid-January.
Then, the three discussed a recent university study, in which certain TCA members participated, called “Angels in Groups,” for which a large amount of data on angel investments was gathered. One of the biggest surprises of the study, they agreed, was the average length of time to a liquidity event. Many angels think of it as generally 3 to 5 years, but they noted that was not happening for those deals studied. Dave said the study found that 61% of the angels surveyed had returns greater than the amount they invested, “meaning 39% didn’t!” The conclusion is that angel investing is more risky than most people think. A diversity of investments is important “before you can count your chickens,” said Dave. Luis Villalobos, the founder of TCA, thought a portfolio of 25 or more investments was a minimum to expect good returns. The study showed that success happens when the angel is involved in the business. The entrepreneur benefits from the sharing of the experience of angels. Finally, the study found that it doesn’t tend to pay for angels to reinvest, which is somewhat worrisome, the panelists noted. “TCA traditionally funds 2-3% of deals they see,” said Dave. “But when we’re ready to take deals to VCs, those firms only invest in 1% of what they see, on average.” Therein lies a problem, because angels often to have to invest a second or third time to keep the business going before it’s ready for the VCs. ‘”It’s a game of patience,” Dave said.
Frank Peters concluded this particular podcast by saying he thinks there’s a need to “start testifying more about angel investing, more education, chewing over issues.”
I like the list of 20 sources of startup money, though — it’s a list that all new and aspiring entrepreneurs need to know. There really are a ton of ways, and most of them do qualify as bootstrapping… or just plain being clever!
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