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Anything very high-tech may be beyond us in terms of our understand-
ing, so we™re probably not equipped to evaluate that very well. But ap-
plying a technology, a proven technology, to a business is something that
we are experienced in.
The product should have substantial market potential, a potential
for $10 to $20 million in revenues within three to five years. We say that
because of what our experience has been. From a liquidity standpoint,
you have to have at least $10 million if you are going to do anything in
terms of getting liquidity for your investment after that period of time.
Actually, I™ve rarely seen a business plan that worked out the way I ex-
pected within one to two years, but I am looking at an investment
growth projection that gives me a feel for the size of the market.
Substantiating the size of the market is very important to me. If you can™t
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Types of Private Investors


convince me of that, I don™t think you™ve done enough homework to at-
tract our investment.
We are active managers, so in early-stage deals we™re interested in a
significant piece of the company for our investment, ranging from 30 to
60 percent of the company. It depends on your stage of development and
the capital required. We can provide an incentive for founders. You™re
going to give us a business plan that says, “Here™s what I can do”; and
we™ll say, “Fine, we™ll put some money in,” and maybe we have 51 per-
cent at that point. But if you meet the business plan, you earn 20 percent
back and dilute us, and so forth.
So we™re very flexible in terms of how we go into a venture, but we
want a significant equity position in the company. Common stock or
convertible preferred, purchase options, licensing agreements, joint ven-
tures”we would consider all of these things. Let me back up a minute
on that. We have an active business today that might dovetail with what
you do. We have an infrastructure in place. We advertise for customers,
we process customer orders, we warehouse, we ship, we build comput-
ers, we service computers in the field. We do all sorts of things: bill, in-
voice, and collect. All of these things we might be able to add to your
business, if you think of us as an “incubator” as well.
So, our investment might take two forms: The first is a cash check;
the second, or combination of the two, enables us to save you a lot of
cash by leveraging off the infrastructure that we already have in our
company. And we operate throughout the state of California.
Participation in the business, representation on the board, part-time
management. My partner and I, or one of us, depending on the needs of
a particular investment, would be willing to spend half our time in the
early stages of that company.
We are interested in communications, data services, and
telecommunications”providing it is not too far out. Also, we™re inter-
ested in computer software. I would say we™re interested in vertical mar-
ket applications: financial and business services. Our company, even
though built on computers, is really a business service; in fact, that™s all
it is. And light manufacturing or distribution is another interest of ours.
In other words, if we can make it, manufacture it, put it in a box, and
ship it out repetitively, that™s something that™s simple enough that we can
understand. So that really forms the outline of our investment objectives.
If you want to place us in a potential investment or a company™s po-
tential investment, put us in cash terms of up to a quarter of a million
dollars. And I would like to think of adding infrastructure equivalent to
that amount in terms of saving you cash (Exhibit 7.7).

The seventh type of investor is the socially responsible investor.
172 UNDERSTANDING THE ANGEL INVESTOR


EXHIBIT 7.7 Barter Investor

• Provides what you would have used capital to buy in exchange for equity
• Participative”not passive
• Early-stage preference
• Offers capital and infrastructure (an incubator model)
• Management is most important criteria
• Independent investor who relies on own investigation in deciding to invest
• Venture must have capability to grow to $10 million minimum in 3“5 years
• Invests up to $250,000 and frequently supplements with guaranteed line of credit

Source: International Capital Resources


THE SOCIALLY RESPONSIBLE PRIVATE INVESTOR
I think that people who come into this kind of business perceive
needs and have values. Those individuals in the nurture capital
process are people with a clear sense of values. The companies that
have integrity, that have a product, that have meaning to them are
the ones that I think really matter.

There™s a big gap and a lot of misunderstanding about what venture cap-
ital is. Venture capital serves as the generic term that refers to the full
range of direct investments in the private equity class. But, typically, a
venture capital firm fills a gap in which you have either a fairly complete
management team or a fairly well-developed product.
Many times a management team is missing a number of key ele-
ments, or a product has just entered the field. But because of their fiduci-
ary responsibility to investors, the venture capital community can™t look
at the technology and can™t look at the company. In this regard, it resem-
bles a bank. This capital gap between the founders, on the one hand, and
the banks and the venture capital community, on the other, has fostered
what I call nurture capital. The terminology speaks for itself. You nur-
ture a company, helping it any way you can. It means a lot of hand-hold-
ing, a lot of intimate relationship with that particular business.
It seems to me people often cling to the impression that venture cap-
ital is interested only in making money. I don™t believe that™s true at all. I
think that people who come into this kind of business perceive needs
and have values. Those individuals in the nurture capital process are
people with a clear sense of values. The companies that have integrity,
that have a product, that have meaning to them, are the ones that I think
really matter.
We end up putting a spin on the developments and technologies of
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Types of Private Investors


the companies that we get involved with; we add a dimension, a spin,
just like spin on the bowling ball spreads it wider than it really is, creat-
ing a greater impact on the target.
My perception is that in the United States especially, but around the
world as well, very little knowledge exists about what is happening in
the petroleum field. Our economy runs on oil, and we are about to see a
major transformation, such as we saw here in the 1970s”except that
this time the entire world will suffer. In the 1970s, United States oil ex-
traction peaked, and, you may recall, a couple of years later major reper-
cussions occurred. But we possessed the unique advantage of still being
able to import oil.
The globe will not have that possibility, at least from oil. About five
years from now when production peaks, oil expectations will continue
to grow. There are many people working on putting plants in China, for
example, and in India, building cars and, sadly, fueling expectation that
oil will be available. The trouble is there won™t be any oil. This event is a
mere five years away and when it happens, we™re going to have to import
oil. The problem is there won™t be any oil to import.
The only source of imports we have is the sun, so my perspective is
that solar energy applications are a major area of investment interest for
me. And we™re going to see a major transformation and the potential and
the technology in renewable and in energy conservation and, suddenly,
the cost of oil is going to be so high that these investments will have po-
tential for the next century as well.
People claim that there™s still plenty of oil out there. Sure enough,
there is. But the reality is that while we had gushers in the 1950s, oil is
going to be harder and harder to get in the years to come, and the yield
we derive for the same amount of effort is going to be less and less. So
it™s going to be less and less exciting to go after oil. Between 1977 and
1991 we discovered in the United States 5 billion barrels of oil. However,
we consumed twice the amount we extracted. It doesn™t take an Einstein
to figure out that this is a losing proposition. If your business plan does-
n™t take this into consideration, and you plan to be here five years from
now, then you have some thinking to do.
And if you are interested in working with me in terms of investment
programs, this is really what drives me. I think that the money will flow
if the service is there. Making money is not the goal; profits and return
become the score that gets chalked up after the goal has been reached
(Exhibit 7.8).

The next investor type discussed in this chapter is the unaccredited
investor.
174 UNDERSTANDING THE ANGEL INVESTOR


EXHIBIT 7.8 Socially Responsible Private Investor

• Nurture capitalist, seeking intensive hand-holding situations
• High need for personal interaction, less able to provide savvy business support
• Seeks to be associated with individuals with “high values”
• Prefers ventures addressing major social issues
• Seeks reasonable ROI while supporting people/ideals consonant with “enlight-
ened” personal values
• Often inherited wealth with extensive investment capability
• Referred investor, relies on recommendations through trusted advisors

Source: International Capital Resources



THE UNACCREDITED PRIVATE INVESTOR

I initially get excited by the concept, but I think ultimately, I invest
in a venture because of the entrepreneur rather than the concept.

I spent 24 years with a Fortune 500 chemical corporation, specializing
in real estate development, a major business of the firm. I started as a
junior accountant of a subsidiary, then left six years ago as vice president
in charge of the company™s activities. Since then, I have combined in-
vesting in a few start-ups with a financial and consulting practice.
I™d rather try to spread my apples around a little bit more, make
smaller investments in a bunch of different companies, companies in
which I would like to spend some time in an important capacity. I might
like a management role, perhaps a board role; I might like to serve as an
interim CFO, though only one day or so a week (Exhibit 7.9).
In looking at deals I™m typically going to make an investment in the
$10,000 to $25,000 range. I get talked into higher amounts occasion-
ally, but that™s where I start out. I don™t have to make a deal. People
who represent funds have to place a certain amount of money. If I don™t
invest in a private enterprise, I™ve got the money in the stock market or
in something else. So it™s really a question of taking it out of alternative
investments.
I typically look for some type of niche, obviously at start-ups. Often
I™ll go in with a bunch of other investors because that™s the thing to do
with a large amount of money.
But to me the story is much more important than numbers. The
business plan is really important, but numbers usually aren™t very reli-
able no matter how well they™re done. So the concept is much more im-
portant. People may have an idea of what they want to do with product
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Types of Private Investors


EXHIBIT 7.9 Unaccredited Private Investor

• Less experienced, less affluent private investor
• Looking for a role in earlier-stage situations
• Not a patient investor; plans to get money out in 3“5 years
• Must “really get to know” investee
• “Spreads his apples around,” making multiple small investments
• Used to invest in real estate, now has a preference for technology
• Invests close to home
• Has to justify investment to spouse
• Typically a referred investor who is primarily influenced by recommendations
from a knowledgeable person
• Invests $10,000“$25,000 maximum

Source: International Capital Resources



A and that really makes sense to me. Then they want to continually rein-
vest and go on. I can understand they want to do that from their per-
spective. But from my perspective, I would just as soon make the
investment in a joint venture, get my money and my return out of it.
Maybe during the course of the investment, I™ll get sold on continuing in
the company, but I don™t necessarily structure it that way going in.
I think that in small investments, one of the main things investors
have to worry about is being able to justify investments to their spouse.
Believe me, the worst thing is to have to explain to your husband or wife
why you lost $10,000 to $15,000 in such-and-such a company, the same
money you could have used on a luxurious trip to Tahiti, or on a mate-
rial purchase of some kind. That™s probably the toughest sell, the one sell
I try to avoid.
I would prefer to be thought of as a friend or member of the family.
I want to really get to know the CEO; that™s the kind of company I™m
going to invest in because I think no matter how you write the docu-
ments, what™s really important is whether that entrepreneur™s going to
treat you fairly over a long period of time, whether he or she is intelli-
gent, and will work hard. I initially get excited by the concept, but I
think ultimately, I invest in a venture because of the entrepreneur rather
than the concept.
One other thing that™s important to me in concept is accessible ge-
ography. On a business plan, I think it becomes a terribly important sales
tool.

The final type of investor”the manager investor”is discussed below.
176 UNDERSTANDING THE ANGEL INVESTOR


THE NEWEST BREED OF ANGEL:
THE MANAGER INVESTOR
Manager Investor #1
Now, six months ago when I first began investing, I would have
characterized myself as a novice. Over the past six-month period,
however, I have grown considerably: I would now characterize
myself as simply inexperienced.

I am what ICR has categorized as a manager investor. This means that
any investment I make is into a company I want to play a role in, a role
in the pursuit of that company™s business activities. It certainly does not
mean that I am interested in control. But it does mean I want to be ac-
tive; I want to be aware of what is going on. From my standpoint, this
becomes a necessity (Exhibit 7.10).
Now, six months ago when I first began investing, I would have
characterized myself as a novice. Over the past six-month period, how-
ever, I have grown considerably: I would now characterize myself as sim-
ply inexperienced. My bet is that there are a number of people like me
who haven™t had a great deal of experience in investing in start-ups, so I
hope it will help you to know how I pursued this area.

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