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But it isn™t a knowledge of technology that helps you determine a good
investment.
I don™t talk from theory, I talk from practice, practice as an investor,
occasionally putting money into deals. There are a lot of similarities be-
tween the institutional and the private investor. You know them as well
as I do. Don™t think you can get by without a good business plan. You
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Types of Private Investors


can™t. It™s absolutely essential. It would be like going out in the street
without your pants or skirt on. You™ve got to have a good business plan.
And you have to associate with professional people who will be
available as soon as you get into operation: a good CPA, but even before
you start, a good corporate lawyer. And you don™t need big people. I™m
not knocking the big firms by any means, but it™s been my experience
that when you™re very small and not exactly flush with money, the big
firm gives you a junior, someone inexperienced. In smaller firms, on the
other hand, you get principals, the more experienced people, those with
the fire to help you and with a desire to make a name for themselves.
When you™re dealing with a private investor, you are dealing with prin-
cipals. So, select your professional advisers with care. They are essential.
I don™t put my money into Hollywood, looking to associate with the
stars, but I will tell you this: I ran my own business and I function today
on the philosophy that I™d spent 25 years in the corporate rat race and
liked most people, but, now and again, you come across some real
so-and-so™s. I vowed to myself to deal only with people I like. I™m not
going to continue looking at a deal where I don™t feel very, very com-
fortable with the people. That™s not only a feeling that they™re straight,
but also that they™re honest. And I gotta like them. Otherwise, I™m not
going to invest.
What are the things that will make you likable? Your commitment,
your understanding of what you are doing, your analysis of your risks.
This is where most people go wrong. They seem to think that the poten-
tial investor doesn™t want to hear the bad news. If he hears the bad news,
he™s going to get scared off. I get scared off when my investee demon-
strates that he is or she is oblivious to the risks. So I want someone who
has taken a hard look at the risks.
Let me give you an example of some of the more subtle things that I
think motivate principals and career people. In the leasing/lending in-
dustry, particularly with emerging growth companies, it™s commonplace
to take additional collateral. I™m sure you know what I mean by that:
collateral above that which you are leasing, taking the form of cash, per-
haps, or cash equivalent.
Now let™s create a hypothetical example. This is a young, high-tech-
nology company. They have $4 million of the institutional venture capi-
talist™s money in the bank; they have a series of timed CDs, but are not
making a product yet. They™re going to use that cash to meet the burn
rate until the product comes out the door. They want to lease half a mil-
lion dollars™ worth of equipment. I come along and say, “I want a couple
hundred thousand dollars of that money and I™ll give you an interest rate
on it just like the bank; in fact, I™ll give you a quarter of a point more and
160 UNDERSTANDING THE ANGEL INVESTOR


then I will release that money to you as you meet certain benchmarks.”
Meanwhile, my competitor”a big guy”comes along and offers the
same thing but says, “I don™t want the cash; give me an assignment of the
CD, or a letter of credit drawn on a credible bank like Citicorp or Bank
of America.”
Why does he do that? I won™t say I wouldn™t touch his offer with a
ten-foot pole; if I couldn™t get anything else, I would take it. But he does-
n™t want the cash, and the reason he doesn™t want the cash is because his
legal department has warned him that under certain circumstances in a
particular state, in a particular city, there might be trouble. They cite a
case in 1973 in which a very aggressive bankruptcy trustee got caught
holding a cash deposit that, in fact, was part of the bankruptcy estate.
They™re worried, of course, about the same thing happening to them. So
this competitor says, “I don™t want the cash; I want a letter of credit.”
And I say, “Baloney! Give me the cash.”
Cash is king to me. If a bankruptcy trustee attempts to do that to
me, I will fight him. He isn™t stronger. He™s not using the money of the es-
tate to launch this legal attack. We™re about evenly matched. This isn™t
the question of the big guy against the little guy. I™ll fight it. Well, I did
fight it, a hundred times, and it never bothered me. The difference is in
motivation. As far as I™m concerned, it™s my money, and if I™ve got a nice
piece of cash from the lessee covering it, it does a lot for me. It helps
me sleep at night. It also motivates my lessee, because I™ve got his cash,
cash he™d like to get back one day. But doing it the other way would
put my job in jeopardy if anything went wrong. I would have made a
big mistake.
Another thing, I find that investing with others is the norm for sev-
eral reasons. We all attract people because of our interests. If you play
the violin, you probably know other violin players. If you fool around in
the private investment marketplace, you know other people because,
generally speaking, you don™t play that game unless you like keeping
very close to what™s going on in the community.
For instance, I knew nothing whatever about high technology. The
only reason I formed a company leasing to high-technology companies
was because I happened to be living in Silicon Valley. Had I been living in
Oregon or Washington, I™d be in fishing boats and lumber”and bank-
rupt by now. If you like a particular field, you want to keep talking to
people who are active in it.
So, if I go into a deal, I will turn to other people for three very pow-
erful reasons. One of them is that I may turn to someone who is closer
to a technology I know little about. I™ll turn to somebody who under-
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Types of Private Investors


stands that field and, very likely, it™ll be someone who, like myself, is in-
vesting. This way, I gain knowledge of a technology I™m not familiar
with. Second, if I think it™s a good deal and I know other people who I
think deserve it, I let them take a part of it. And third, I™m probably not
going to make a cold investment. I™m probably going to want to get in-
volved in one form or another, maybe not actively, but when I put money
into a company, I want to help them. It™s not like selling insurance, call-
ing on all your friends. I™m not being critical of that field, but, generally
speaking, I™ve identified with a small company, I like the people, I like
what they™re doing, I believe in them, I want to help them. I don™t de-
mand a board seat unless I have a significant position. So I™m going to
turn to other people whom I know, but I™m not going to go hunting for
money like an investment banker.
Normally, I do want some involvement. I™m not necessarily going to
be attracted unless I feel I can make a contribution somewhere. I™m not
looking for operating management responsibility. I™m through with that
part of my life, and I like things the way they are now. But if the thing is
going downhill, I have to realize I am stronger than the individual run-
ning the show; I have to get him out and get myself in”something I
don™t otherwise want to do.
That™s why I will not go some distance away. Like carrying an um-
brella, I hope it never rains. If I stay close to home, fewer problems seem
to crop up. This means that people are absolutely critical. You™ve got to
have confidence that they can do what they say they will do, and that
they have got the sticking power to do what they say they will do.


Deep-Pocket Investor #4
One thing I do not want to hear is that it™s going to be a wild ride
and a lot of fun. If I want to have a lot of fun, I™ll go fly an F-14.

I™ve been investing since 1988. I™ve done a wide range of investing in sev-
eral different types of firms. Overall, my investments probably total
about $20 million now, including those of my co-investors. I™ve invested
in insurance, financial services, money management, investment advi-
sory”those kinds of things. I™m pretty diverse. I have no requirements
in terms of geography. I™ve invested in a firm outside the United States, a
firm in New York, a firm in Iowa, where I™m from originally.
I really look for innovation and passion””fire in the belly.” But you
can get some sense of that, I imagine, in looking at an executive sum-
mary or business plan. I like to sit down with the people, look them in
162 UNDERSTANDING THE ANGEL INVESTOR


the eye, find out their backgrounds, find out what drove them to this in-
vestment and basically what their personal commitments are. I think
that that™s very, very important.
I try to add value whenever I can, particularly if it™s needed. I have
been doing this a long time and my vision is usually pretty good and
I have found that I can help an entrepreneur substantially if he or she
remains open to ideas. One thing I do not want to hear is that it™s going
to be a wild ride and a lot of fun. If I want to have a lot of fun, I™ll go fly
an F-14.
On the other hand, one thing I do want to hear is that you have an
executive summary that tells me what it is you need, what the potential
market is, how much you™re looking to raise, and what kind of rate of
return might be expected with the size of this particular market.
Explain where the technology is coming from, how it™s going to be
developed. Elaborate on your concept; tell how it is innovative. Explain
why your product or service is superior to the techniques currently in
place and what the relative cost would be. Tell why it™s superior, what
the relative cost advantages or disadvantages might be, and just explain
a little bit more of what it is. You have to be a little more excited and tell
why. Why you™re at the company, why you believe in this, and why you
are spending the amount of energy that you™re expending.

The third investor type is the consortium of individual investors.


THE CONSORTIUM OF INDIVIDUAL INVESTORS

Consortium Investor #1

Our group has three investors with quite diverse backgrounds. And be-
cause of that, our investment interest is very diverse. One of my col-
leagues and I most recently founded a multimedia software company in
the educational software field. We went through all the trials and tribu-
lations that I™m sure many people have gone through. I started from
self-financing through friends to institutional financing and we were for-
tunate throughout the process.
We finally sold the company to a public software company last year.
We learned a lot about what you don™t do and what you need to do in
order to be successful. One of my co-investors has gone the more tradi-
tional institutional investor route in the retailing field and cofounded a
company that received a venture backing and then went public last year.
He™s been very successful. So from that experience of both self-financing
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Types of Private Investors


and the traditional institutional venture capital funding, I think we™ve
learned the ins and outs of how to get from here to there from the view-
point of the people seeking money.
So, we™re most interested in talking to people. Our interest in fund-
ing is in the $50,000 to $500,000 range. We™re looking at seed funding
to early-stage funding. Retailing is an area we are very interested in, and
the software technology area as well because of our backgrounds. And
lastly, we are interested in consumer-related investments. So that pretty
much hits the entire spectrum (Exhibit 7.4).


Consortium Investor #2
We like to get very close to the entrepreneurs, the people who start
the business, the people who have the ideas. We offer them some
oversight; we offer them a sounding board, and, of course, we
offer them some capital.

I am an individual investor, working with about half a dozen other peo-
ple, all of whom have started, run, and then sold businesses, but have
continuing interest in nurturing small businesses. We™re a loose confed-
eration of investors. We don™t have a company structure as such. We re-
spond to each opportunity as we see it.
Our focus is on the people involved in starting a business. We like to
get very close to the entrepreneurs, the people who start the business, the
people who have the ideas. We offer them some oversight; we offer them
a sounding board, and, of course, we offer them some capital.
We generally work in technology-based areas, often manufactured
products. We don™t do a lot of seed ventures but, in fact, we just invested


EXHIBIT 7.4 Consortium of Individual Investors

• Loose confederation of private, individual investors (unrelated, typically 3“6)
• Experience in start-up, running, and selling their businesses
• More passive involvement; seek oversight; sounding board role
• Will invest in technology and product opportunities, as well as start-up companies
• Individuals make their own decisions, may not always invest as a group
• Extensively connected with "deep-pocket"“type of angels with whom they co-
invest or to whom they refer deals
• Seek some protectable advantage
• Invest $50,000“$500,000

Source: International Capital Resources
164 UNDERSTANDING THE ANGEL INVESTOR


in a small one last year that turned out quite well for us. We didn™t carry
it to the prototype stage. We managed to sell it to an East Coast com-
pany for a fairly substantial return on investment. Normally, we™re look-
ing for return in the area of 10, maybe 15 percent. The days of 20 and
25 percent, I think, are behind us.

Consortium Investor #3
As we look at the lower end, at start-ups or seed money, we don™t
really care if it has the potential of becoming a company. All I
really care about is if it has the potential of making money.

My group is a loose confederation of private investors who look at
individual deals, make their own decisions, and may or may not end up
investing in the particular deal as a group. Basically, I think we classify
deals in two categories. We invest in deals less than $250,000. In bigger
deals we have a number of well-heeled private investors that we will
bring in, simply pass the deals to, or become co-investors with.
A difference exists, I think, in the way we, or I as an individual, will
approach some of these opportunities. As we look at the lower end, at
startups or seed money, we don™t really care if it has the potential of be-
coming a company. All I really care about is if it has the potential of
making money. That simply could mean that it™s a product or technology
that, unto itself, is not going to turn into a $50- or $100-million-a-year
company. But it may turn into a $10 million product line that GE would
love to have, or that some international company feels it can manufac-
ture and distribute more efficiently overseas.
I think Silicon Valley is full of opportunities that are masquerading
as companies, but are really product opportunities or technology
opportunities that need to be developed and then put together with an
exit strategy that makes everybody involved a little bit wealthier. The
larger deals are company deals. They generally are things to be looked at
much farther along the path; they probably have a proven concept,
maybe they™ve done some test marketing, and have most, if not all, of
their staff in place.

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