Angel investors tend to remember their winning bets and forget the money they sank into businesses that failed.
Yet most say they’re really not in it for the money. It’s all about working with a new company, and seeing them move on to the next level, say several angels who are actively investing.
“When I started investing I was not motivated by financial returns. I didn’t want to lose money but I wasn’t looking to make a lot of money,” said Mike Elconin, now the chief executive of Cognionics, a San Diego medical device business.
Elconin and other angel investors provide the next level of funding to startup companies that have already financed their business from their own means, as well as their friends and family.
The distinction of angels with venture capital firms is the former use their own money, while VC firms use investor funds, usually institutional money from pension funds, hedge funds or similar large organizations.
Also, angels provide much less to companies, usually investing no more than $20,000 to $50,000, often doing so with other angels.
Elconin has invested on his own and with others usually as part of the San Diego Tech Coast Angels, and says the latter is far preferable.
The riskiness of such investments is evident. Most startups never turn out like Apple Inc. or Qualcomm Inc., and the vast majority never make it past year one.
Elconin, 59, says he’s done OK over the 13 years he’s been investing with TCA. “I’ve done a little better than break-even, probably not doing any better if I would have invested in the stock market,” he said.
“But my best prospects haven’t exited yet,” Elconin said. “I’ve invested in five or six companies that I think could be 100X (meaning his investment return would be 100 times what he put in).”
Rory Moore, chief executive of CommNexus, the nonprofit telecom trade group, says he’s also had some nice returns on a few notable investments, but making money really isn’t why he’s in the game.
“I invested in 10 startups. Six failed and four had outcomes (sold or went public). In baseball, those are Hall of Fame numbers,” said Moore.
Moore and other angels can well afford to engage in such high risk investing. They’ve usually made fortunes in other business ventures, and have seen a few of their investments hit it big. Moore was one of three founders of Peregrine Semiconductor Corp., a maker of chips contained in a wide range of electronic devices. Last year, sales at Peregrine topped $200 million, nearly double what they were in 2011. Its stock, which was issued last year, was recently trading above $10 giving it a market capitalization of $334 million.
Moore, who declined to provide his personal net worth, also was a co-founder and early investor in another technology business, Silicon Wave, which was acquired by Qualcomm.
The most successful angel investors are those that aren’t focused on how much they’ll make, Moore said.
“High net worth investors who made their money in technology are not investing for ROI (return on investment),” Moore said. “They’re investing for what I call bragging rights. If they lose $1 million to $2 million, that ain’t going to change their lifestyles … They’re looking for their money to help create the next big company.”
Angel investors have to be wealthy enough to sustain what often ends up being either an outright loss or a request for more money to keep a startup going beyond the initial angel round, they say.
Most angels interviewed said people shouldn’t even consider such investing unless their net worth is north of $3 million to $4 million.
“The angels who do the best are those who do multiple ventures. Those who invest the first time and lose often don’t return,” Moore said. “You have to realize it’s a numbers game.”
Martha Dennis, a longtime telecom executive who formerly headed up software development at Linkabit, the predecessor company to Qualcomm, has been involved in a number of startups, both with the Band of Angels and TCA.
Angel investing is not exactly the road to riches, she said. “Everybody is going for the big win but it hardly ever happens,” Dennis said. “About 85 percent fail, on 10 percent you’ll sometimes get your money back, and if you’re lucky, you’ll make money with 5 percent of them.”
Of the eight to 10 investments Dennis has done, most were for sums around $20,000 to $25,000, a range that’s common for TCA members.
One investment Dennis made that she lost money on was the most frustrating because it could have resulted in a profitable outcome. Widcomm, a San Diego software provider for Bluetooth wireless, showed lots of promise and at one point, attracted a nice offer, but the board nixed it, Dennis said. It never got a better offer.
When the business was acquired in 2004 Dennis said early investors got 57 cents on the dollar. “It made me angry because it could have been a winner, and after they passed on that offer, they never got close again,” she said.
Still Tough, But Better
Dennis doesn’t hesitate to recall the best investment she ever made. “It was for ‘Jersey Boys’ (the Broadway hit musical that started out at the La Jolla Playhouse) and it returned 14 or 15X, and it’s still paying off,” she said, declining to state what that investment was.
San Diego angel investor Marco Thompson said while it’s still tough for startup companies to find capital beyond the friends and family round, things are better today than they were in the early 2000s when he began investing.
At the time, there wasn’t any local investor network, and new companies seeking seed capital had few options. “There was a lot of money in San Diego but it wasn’t organized,” he said.
Meanwhile, the investing scene in the Bay Area was far more lucrative and organized causing a lot of San Diego entrepreneurs to move there, he said.
“It was killing me to see quality people who were unable to raise money,” Thompson said.
In 2005, to bridge that gap, Thompson and partner Joe Markee, another veteran high-tech executive, formed Express Ventures in 2005, raising about $8 million from 47 investors, including four of the top 10 executives at Qualcomm.
The Thrill of the Deal
So far, the fund, which concentrates on high-tech startups, has invested in eight companies that have created more than 400 jobs, Thompson said.
As for his biggest win, Thompson says it was an early investment into a local software firm called Auto Point. It was acquired by a much larger firm, Las Vegas-based Service Repair Solutions in 2010. “That was my best outcome as an angel or a venture exit,” he said, without disclosing the amount invested. “I’ve essentially doubled down on it,” meaning he hasn’t cashed out yet.
His most spectacular loss was in a DVD distribution business called Giftflix he invested “in the low six figures.”
“It was a bad idea on a lot of fronts,” he said. Adding to his pain was the fact he convinced some friends to invest in the dog too.
Steve Flaim, past chairman of the San Diego Tech Coast Angels and an active investor, said when he first got involved in investing he made some bad bets, not understanding all the due diligence that should be done. Since joining the TCA in 2004, Flaim says he’s done much better, and probably made more money than he’s lost.
Flaim said most of the angels in the group are similar to him: They’ve been successful in some businesses, and enjoy working with entrepreneurs, and helping them navigate the landscape of growing a business and taking it to the level where it can attract venture capital.
His biggest win was for a local startup that developed a new re-chargeable gift card called Green Dot. That investment, if taken past the lock-up period on insider shares, was valued at about 180X, he said.
Moore said angels genuinely like investing in startups because of the thrill it gives them when a business they believed in starts to take off.
“It’s more fun than anything you can imagine,” he said.