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Tuesday, Mar 19, 2024
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Eyes on the Enterprise

Yet another sign that a recovery is gaining power: More angels are out there, looking to help companies.

The Tech Coast Angels San Diego, the most active angel investment network nationally last year, said it plans to be even more active this year, increasing its funding to startup firms by 50 percent.

At an invitation-only meeting Thursday, Feb. 28, the group expects to hear from some 90 entrepreneurs, all of whom need funding to take their business to the next level.

“Most of these companies are nonrevenue, in their first year in business … and have less than 10 employees. They’ve started out getting investments from friends and family and now they need more. We’re usually the second step,” said Gary Phillips, president of TCA San Diego.

For those fortunate entrepreneurs who convince the 20 or so TCA members at the upcoming meeting that they are investable, it’s only the first step. Next they’ll be invited to make a presentation to a TCA screening committee. If they pass muster there, they’ll get a chance to present their business model to the entire TCA chapter.

Should a business look viable and if sufficient members are still interested, the group will conduct more due diligence and research before any term sheet is proffered.

Friendlier Sharks

“It’s very similar to ‘Shark Tank’ but hopefully we’re a lot nicer,” Phillips said of the Q&A session following a presentation.

The number of angels committing to a particular business may only be a few, but usually there’s at least five, each of whom put up an average of $25,000, Phillips said.

An average investment round for a nonrevenue business is about $500,000, but TCA has done less and quite a lot more, he said. “We recently did two deals that were each about $1.5 million,” Phillips said.

Last year, TCA’s local network invested $5 million into eight San Diego startups. The entire TCA, including groups in Los Angeles and Orange counties, the Inland Empire, Central Coast, and San Diego, invested about $12.5 million into some two dozen companies.

Phillips said because TCA has expanded its membership, it should increase its investment by about 50 percent. In San Diego that will translate to about $7.5 million this year.

San Diego has always had a strong membership in TCA, and counts 113 members; the entire group has some 300 members, he said.

To join TCA, members must prove they are an accredited investor or have a net worth of at least $1 million, not including the value of one’s home. Phillips said realistically, they should have a net worth of about $5 million.

Beverly Cormier, a retired executive in the life sciences industry and now a consultant, says she’s pretty sure she’ll invest this year in a particular business she’s familiar with that has yet to go before TCA.

Cormier couldn’t divulge the name of the business except to say it was a medical device maker that already has customers and looks like a winner. “I don’t know if the return on investment will be 25X, but I think it will be a multiple of what I’m investing,” she said.

After working more than 22 years in life sciences including stints with Exagen Diagnostics, Prometheus Laboratories, UroCor and Alverix, Cormier has a good feel for what it takes to succeed.

If Cormier decides to invest, she and other investing angels get equity in a company. The members usually don’t get to collect on their investments until a company is acquired by a larger company or grows significantly. But angels also are well aware that their initial investments often require follow-on rounds of investment. And if companies fail, the investors won’t get a dime.

Perhaps one of the most successful companies that obtained TCA funding and made it big was Green Dot, a type of debit card, said Phillips. The exit through an acquisition by a large financial entity resulted in a return of about 100 times TCA’s investment, he said.

Besides funding, TCA can also provide hands-on practical mentoring as well as business connections to help a company succeed. TCA’s members can be a valuable source of expertise for startups.

Making an Impression

The get-together this week is sort of a large cocktail party wherein entrepreneurs talk with angels that have interests in their industry, and try to make a good impression.

Vince Sebald, president of GxPReady, who is attending the event, said the software his firm makes “helps companies meet FDA requirements at a lower cost and more quickly than currently available software.”

Sebald estimated he and four partners have invested about $500,000 in combined cash and sweat equity to get their product to the beta testing level.

While obtaining funds to continue down their path would be nice, the partners also want to be sure whoever invests is a good match for them. “We have multiple plans — one plan if we get money, and one plan if we don’t,” Sebald said. “If we can find a good match, we’re definitely open to (investment).”

Hal Slater, the owner of Geothermal Water Heater, says he’s already received an $80,000 state grant to conduct testing of his invention, a heat pump water heater that is more efficient than most home water heaters, using about a fourth of the electricity as those models.

“My idea is designed for climates that are temperate or tropical,” said Slater, who formed his latest business in 2010, and has a patent on the technology. Previously he was involved in businesses making solar water heaters, and in designing swimming pools.

Slater, who invested about $20,000 of his own money in the company, said he’s seeking about $500,000 from investors to build a workable model. That’s a necessary step before the heater can be shown to the three major manufacturers that dominate this industry. “What I need is a commercialization partner,” he said.

Asked if he felt any anxiety about being among 90 other entrepreneurs seeking an entrée into TCA, Slater says absolutely not. “In the invention world, those are great odds,” he said.

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