Venture Capital Angels: Financing for Start Ups
First in a Series “Where Mind Meets Money”
January 26, 2006, Hilton
Capital ‘angels’ have some $60 to $90 billions to invest in business start ups, but they complete only one or two deals a year–––ranging from $5,000 to $500,000. The funding is available. How does the entrepreneur find it? This was the major message sent at the January 26, 2006 meeting of TCVN’s new series of Forums.
In order to compete for that money you have to have a clearly defined roadmap to funding. It is critical to remember that venture capitalist want to make money as much as the business owner does. To vie for that money you have to be prepared to explain how your business is going to be profitable for everyone involved. Entrepreneurs must also communicate in what way their product or service is needed because that’s what most angels want to know.
Bart Greenberg, TCVN chairman, is launching a series of TCVN programs, “Roadmap to Funding,” specifically designed for unaffiliated angel investors. The programs will focus on how to approach Tech Coast Angels . "We believe there is a very large, untapped source of funding for early-stage deals,” he explains, “I believe many people would like to help fund early-technology companies but simply do not have the time or resources to join formal angel groups. Through out Forums we can help these people meet entrepreneurs and better understand the process of investing in early opportunities.”
Other Forums will endeavor to help early-stage companies break out of "the entrepreneur's dilemma" by bringing credibility, experience and skills to rapidly accelerate progress–––and help position companies for ongoing success in their business’ key fundraising endeavors.
SUMMARY
January 26, 2006, Forum, Hilton
By Sara Pentz
There are several types of angel investors: the serial angles, freelance angels and the operation value-added angels–––all of whom want to work with start up businesses to build for success. Actually, there are a flock of angels–––they can be individuals working in groups, enthusiast individuals or retirees, and financial tourist angel who are just looking around. There are socially responsible angels; neighborhood angels who live right down the street. And there are celebrity angels who may just be tire-kicking angels.
If you want a private equity investor, there are certain rules to follow. First, you must have a business plan in order to meet the right people. And you must know how to get your deal done. The rules include a good knowledge and understanding of business planning, angel/venture capital financing, capital raising strategies, high tech marketing, strategic alliances, and knowledge of how mergers & acquisitions work.
At this particular meeting of TCVN, the panel consisted of Robert W. Price, Senior Research Fellow, Global Entrepreneurship Institute, Richard J. Dadamo, Founder, RJD Associates, Inc. and Christopher Romine, CEO, S.two Corporation; panel moderator Matt Ridenour, Managing Director, Momentum Venture Management, LLC, who guided and contributed to the discussion.
THE VENTURE CAPITAL PANEL SPEAKS
by Sara Pentz
Robert Price is currently working on his eleventh book. He is world-renowned as an expert in the field of entrepreneurial capitalism and early-stage information technology companies. His clients' business plans have raised nearly $24 million from angel investors, venture capitalists, and strategic capital partners.
He spoke about the importance of having a roadmap for funding. “Know how to raise money, structure your business, and take the risks of the trade,” he explained. “It’s not enough to have an idea about a business you want to grow. You have to know how to put the pieces of puzzle together, and how to get the deal done. You have to know the venture-drill process, the packaging, the placing, the presenting–––what the environment wants and needs in order to buy into your concept. You have to build the business plan. You have to find the right individuals to support you. You have to know where you are on the food chain or the investors will pass you by. You have to be ready for hard work. You have to be ready to win.”
Essentially, that was the themed content of the evening’s discussion. These are commandments entrepreneurs have heard repeatedly. The value of hearing them from these experts was to hear the discourse, the exchange of ideas, and the empathy and support the three exude for the process of business building. It is always a motivational experience.
Panel member Richard (Dick) Dadamo is founder of RJD Associates, Inc., a management consulting firm that offers mentoring support to company presidents and owners of small companies that have sales under $20 million. As a serial angel investor, and an active member of the Tech Coast Angels, he has made a number of investments in start-ups. With more than thirty-five years of experience in the corporate world, he is well known as a mentor and friend. His advice is always practical and down-to-earth.
Dadamo strongly urges, “You have to realize that if you are an entrepreneur–––this is your life. You have to get to a point of due diligent, spending about 50-100 hours preparing your project for the investor. It’s all about discipline. If you don’t want to make money, we can’t make money. Plan the money. Review your story. Use common sense. Do all these things before you turn off the investor. They don’t care if you have the solution. They want to understand the need.”
Price talks about the emotional contact between the entrepreneur and the investor, citing one case in particular, “My job was to figure out how to get the angel in front of this technology in order for him to understand the concept. We used a trade show. He stood there and watched the look on people’s faces when we showed them what we did. He then stepped up to the plate. We used only our own money to develop the technology. We believed in what we were doing. If we didn’t find that next round of capital it was all for naught.”
Moderator Matt Ridenour agrees with the idea of emotional contact, “You can almost track the need for emotion contact versus the need for data content.” Ridenour has been a principal in more than 25 private market transactions with an aggregate value of more than $200 million. He has been active in private equity and venture capital initiatives, and as a successful CEO in early stage companies.
Christopher Romine, CEO S.two Corporation was the third panelist. His company is based in
As a manager and entrepreneur, Romine suggests that the relationship process is critical.
“With an initial investor the relationship is a process–––especially if he is lower down on the food chain. You have to develop of a relationship of trust. As we moved up the food chain in our business the relationship became much less important. So the history becomes more important. Relationships are important but you must not forget the credibility issues.”
In a discussion about business plans, Price, Dadamo and Ridenour each agree that you have to know what you’re doing. “The concept of creating a business plan forces you to know what you have to do first–––who are you going to call and why you need to have a specific understanding of what they are doing.” “Their first questions will be why should I not make this investment, especially if the management team is not in place.” “The investor will ask himself what are some of the deal killers on this proposition?” “Often early stage companies move too fast and we see them rewriting the business plan every several months. You must articulate what you fundamentally do in that plan in the presentation. What’s the right format? What is basically enough?” Adds Dadamo, “Make sure the first paragraph includes everything. Nobody wants 58 pages of financials. Tell them what is unique, where there is a need. You must convince the investors of this
“Trust and credibility equals comfort,” a tip offered by Dadamo. “If there’s more than one person involved in the project, you have a team. Team, team, team–––you get credibility from the team. You must also champion an investor who gives you credibility” Says Romine, “The team is the answer because we tend to get too narrowly focused. Tunnel vision is bad. Team has built-in critics. The chemistry builds on the temperament but the team is diverse enough to be critical and keep everyone on the path.”
“It’s an ongoing thing,” Adds Romine. “Once they give you the money, you don’t have to keep them in the loop, so if you do keep the relationship you maintain your credibility and they become part of what’s going on.” Price: “It takes passion–––sell, sell, sell, sell. If the entrepreneur doesn’t have passion, how are they going to go out and sell the product? The team has the passion. That’s the word I like best.”
Price says there is more to it than just the internal team. “You have to get the venture team involved. Ask yourself how to do this. Think of an external team. Think of people who would sit on an advisory board. This is not a director’s board. Attorneys, bankers, accountants, other professional guys–––you can knock around ideas together. They can be your test flight guys.”
Ridenour seconds this idea. “If you don’t have credibility be honest borrow some. The scariest thing you can do is to ask someone for money – so ask them for advice. Get some of their time and, if you have merit, they will get attached and want to get involved. They may even introduce you to the right people.”
Adds Dadamo, “Every business plan has an advisory board. Give them a certificate–––these white hairs and the no hairs. They know where the money is, the help is, and the people are. Don’t hesitate. I run into this problem all the time–––whether the guy really wants to be an entrepreneur. You have to be wiling to work for no pay. It all about commitment and passion. We all have to be on the same page. It’s sweat equity. If you’re getting into this just for the enjoyment, that may not be the place to go.” Price tells it straight, “You have to be an event banger. You have to ask for the money. What’s key is triangulation–––know someone who knows someone who know someone.”
The Tech Coast Venture Network (TCVN) is dedicated to assisting, educating and connecting early stage growth companies with information and advisors for the purpose of raising money. TCVN has been directly or indirectly responsible for the establishment and growth of a significant number of new and early stage businesses. Through its major program, the Venture Forum, TCVN has had over 150 programs on topics to assist and educate entrepreneurs. More than 400 entrepreneurs, CEO's, investors and other presenters have shared their professional business knowledge and experiences.
(Compiled and written by Sara Pentz, www.sarapentz.com, January 31, 2006)
