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Probably you have seen the company profiles that ICR periodically
makes available. These have been extremely helpful to me. They offer
within a very short period of time a perception of what a company does,
what its product is, what its marketplace is. These profiles supply an ex-
cellent overview of opportunities, letting a person like me zero in on the
10 percent of the deals that make sense to me (Exhibit 7.11).

EXHIBIT 7.10 Manager Investor

• Affluent, senior-level executive or former business owner reentering workforce
and buying a "last job"
• Focused on making one investment
• Less experienced at direct, participatory investing
• Referred investor who asks questions and reads materials but can be primarily in-
fluenced by recommendations from a knowledgeable person
• Very long due diligence cycle
• Less tolerance for risk, so seeks more developed ventures
• Seeks high level of involvement for extended period of time
• Invests $100,000“$200,000, staged investment

Source: International Capital Resources
Types of Private Investors

EXHIBIT 7.11 Characteristics of the Manager Investor

• 40s to mid-50s. Mid- to late-career manager or former business owner, seasoned
executive, astute business analyst
• Full-time operational involvement; will provide support and industry savvy
• $100,000“$200,000 to invest. Not a deep pocket for subsequent rounds
• Less concerned about control, more concerned about sharing founder's vision;
however, does desire at least some influence
• Typically well connected both geographically and in the industry
• Not interested in seed stage, but will consider more developed start-ups
• Prefers business with demonstrated viability, less inclined toward turnarounds;
more concerned with the business than with pro forma statements (e.g., what is
produced, who the competitors are, debt on balance sheet)
• Will require a business plan
• Will seek to benefit from appreciation on equity, and will seek steep discounts in
private negotiations; will aggressively negotiate price; will want potential for
above-average returns
• Will seek long-term commitment, "chemistry" with current management and
founder, and geographic proximity to home or desired locale

I suspect that I™ve looked at maybe 50 or so of those company pro-
files. I probably ask for either additional information or an additional
conversation with ICR principals, or maybe product information”
sometimes even a business plan, if it™s available”on maybe 10 of those
50, having eliminated 40 of them. From there I believe I met personally
with 6 of the remaining 10, having become sufficiently interested in 3 of
the 6 to conduct more than one meeting.
One in particular I have met with numerous times, and, frankly,
some have accused me of making a career out of this one potential in-
vestment. But I think I™m in the eleventh hour of that one, and it will no
doubt be coming to fruition soon. First of all, I try to take a look at the
product and make certain that I feel that it™s good, something I can iden-
tify with.
Second, I consider whether the marketplace for that product is frag-
mented, or whether it is dominated by a single or several very large com-
panies. And third, I consider whether this company has any kind of an
edge, for example, in its technology. I don™t mean that it has to be a tech-
nology company, but it may use technology in a way that is more ad-
vanced than anyone else”anything, in other words, that might give it
the edge. And I check to see if the company has patents on the product,
another thing that could give it the edge.
This is typically when I have become serious in discussing the com-

pany in depth with its management. Now let me give you three examples
of prospective ventures, and tell you how I characterize them. There was
a software company that had what I consider to be a very good product
and a very good market, not dominated by any single seller or manufac-
turer of a similar software package. There certainly was and is similar
software in the market, but no one dominated it.
My concern with this company was that I didn™t feel it had an edge.
Additionally, even if they had had an edge, I thought it would slip away
very quickly. This may be true of all software; I™m not certain. But I™ve
noticed in the case of Lotus, Excel, and Quattro Pro, that by turns one
will come out with a new version containing a few features, then another
will match those features and raise the ante two or three features more.
Someone else will then match those and raise again. It becomes an un-
ending poker game. I didn™t believe that this company could maintain an
edge under this circumstance, and therefore I tended to eliminate it as an
The second company was a medical transcription business. It had a
very good product. Medical transcription, I think, is a classic example of
a function that should be outsourced from a hospital. It™s specialized.
The people are highly paid. They™re intermixed presently with other hos-
pital employees who have dissimilar interests and goals; therefore, it™s a
function that is ripe for outsourcing.
In addition, it™s a function that can be turned into a cottage industry
quite easily with technology. And this company, through its planned use
of technology, seemed to have that ability. Therefore, I considered it a
good product with a good market and, potentially, with a solid edge.
The eliminator in this case had to do with the business plan. The projec-
tions had included revenue from a contract, but when I examined the
contract more thoroughly, I discovered that the projected revenue wasn™t
there, changing the forecast rather significantly. This circumstance made
my equity investment seem considerably more risky than had been the
case, and made my desired reward much less realistic. That™s when the
deal no longer made sense for me.
The third company, the one I have made a career on, is a chair
manufacturer. This is a chair so advanced that it comes with an operat-
ing manual. Therefore, the marketing job for this chair has been diffi-
cult. And though the company has been in business for a number of
years, it has been unable to get the product off the ground. They™ve also
been cash starved for a number of years. Their brochure looks amateur-
ish. They have an instruction video that is okay. But they don™t have the
money to advertise. They don™t even have a full-time salesperson. Yet,
Types of Private Investors

while they™ve had a lot of things going against them, I continue to view
them as having a good market and a product with an edge. The only fail-
ing I have discerned is an absence of investment capital, and that™s the
reason I have spent as much time as I have on this one. In fact, I™m still
hopeful of doing something with them.
Resources for
Raising Capital

Alternative Funding Resources in
Accessing Angel Capital

In earlier chapters we have emphasized the trend toward alternative financ-
ing methods. Clearly, the business angel investor represents one of those al-
ternative financing modes”a substantial resource, which we have
documented. Today™s alternative funding resources ease the access to capital
for inventors, entrepreneurs, and owners of small, rapidly growing busi-
nesses. These resources did not, however, materialize out of thin air. Like
everything else we know of, they have evolved from their early contours to
today™s sweep of alternatives, suggesting ever-new directions to come.
In this chapter, we provide a set of invaluable tools for entrepreneurs in
their search for capital. Our overview provides a comprehensive historical
introduction to alternative funding resources, particularly those useful in
identifying angel and early-stage private equity investors. These resources”
past and present”have helped entrepreneurs face the challenge. We also will
share research on emerging directions as viable sources of investor prospects
and capital.
In Chapter 9, the entrepreneur will find an updated, comprehensive di-
rectory of alternative capital resources in the United States.
Historically, alternative funding resources were composed of informal
groups of friends, colleagues, and co-investors”individuals who invested in
a deal in a specific industry, at a particular stage of a company™s life cycle.
Those individuals either invested alone or formed a small circle of family,
friends, and colleagues that pooled its money and shared the mutual respon-
sibility of due diligence. The group also shared the risks inherent in such
deals. This informal concept still exists today. It tends to be focused geo-
graphically, offering, as always, the benefits of shared responsibilities and
shared risk.
Remember that investors have a vested interest in alternative funding


sources”not just entrepreneurs. Investors select from an array of tactical op-
tions for creating their deal-flow development mix. The default is the
serendipitous approach of sitting around hoping a diamond in the rough will
drop into their laps. As one investor told us, “Good investments come to
those looking for them.” The lesson here is for the entrepreneur to select
communication channels, to introduce their deals that investors are, in fact,
listening to.
As Exhibit 8.1 illustrates, 57 percent of the angels receive their deals
from a friend, family member, or co-worker; 31 percent receive referrals
from professionals; and only 12 percent receive referrals from nonfamily
members, who are representatives of the firm seeking financing by cold call-
ing them. Only one time in ten will someone who does not know you work
with you over a cold call. These statistics bear out that cold calling in this
business is less efficient. As we have pointed out, you are not selling stock
from a brokerage desk, something you can turn around and sell quickly in
order to ease the pain of getting burned.
In our study of 60 angel and early-stage investors presented earlier, we
asked, “Please indicate your preference with respect to venture opportunities
submitted to you for consideration.” The results are:

Mentioned by a friend,
family member, or

representative of
the firm seeking

Survey of 600 Investors by ICR, 1998

Figure 8.1 How Angels Find Their Deals
Source: International Capital Resources
Alternative Funding Resources in Accessing Angel Capital

Number of
Respondents Categories
18 A large number of referrals, some of which may
not fit your stated investment criteria.
42 A smaller number of referrals, most of which fit
your stated investment criteria.

Seventy percent of the investors wanted referred ventures to have been
prescreened to ensure that their investment parameters were a snug fit. But
30 percent of investors sought more deal flow, even if the ventures they saw
did not meet their investment criteria!
This research finding is important because it supports the contention
that individual investors and groups of investors face the problem of skimpy
deal flow, a scarcity in the number of ventures and transactions that turn up
for their consideration.
Exhibit 8.2 further demonstrates the depth of this discontent. A 1996
independent study by Harrison and Mason found that 33 percent of in-
vestors were “dissatisfied” and an additional 10 percent were “very dissat-
isfied” with existing channels of communication available to find out about
businesses seeking financing. Such statistics indicate that entrepreneurs
would benefit from studying alternative funding resources to determine
which might be suitable resources for investor prospects for their particular

Independent study by HARRISON & C. MASON, 1996

% of Investors



Totally Partially No Dissatisfied Very
Satisfied Satisfied Opinion Dissatisfied
Figure 8.2 Satisfaction of Angel Investors with Existing Channels of
Communication and Business Seeking Financing
Source: International Capital Resources


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