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venture forums still active across the country. Venture forums are fairly con-
sistent in their structure. Typically there will be a keynote speaker, and a lim-
ited number of prescreened and member-sponsored entrepreneurs will
present their submitted business plans. Presentations with visual support
usually last 10 to 30 minutes. The presenters may be augmented by other
companies seeking financing who set up booths or tables and exhibits. There
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The Solution: A Strategy That Works


may be a luncheon, dinner, or after-presentation social hour, during which
entrepreneurs can network with the attendees. Although many in the audi-
ence will be service providers and consultants, a number of lone angels do at-
tend these events. Breakout sessions or private meetings immediately after
the event between entrepreneurs and potential investors are also common.
The key to mining the most out of time and money spent on the venture
forum strategy is to be prepared by doing your marketing planning before
the event, and to hit a home run with a standout road show presentation. We
discuss a mix of essential elements in preparing for a successful venture
forum presentation in Appendix A. Do your market research by knowing as
much as you can about the investors who will be present, and which of those
investors will most likely be interested in your deal. Which investors invest
at your minimum size of investment at your stage of development, around
your geographic area, and in your industry? Answering these questions is a
good starting point.
Position yourself vis-à-vis the other presenting companies. Find out a bit
about the other firms competing for the investors™ attention, especially those
presenters immediately before and after you. Make sure to emphasize your
strengths over competitors at the event.
Before presenting, make sure the size of your deal and size of the mini-
mum investment is consistent with investments by investors at past venture
forums offered by the sponsoring organization. Usually this information is
available to prescreened companies who the forum wants to feature at the
event, and are provided when requested.
Make sure that you are organized. Have readily available business plans
professionally duplicated and bound. Also, have copies of any electronic ma-
terial, for example, video or CD, web site address updated, reference list, and
a color copy of the slides from your presentation. Take careful notes follow-
ing any discussions with investors, collect contact information, and put it
into your database as soon as possible after the event.
Last, remember to follow up with investors after the event in a timely
way, and to provide promptly any further information they may have re-
quested. Angel groups take a number of different manifestations, from the
informal to the formal.
Informal groups include angel or venture capital clubs, and informal net-
works and associations. Informal groups are loosely tied affiliations of an-
gels sharing the responsibility of deal flow development and due diligence.
By banding together, the individuals leverage their capital by pooling it, al-
lowing not only risk sharing, but opening the door to participating in larger
deals than would have been possible as a solo investor. The mix of investors
ranges across all types of investors, and we refer the reader to Chapter 7 on
“Angel Investor Types” for more details. The informal group gives the more
62 THE CHALLENGE AND THE SOLUTIONS


independent investor the benefit of shared resources without the burden of
more constricting rules of participation associated with larger more formal
organizations.
More formal angel enterprises have developed for numerous reasons. A
major study by the Kauffman Foundation in 2002 suggests that business
angel investing groups are growing in North America, and that angel groups
are formalizing in response to increasing demands and complexities in the
private equity market. Today, according to the Center for Venture Research,
more than 170 such organizations dot the United States and Canada.
More formal angel organizations have well-defined legal structures;
part- or full-time management; standardized investment processes; and pub-
lic relations components, for example, a web site, and so forth. They may
also have a structured angel investment fund.
The forces driving more formalization in angel groups are numerous
and include a desire to attract higher-quality deals and generate better re-
turns to get more investors involved; increased awareness of the long-term
returns from venture investing stimulating newly affluent and less-experi-
enced investor involvement; the need for pools of capital to fill the gap in the
private market created by institutional venture capitalists moving to larger,
later-stage transactions; the legal complexity of private deal structures; the
large numbers of high-net-worth investors and visionary entrepreneurs
looking for ways to more efficiently bridge the capital gap; and the desire for
increased interaction among investors who can become isolated in their in-
vestment activity.
More formal angel investor groups may involve pledge funds or limited
partnerships. Manager-led limited liability companies (LLCs) are common to
aggregate individual angel funds into pools of capital to co-invest. Voting
might be used, and a majority of members can direct where funds are in-
vested. Structure can vary significantly, from nonprofits and management
companies, to independent LLCs, to the formal venture capital partnership
with the angel group as the general partner.
The size of groups ranges from about 20 to the largest at 80 investors.
All investors are accredited, and may pay dues to help the group cover ad-
ministrative costs and operation expenses. More formal groups have invest-
ment requirements, and members are expected to invest a minimum amount
each year, $25,000 to $100,000 in each deal, for example, or they may be
subject to investing a fixed amount over some period of time.
Most important to the entrepreneur in raising capital is that these groups
have regularly scheduled meetings. Presenting companies are usually spon-
sored by a group member, and the company™s documentation is subject to
prescreening before its presentation. The entrepreneurs give their road show,
followed by a question-and-answer period with the angel group members.
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The Solution: A Strategy That Works


Angel groups have led investors who scout out deals at venture forums,
incubator and research organizations, university entrepreneurship programs,
and through their own and other angel group members™ networks of con-
tacts. In addition, most have web sites describing how to apply to get your
deal considered by the group. Then, a screening committee usually makes
decisions about deals that fit the group™s criteria. Investment into a company
is sometimes done by the angel group as an organization, at other times di-
rectly by individual members. The key for the entrepreneur is to have a spon-
sor respected by the members of the angel group.
As a case study, one angel group in Northern California started by an in-
dividual angel investor obtained sponsors, a law firm, a CPA firm, and a
commercial bank to fund start-up operations. In its first year, the angel group
attracted 50 members, each of whom paid $300 a year and $60 per dinner
meeting. They held six events with 12 companies presenting. Four compa-
nies were funded fully and four received partial funding, totalling approxi-
mately $2 million in investment. The group™s most successful investment was
$750,000, which led to a successful venture capital round. The company was
recently merged into a publicly traded corporation for $300 million. The
group is now setting up a $30 to $50 million venture fund.
The fifth strategy we discuss is the use of financial intermediaries to as-
sist you in developing leads for financing your venture.
Whether described as intermediaries, finders, placement agents, invest-
ment bankers, or brokers, most entrepreneurs understand their role. A good
financial intermediary can be as challenging to find as an angel investor. In
general, attractive intermediaries are experienced in the private equity
process; known by legal, accounting, and investment banking players in their
region; respected for their records; published authors and educators on rais-
ing capital; and recognized as one with a reputation for having built a data-
base of real and active investors.
A financial intermediary helps you to raise the capital you need. This can
be accomplished by prospecting his or her database and referring leads; or,
in the case of licensed placement agents, actually placing the securities with a
private or organizational investor. The intermediary is an expert in the pri-
vate market and is an invaluable guide, and, when authentic, can signifi-
cantly increase your chances for financing success. A skilled intermediary can
also assist you in getting organized, planning your capitalization program to
avoid giving up more equity than necessary, and helping in drafting investor-
oriented, compelling documentation and presentations.
Intermediaries typically work for a retainer and also receive a success fee
when their efforts result in the entrepreneur raising capital. A retainer is an
up-front fee to secure their services exclusively for a time, and defrays ex-
penses while working on your campaign. The success fee is a percentage of
64 THE CHALLENGE AND THE SOLUTIONS


the money raised and can vary from 2 to 10 percent. Sometimes intermedi-
aries will take equity in the venture or warrants to buy company stock at a
set price. If equity is taken, it is usually at a set percentage of equity raised at
a predetermined, negotiated price. Experienced intermediaries will have ref-
erences and be willing to undertake due diligence to confirm their business
development statements.
The landscape in the financial intermediary community has changed
dramatically, with many firms closing and going out of business because of a
loss of investors, or from having been swallowed up because of mergers, ac-
quisitions, and other consolidations. The new directions involve these enti-
ties doing more research, publishing, avoiding conflicts of interest, and
expending more on due diligence in order to identify fundable and sustain-
able ventures for their investor contacts. All these activities will facilitate
finding trustworthy intermediaries.
Government is also getting the message about the efficiency of going di-
rectly to the investor. For instance, California™s Commissioner of
Corporations and others who appreciate the challenge of raising capital have
helped enact laws that offer opportunities for private placement investment.
A concerted effort by the SEC and the State Department of Corporations
(SDC) in California has struck a balance between the need to protect in-
vestors and the need to offer emerging growth companies flexibility in their
capital-raising activities.
Although we have cautioned you about advertising, be aware that new
laws are coming onto the books. The California legislature has taken the lead
in the United States with its innovative new program, enacting section
25102(n) of the California Corporate Code, mentioned earlier. This section
allows entrepreneurs to advertise for angel investors following a simple, in-
expensive procedure. [Section 25102(n) also grants an easing on dollar
amount and number of purchasers, an action that may reverberate nation-
ally.] Some believe that regulation is unfair to small companies, that there is
no empirical evidence that small offerings are any more fraudulent than large
offerings, and that, in general, compliance is strangling capital formation.
However, this law opens the way for angels to use their own judgment in as-
sessing the risks and rewards of an offering, just as the multi-million-dollar
institutional investor does.


Sell
You must invest time in the investor if you want the investor to invest money
in you. The high-risk investment represents nothing less than a sale. Make no
mistake: The private placement investment is a sale, and a sale involves ob-
taining a decision. High-risk, early-stage private equity illiquid story securi-
65
The Solution: A Strategy That Works


ties with potential for high return are not bought. They are sold! Attracting
a group of affluent, sophisticated co-investors to write checks for high-risk
ventures”in some cases far below investment-grade securities”relies on
your ability to cultivate relationships. So stay close to the gold. Don™t just
view investors as deep pockets. A respectful attitude is crucial. Cultivate a re-
lationship with investors by treating them as peers or mentors.
However, mailing out business plans cold and following up with tele-
phone calls do not constitute a sales strategy. Selling has changed since the
1990s. Documents are like milk, spoiling with time. Business plans don™t get
funded; people get funded! Entrepreneurs need to focus on selling, and dur-
ing early investor screening and interest development, they don™t need to de-
velop elaborate venture documentation. They will find, instead, that an IOP
is adequate to generate investor interest in meeting with them and moving
the deal forward.
Selling early-stage deals has changed over the past five years. Many en-
trepreneurs cling to the notion that selling is beneath them, that it is too ma-
nipulative, but such thinking hinders their soliciting the high-net-worth
private investor market. It behooves entrepreneurs to enlist their best efforts
in this part of the strategy.
We have suggested that selling is different from times past because of
the buyers, the regulations, the investment decision-making procedures, the
presentations and promotions, and the packaging of investments. All are
different.
First, high-net-worth investors today are sophisticated, educated, and
experienced. New laws, licensing regulations, and consumer- and investor-
protection statutes and practices stifle old-fashioned exuberance. Worse,
during the late 1990s, a number of brokers, investment bankers, money
managers, and their representatives were accused and convicted of duping
clients. Considering the publicity that accompanies criminal wrongdoing in
the sale of limited partnerships, closed-end funds, and other types of
high-risk investments, investors who have remained in the market and not
exited alternative asset class investing have become justifiably cautious when
they approach high-risk/high-return venture investments.
Investment decision making today belongs in many cases to committees.
And at least as significant in private transactions is the influence of a spouse.
In fact, ICR concluded from our own research that one of the major reasons
for nixing investments is a spouse who does not feel comfortable with the
deal or the entrepreneur.
Technological innovations have also transformed investment presenta-
tions. Developments include multimedia, laptop and wireless computers, vi-
sual graphics, DVD visual and CD audio programs to support the
PowerPoint graphs and charts, Internet web sites with passwords for in-
66 THE CHALLENGE AND THE SOLUTIONS


vestors to join online presentations about the deal, telephone and video con-
ferencing to discuss deal questions, and fax and e-mail communications to
support marketing material duplication and dissemination.
Among entrepreneurs enamored of the new technology is a tendency to
package their deals but to disengage themselves from the selling process, par-
ticularly replacing crucial early face-to-face meetings with electronics gad-
getry. Moreover, the geopolitical situation, making air travel more difficult
and time consuming, may also be contributing to this trend.
With technology spewing out such extensive documentation, due dili-
gence can be carried on long before person-to-person meetings and presenta-
tions take place. And although no one asking for money should ever be
farther than a handshake away, this modern communication technology may
let prospective investors draw their own conclusions before the entrepre-
neur™s personal closing sales presentation.
Today, the sale in these types of investments is not made by an in-
vestor-development person or salesperson, but becomes the final step in a
meticulously orchestrated public relations marketing and venture advertising
strategy. However, these circumstances do not make the basics of selling ob-
solete. The principals still need to know their venture and be able to explain
their financing proposal. They must use sales, promotion, and packaging
techniques, and must learn the art of asking questions to get the answers they
want. Like it or not, they must cultivate the ability to manipulate.
As Exhibit 3.7 illustrates, selling is a process. So here is the checklist you
need to manage. First, make sure your presentations are face-to-face.
Maintain a positive mind-set. If someone rejects you, don™t be thin-skinned;
realize that rejection may be because the risk is too great now. Enter the in-
vestors in your database for later consideration. Be closely informed about
investors and be prepared for the questions investors are likely to ask. In
Chapter 12, “Preparing for Due Diligence,” we have compiled many of the
questions that entrepreneurs can expect to encounter during the venture
audit with angel investors. We refer the entrepreneur to this extensive list to
prepare themselves for questions likely to arise.
Remember to pick the best person (not necessarily the CEO) to present

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