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On the low end, we typically look at technology deals simply be-
cause that™s our background. On the higher end, because there™s gener-
ally more information in place, we look at a broader range of ideas. I
look at what I call value-oriented opportunities. And, from that per-
spective, I consider their protectable advantage. Typically, protectable
advantage means patent protection, technology protection, a lock on
distribution channels, something like that.
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Types of Private Investors


It may be a great technological idea or a great technology opportu-
nity, but if nobody cares except the inventor, it™s of no value. And if
somebody does care, the question is whether they will pay, whether it
can be done profitably. And probably one of the more important things
to me because I come from a sales and marketing background is how to
get to them. How do you distribute whatever you™ve got? In that respect,
when I look at an opportunity, I will look first at the market, at the mar-
keting aspects of it.
Second, I™ll look at the technology aspects of it and, third, at the
people. When it comes to the decision-making phase, I reverse that
process: Who are the individuals involved? What does the technology
look like? And, how are they going to package that technology and
market it? Beyond that, I look for people who believe in focusing on the
customer.

The fourth type of investor is the partner investor.


THE PARTNER INVESTOR
Somebody once defined the survival of the fittest to me as not being
the strongest, but finding the niche where you can exist and make
things happen. So it™s not the “fittest” that counts; it™s the “fit.”

I™ve been looking for an investment for eight months. I left my job in Jan-
uary, and I™ve had this long-term goal to buy into a business. Basically,
my career has been sales oriented and general management, which I
think is key to being a successful entrepreneur. I operate where the rub-
ber hits the pavement. I dislike meetings and bureaucracy.
But I do like collaboration and teamwork, and I think that to be suc-
cessful in the kind of environment we™re talking about you need to
have”and I think I have these elements”a lean, seat-of-the-pants oper-
ating style from running small businesses, extensive direct sales and mar-
keting experience, finance and numbers discipline. And I™ve acquired
that from working on an $80 million leverage buyout, and a lot of cal-
luses from fighting for customers in competitive markets and from nav-
igating the corporate jungle. And you have to have a very strong desire
to do a deal, and you have to be very focused about it.
I have a collaborator whom I met at an event hosted by ICR, a col-
laborator who™s been at it for 18 months and he™s running out of
money”and he™s got a lot more money than I do. So, it™s a tough slog.
So you have to be focused. The key part of all this is to generate deal
166 UNDERSTANDING THE ANGEL INVESTOR


flow. You have to develop as much deal flow as you possibly can, and
you have to constantly get feedback from the marketplace and refocus
your efforts. That™s what I™ve been doing.
There is no path in this process. It™s constant invention, reinvention
every day. I have a little model in front of my desk that for me reflects
this whole process. I call this model the funnel strategy. Basically, the
way to succeed is to employ six ways in closing more sales, or employ six
ways in getting more deals going”all of which depends on the size of
your funnel. In other words, get more of an effort going; weed out un-
profitable prospects. The idea is to fail quickly; get off the stuff that isn™t
happening immediately because you can burn a tremendous amount of
time on wasteful action.
Don™t work on the undecided that have little chance of going further.
Find better prospects. Increase the speed. I think the key is more
throughput. It™s all about throughput. It™s about replenishing your fun-
nel every week. And don™t chase one deal too long; instead, continue to
feed the funnel. This is the model I™ve used to work on deals. I™ve created
deals by answering ads in the paper; I™ve worked with business brokers;
I™ve networked with people; I™ve used direct mail, a CD-ROM database,
mailed more than 700 letters to targeted businesses located within spe-
cific Standard Industrial Classification (SIC) codes, zip codes, and types
of businesses.
In fact, out of those 700 letters, I received 40 calls, a 5 percent re-
sponse rate. I™ve evaluated more than 100 businesses, evaluating them
across a wide range of criteria”from just a quick phone call during
which someone runs the gist of the business by me to doing full due dili-
gence. I™ve made four offers on businesses: One was a manager-investor
opportunity, while three were to purchase. I™m in escrow on a deal right
now, hoping it will work out.
Since everyone is different, you have to figure out what people want,
that is, you have get to people who want to do your kind of deals. It™s a
waste of time to talk to people who don™t. My deal is that I had about
$200,000. I also have $140,000 in credit cards that I worked very hard
to accumulate over the last few years. Credit cards are being used to fi-
nance about 25 percent of the small- to medium-size businesses in the
United States today. And if you evaluate what private investors want in
terms of return, I want a 30 percent return on the investment from my
deal. Credit cards are really the cheapest forms of financing”if you have
the guts to do it.
I built up a wish list that I kept on my bulletin board. I™m looking
for an international business, a consumer product leading to an ongo-
ing relationship in the business, a business I could bring value to. As an
individual investor, I don™t have an unlimited supply of money, so criti-
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Types of Private Investors


cal for me is what value I bring to the party, what value I add to the
business.
The business has to be able to respond to aggressive direct sales, re-
spond to strong, capable management. The business has to be local. I
want to be able to ride my bicycle to work. I want casual dress. I want it
to be part of a “wave” out there, a wave that is home office, aging pop-
ulation, information technology, and so forth. I want it to be fun. I want
to be president. I want a good return on investment. I don™t want it dom-
inated by few customers or few vendors. I want an exit strategy so I can
cash out for cash. In my current deal I got about 70 percent of this stuff.
That™s the way it goes.
But the really critical piece in terms of keeping the whole thing to-
gether is the chemistry and trust among the people involved. Things have
to be very good, but things are better if the chemistry is excellent.
Everybody has different needs and wants. Understanding this one fact in
terms of the whole process, plus being able to deal with rejection, is dead
center. Basically, it™s not about being the smartest, or having the best
product, or looking the best, or even having the most money. It™s about
getting the right fit.
All those other things help, but somebody once defined the survival
of the fittest to me as not being the strongest, but finding the niche where
you can exist and make things happen. So it™s not the “fittest” that
counts; it™s the “fit.” That™s what this process is all about for me.
This type of investing takes persistence; it takes throughput, as
much throughput as you can muster and emotionally tolerate. It is drain-
ing. You simply cannot do it all by yourself. Firms like ICR can help.
You have to delegate. And you have to collaborate. I met someone at an
ICR event who has helped me. Now, we meet every three weeks and col-
laborate on the process and share ideas and share leads (Exhibit 7.5).

The next type of investor is the family of investors.

EXHIBIT 7.5 Partner Investor

• Buyer in disguise
• Very high need for control
• Is trying to build network or has developed some co-investor relationships
• Would prefer acquisition of established company but lacks financial resources
• Lead investor who searches for opportunities, makes independent decision, and
suggests investment to co-investor network
• Wants to be president
• Able to invest $250,000“$1,000,000

Source: International Capital Resources
168 UNDERSTANDING THE ANGEL INVESTOR


EXHIBIT 7.6 Family of Investors

• Family money is pooled, and a trusted, skilled family member coordinates invest-
ment activity
• Very astute investor, MBA minimum, many Ph.D.™s in coordinator role
• Contribute experience, intense involvement for short periods of time
• Group investor likely to invest only if there is group consensus
• Very common among Asian investors in Bay Area
• Invest $100,000“$1,000,000

Source: International Capital Resources




THE FAMILY OF INVESTORS
We believe we can contribute not only the funds but also the
experience in management, as well as provide the connections we
have in the Far East and in some countries in Europe.

I™m new to the United States. We still have some investments in the Far
East”Taiwan, Singapore, and also China. We also have some business
connections in Europe. But, basically, we are a family-owned business, a
small group. We are interested in information services, computers”both
hardware and software”as well as medical industries.
We view investments in amounts ranging from a few hundred thou-
sand dollars to several million dollars for each project. We like to look
at the early-stage venture, as early as possible. We believe we can con-
tribute quite a bit of experience, just as we have in the past.
Our company has been in the high-tech business for more than 20
years. We have been handling very complicated processes, such as air
traffic control, radar, defense equipment, and small components. So we
believe we can contribute not only the funds but also the experience in
management, as well as provide the connections we have in the Far East
and in some countries in Europe (Exhibit 7.6).

The sixth type of investor is the barter investor.


THE BARTER INVESTOR
We have an active business today that might dovetail with what
you do. We have an infrastructure in place. We advertise for
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Types of Private Investors


customers, we process customer orders, we warehouse, we ship,
we build computers, we service computers in the field. We do all
sorts of things: bill, invoice, and collect. All of these things we
might be able to add to your business.

Do you need the money, or do you need what you™re going to use the
money to buy? Our company operates in a limited area, looking to make
investments and participate in your company. So that sets us apart, nar-
rows the scope, if you will. Our business is to try to dovetail with what™s
out there, something that could be a good fit for us. My partner and I are
knowledgeable in starting up companies. We both have done several.
We have a company that operates and provides business-to-business
services throughout California. And what we are looking for is investing
in an early-stage idea or business that we can contribute money to. But
equally as important to us is the infrastructure of the business. We have
thousands of customers, we bill them, we collect, we negotiate bank
lines, we do marketing”we do all of these things.
My partner and I are interested in participating in new ideas, in
growing a new business. We are interested in the expansion phase of a
seed-capital or start-up business, defined by us as a venture with a work-
ing prototype ready to roll, what we call a beta test. We are interested in
the early stage of testing or initial growth capital. Mezzanine, bridge, or
IPO is beyond our scope. So that is not what we are looking for.
We feel a capable management team is necessary, as everybody says,
but it doesn™t have to be completely formed. Because of our participa-
tion, we believe that we can fill some of those holes, give a running start
to the company, get it going a little faster than might otherwise be the
case.
Quality product or service is of interest to us. Technology advantage
is always nice. Proprietary is desirable but not necessary. We like a sub-
stantial market potential, a $10 to $20 million revenue target in five
years with compatible financial objectives. And this is one of the stum-
bling blocks that I run into many times with entrepreneurs: The entre-
preneur has to agree we are not just building a good lifestyle for that
individual. So we have to have an exit strategy within a time frame that
we can mutually agree on.
Business categories of interest are communications, the Internet,
computer software, and multimedia. Of course, every time I hear of a
new business outside these categories, I get interested and I add that to
my list. And not so much multimedia CD-ROM games, but multimedia
interactive marketing, or some projects we™re working with now, such
as financial and business services, even light manufacturing or distribu-
170 UNDERSTANDING THE ANGEL INVESTOR


tion. We™re fascinated with the idea of producing a product and distrib-
uting it.
Our company is in the computer rental, leasing, and sales business,
primarily rental. People always ask what the difference is between rental
and leasing. If you think of it as a Hertz rental car kind of thing, as op-
posed to long-term leasing, that™s what it is. Computers cycle in and out
of the shop every day. People call and order. We deliver, install, then pick
them up when they™re through, put them back on the shelf, and rent
them to somebody else. The investment of interest to us might have a di-
rect fit with some other business we™ve had.
We are interested in early-stage companies, ventures in the idea
stage, in the process of being organized, a start-up, a venture that has
been in business less than two years, that is completing product
development, and maybe has some sales. First stage, expansion stage.
Everybody has a different definition for these terms, but we™re
interested in a venture with a working prototype that has been
through beta testing and is in need of initial growth capital. Mezza-
nine, bridge, IPO are beyond our financial capability. We are not in-
terested at that level.
We look for general investment criteria. Of course, first comes a
good management team. We invest in key people as much as the product
or the technology. That team should have industry experience and be
able to execute its business plan. We don™t expect you to have all the
holes filled, because we are interested in being active investors. We are
not passive investors in that sense. So between my partner and me, our
backgrounds cover finance, accounting, marketing, and general man-
agement, and we are interested in a couple of people with an idea and a
good market to pursue. We believe we can fill in some of the holes.
Quality product, service, or technological advantage is important.
Of course, the proprietary advantage is desirable but not necessary.

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