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Tech Coast Angels Financially Nurtures Fledgling Businesses

Suppose 50 or 60 business, science and technology professionals get together with their checkbooks and give young companies and projects the chance to audition for funding that can push them into the big time?

The Tech Coast Angels think that’s a grand idea. Using a proven viable combination of capitalism and parenting, the nonprofit organization’s goal is to find companies that are ready to grow big with some money and some help. From there, the individual angels who choose to invest hope to profit handsomely at the end of their partnerships.

Last year, Tech Coast Angels was the most active angel investor consortium in Southern California, according to a PricewaterhouseCoopers LLP/National Venture Capital Association MoneyTree analysis of Thomson Reuters news agency data.

It could be that the money from three apparently successful angels exits was burning holes in those investors’ pockets.

According to a TCA press release, an IPO for prepaid credit card issuer Green Dot Corp. that yielded more than a 110 times return, the acquisition of Language Weaver Inc. by multilingual software provider SDL for $42.5 million, and an IPO for local biopharmaceutical company Trius Therapeutics left the investors group feeling pretty good about the angels’ investment efforts.

Steve Flaim, president of the San Diego TCA network — one of five regional networks in Southern California encompassing Los Angeles, Orange County, Westlake Village/Santa Barbara and the Inland Empire — joined the group in 2004 because he was ready to go back to work after four days of retirement.

“When I found out about this large group of knowledgeable people working together on these exciting projects that give you a chance to see what the world will be like in five years I was interested,” Flaim said. “I was done with investing on my own. I invested in startups and I lost my shirt.”

An Active Membership

About 60 investors are active in the San Diego group, part of a network of about 250 potential investors in the region. Being active is a core notion for membership.

“You have to be willing to participate in the process,” Flaim said.

Flaim said members have to meet the definition of a federally accredited investor as defined by the Securities and Exchange Commission, sec.gov/answers/accred.htm, and the organization asks its members to invest $50,000 a year.

The investors are divided into three groups: life sciences, technology and seed money — companies that are in their infancy and are looking for less money. Each has a pre-screening committee that reviews entrepreneurs’ initial application to determine if the venture is viable. That means the startup meets with the group and explains its ideas, shows a business plan. A winning presentation nets the next step: a chance to pitch to the full membership.

“We do that at a monthly dinner, three or four companies pitch to 50 to 60 members,” Flaim said. “There’s a Q & A and then we have a closed meeting for a show of hands. If the company attracts a TCA member to volunteer to be a due diligence leader, they go on.”

Negotiating a Deal

The devil, they say, is in the details and the details matter now. The startup negotiates a term sheet — the deal. The applicant opens its financial and customer accounting books. Its intellectual property and science or technology are checked and rechecked. Customer lists are verified before the final draft of a proposed deal ever hits the table.

When everything is ready, it might be payday. The startup heads to the final meeting and investors can open their checkbooks. If the company might appeal to other angel investor groups in the network, its champion makes the introductions.

“We frequently syndicate deals with other angel investors, like Life Science Angels in the Bay Area,” Flaim said. “We also frequently get deals from them and two or three other groups in Southern California.”

Getting through the process is tough, Flaim said.

Tyson McDowell, chief executive officer and co-founder of Benchmark Revenue Management Inc. in San Diego, agrees.

In June 2009, members invested an undisclosed amount in his company, which owns and sells software to make hospitals more efficient — now a requirement under health care reform.

The company just lost its on-board angel with an equity investment of $5 million from Iowa-based Avadyne Health, a revenue management company, this past year.

“They have a long, thorough process,” McDowell said. “But having a completed term sheet with TCA gave me the ability to raise more capital — the cost is borne by TCA until the deal closes.”

McDowell said that he is grateful for the board member, John Moore, who came with the deal.

“They are wonderful to have around. They help you with anything you need and any talent you need,” McDowell said. “You get good deals and treatment from law firms and professionals, and even in real estate, and they helped us find really good people to hire.”

Significant Returns

And then the angels leave.

“We ask for an exit and significant returns,” Flaim said. “A TCA investor typically owns 20 (percent) to 25 percent of the startup, which usually has a pre-money value of not more than $3 million to $4 million and is looking for an investment of a half-million dollars.”

But McDowell’s angel investors left a great legacy, he said.

“San Diego doesn’t have great funding leads and Tech Coast Angels is very interested in keeping the businesses and the jobs here,” McDowell explained, noting his company has grown from 14 to 40 employees and will hire 10 more this year. “Tech Coast Angels kept us here and then we brought $5 million to San Diego from Iowa.

“It’s massively critical for new companies to have that kind of support here,” he added. ” Their (TCA’s) work is critical to new jobs coming to San Diego.”

Marty Graham is a freelance writer for the San Diego Business Journal.

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