San Diego Angels Lend Financial Wings to Entrepreneurs Needing Cash

In polo shirts and khakis, about 35 members of San Diego’s Tech Coast Angels met recently for breakfast,as they do every month, to listen to hungry businessmen ask for hundreds of thousands of dollars.

Telum Corp. wanted $750,000. The San Francisco-based company has developed a topical microbicide cream that stops the spread ofsexually transmitted diseases. So far the company has received about $5 million in research grants from the National Institutes of Health, but it needs extra funding to get the product into clinical trials to determine its effectiveness.

By:
Terri Somers
San Diego Union Tribune

http://www.nasvf.org/web/allpress.nsf/pages/8832

The angels, affluent individuals with a background in business, nurturefledgling companies such asTelum through the lean startup period to the point where their product is developed enough to attractthe bigger money of venture capitalists.

Since 1997, the Southern California Tech Coast Angels, whose membership stretches from Los Angeles to San Diego, have invested more than$45 million in more than 60 companies.

Angels have traditionally been the largest source of seed and startup capital in the United States. A total of 42,000 entrepreneurial ventures received angel funding last year,a 16 percent increase from 2002."Typically angels investors are cashed-out entrepreneurs who provide their own money and advice on how to make startups successful," said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.

Usually they meet in groups, like the Southern California Tech Coast Angels, who have chapters in San Diego,

Orange County and Los Angeles. Although they meet and listen to presentations as a group, investment decisions are up to each individual. They do not invest with money from a fund, like venture capitalists do.

Warren Hanselman, a 62-year-old member of the group, jokingly refers to his colleagues as "frustrated retirees who want to do this rather than play golf or go fishing."

Hanselman retired four years ago from Lenox Industries, where he served as president of a division. In retirement, he could bear to spendonly a limited time on his boat.

He heard about the angels through the San Diego Venture Group. He met the Securities and Exchange Commission guidelines of a qualified investor: $200,000 annual income for an individual, $300,000 for a couple or $1 million in assets. He thought he could meet the group’s requirement that he invest in at least two $25,000 deals a year. The investment opportunities, though risky, could provide a bigger return than many stocks.

"The reason I’m in this is the opportunity for a bigger payback – it could be ten times a return on my investment, and I can have a personal impact on a company," Hanselman said.

Both issuesare important to these investors, who have spent years as CEO, CFO, president or in other executive positions in corporate America. They frequently lend their expertise and advice to companies in addition to their money.

Among Hanselman’s angel investments was CargoTech, a San Diego-based company that makes insulated packaging systems that protect perishables. When the company needed a temporary chief executive, Hanselman filled the post.
Investor Alan Creutz, 60, said he’s in it for the fun.

"Most of us don’t expect to make millions of the Tech Coast Angels," Creutz said. What they’re looking for is the excitement of helping a new company take off, and the kick of seeing the glimmer of excitement and resolve in the eyes of the business people they help.

"A lot of us just said ‘that sounds like fun, let’s give it a shot,’ " Creutz said.

Jack Florio, 55, another San Diego angel, worked for Eli Lilly in management positions for more than 30 years before retiring in 2001. Like many members of his group, when he retired he missed the fun part of business: the strategy, the ideas and helping the company grow.

Angel investing gives him all that without the worries about cash flow, staffing, personnel issues and other parts of running a business that lead to sleepless nights.

These early-stagecompanies also benefit from the Rolodexes and relationships the angels have spent decades building.

"A half-dozen people mentored me through the years and what they gave me was so valuable. This is my opportunity to pay that back in a way, and I enjoy doing it," Florio said.

One of the recent beneficiaries of the Tech Coast Angels was Property Bureau, an Internet auction site that sells items that have been confiscated or recovered by police departments around the country.

The company raised about $500,000 fromthe Tech Coast Angels last year, Chief Executive Thomas Lane said. He offered a position on the company’s board of directors to an angel from the Los Angeles chapter who has years of experience in marketing and e-commerce.

"We get continuous, basically daily or weekly, help from the person on our board. We use his expertise extensively and run ideas past him," Lane said.

Angstrom Pharmaceuticals wasn’t looking for mentoring or advice. The San Diego-based biotechnology company wanted cash to put its cancer treatment through clinical trials, Chief Executive Virgil Thompson said.

The company was past the point of needing seed money, but its product wasn’t developed to the level where venture capital investors would get involved.

"My goal was to raise at least a half-million dollars, because we are dong clinical trials and spending millions," Thompson said. "To do that in increments of $50,000 is quite daunting."

But pitching his company to the Tech Coast Angels gave Thompson an opportunity to reach up to 250 investors who might individually get him to his total requirement.

He said he was disappointed when he wound up raising only several hundred thousand dollars.

He probably shouldn’t take it personally. Angels typically invest about $500,000 less than whatstartups request, said Sohl, of the Venture Capital Center. And Angstrom was the first biotech deal funded by the San Diego group’s new BioMedTrak program, a subgroup of angels with a drug-discovery background specifically dedicated to biotech and life sciences companies.

In the past few years, angel investors have increasingly filled a widening funding gap between what Sohl calls "Aunt Mary’s $25,000" and the big bucks of venture capital.

Venture capitalists used to participate in $2 million to $5 million second-round financings, Sohl said. Now venture capitalists have moved farther downstream to the $7 million range, he said.

Last year 35 percent of the angel investor deals nationwide financed companies in thepost-seed-money stage, he said.

Companies that make their pitch to venture capital firms but are turned away because they’re not developed enough are often referred to the angel investors, said Michael Elconin of the San Diego angels chapter.

Often venture capitalists use the angels’ due diligence on companies they may be interested in, he said.

If a company’s pitch at a breakfast meeting sparks interest, it is then put through the due diligence process. From there, companies could be invited to the network’s dinner meetings, where they again make their pitch and answer questions. About 2 percent of the companies eventually wind up with investors.

At the recent breakfast meeting, investors asked the entrepreneurspointed questions but seemed to be reticent about them. Typically they would be looking foran exit strategy within two to five years.

Telum, the company developing the microbicide, would have to wait five years before it could even get the data to show whether its product is effective. That’s probably why all the competing products being developed have received all their funding through government grants.

Elconin, whose background is public service and technology, said the questions thrown at Telum were pretty tough.
"My gut feeling, and keep in mind I’m a tech guy, is that there was less interest for this company than the other (that presented later). But then I’m always surprised at what appeals to some people here or what doesn’t," he said.
Creutz said it’s not always about the money.

"Even if you don’t get funded, the companies that come in here find the process positive because of the questions asked and the feedback."