‘Angel’ investors boost to start-ups – 350-plus attend Valley conference

Wealthy investors may have gotten burned by a dot-com or two a few years back, but they came out in droves Wednesday to find out how to cut the risk of putting their money into some of Arizona’s newest companies.

Jane Larson
The Arizona Republic

http://www.azcentral.com/arizonarepublic/business/articles/1202angelinvest02.html

"We used to be lone wolves, and now we hunt in packs," said Darryl Dobras, a private investor and member of the Tucson-based Desert Angels investment network. "In my experience, it’s a lot better to be in a pack than to be a lone wolf."

More than 350 investors and entrepreneurs turned out for the first-ever Arizona Angel Investment Conference, held Wednesday at the Fairmont Scottsdale Princess. The conference, presented by the Greater Phoenix Chamber of Commerce and other organizations, was designed to educate and bring together companies needing seed and early-stage financing with wealthy individuals or their money managers.
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The result could be a new source of financing for emerging Arizona companies as they seek to gain a footing in the economic recovery.

Joining a network like the Desert Angels or the Phoenix-based Arizona Angels gives would-be investors access to deals they may not see on their own, said Mike Wolf, a Phoenix investor who helps screen companies for the Arizona Angels. Investors also can share their experiences with others, "so you don’t have to make all the mistakes yourself," Wolf said.

Organizers suspect that Arizona has a strong potential pool of private investors, known as "angels," because of the continuing influx of new and part-time residents who have made their fortunes in other states.

Great need, lower risk

Angel investments tend to be smaller than those of venture capital – a stream from which Arizona companies typically draw less than 1 percent of the amount nationally. Conference organizers and others say there is a greater need among young Arizona companies for angel-size investments and business connections.

Knowing that the angel investment networks exist makes a difference in evaluating possible investments, said Bob Semple, a partner in accounting firm Semple & Cooper LLP of Phoenix, who was attending the conference with a client.

"We’ve invested in others (companies) that didn’t work well, so trying to share the risk is a good strategy," he said.

Alan Kennedy of MKK Capital Partners said he came to the conference to train himself and lower the risk of angel investments. Such investments would help diversify his portfolio, he said.

Other trends
Several other trends are making angel investing less risky today than in the past, said Joe Milam of Silicon Valley-based Legacy Capital Management Inc.

Entrepreneurs are becoming more professional and accumulating knowledge about how to make businesses succeed, he said. Similarly, investor knowledge of term sheets and other tools is becoming more mainstream, making the process more efficient, he said.

The transfer of trillions of dollars in wealth from the risk-averse Depression-era generation to a more "risk-comfortable" generation also bodes well for the angel market, Milam said.

He advised would-be investors to compare their angel investments, which can make or lose money, to their philanthropic donations, which carry no financial return beyond a tax deduction. In both cases, the wealthy likely have personal reasons for writing the checks.

"Don’t deny your psychic returns," he said, only half-jokingly.

"If you love what they’re doing, or if you love the people, it feels like charity. So there’s no downside."

He also urged investors to build a portfolio of angel investments, diversifying their risk over a number of companies and over time.

Angels mattering more
Attendees also got some encouraging words about the future of angel capital from Philip Facchina of investment bank Friedman, Billings, Ramsey & Co. Inc.

Angels matter more now than they have in the past, Facchina said, because venture capital investments have fallen dramatically, both in dollars and number of deals, since 2000.

Venture capitalists also are investing less in seed and early-stage deals, a trend that Facchina said he does not expect to reverse.

Facchina agreed that angel investors are becoming more "institutionalized" instead of working alone or in loose organizations.

"This is something that’s got to happen," he said of networks like the conference.

The angel conference replaced the Arizona Venture Capital Conference, which raised more than $230 million during its 12-year run but foundered in recent years as the technology bubble burst and venture investments slowed.

Seeking angels
Medipacs Business: Disposable infusion pumps for medical uses.
Headquarters: Tucson.
Amount seeking: $1.5 million.
Use of funds: Develop industry partnerships, hire management, protect patents and begin research on next version.
Plan B: Once its prototype is complete, Medipacs could take it to large companies that can finance research and development. It also could seek federal research grants, co-founder Mark Banister said.

CamLite Corp.
Business: Wireless audio-visual system for law-enforcement agencies.
Headquarters: Phoenix.
Amount seeking: $2 million.
Use of funds: Launch sales and marketing, build inventory and add distributors.
Plan B: CamLite has made sales to 11 agencies so far, so it could bootstrap the company without the funding or it could form strategic relationships. "We’ll just do it a little bit slower," Chief Executive Officer David Nielsen said.

Cynexus Corp.
Business: Anti-inflammatory products for dry eyes.
Headquarters: Chandler.
Amount seeking: $500,000 first round; probable second round of $500,000.
Use of funds: Legal fees to further protect intellectual property, option fees to Arizona State University, retention of key personnel and pre-clinical trials.
Plan B: Apply for Small Business Innovation Research and follow-on grants, or seek licensing and corporate partnerships. "It becomes difficult to plan, because with the grant route, you never know if you will get it," President Chad Kennedy said.

Biomarker Technologies LLC
Business: Blood diagnostic tests for breast cancer.
Headquarters: Phoenix.
Amount seeking: $3 million.
Use of funds: Conduct clinical trials over six to seven months with 1,500 subjects.
Plan B: Apply for grants. "It would just take us longer" to get the test in the hands of manufacturers or diagnostic centers, Chief Executive Officer William Gartner said.

Motionease Inc.
Business: Motion-capture system for rehabilitation and sports markets.
Headquarters: Gilbert.
Amount seeking: $350,000.
Use of funds: Additional product development.
Plan B: Use $90,000 in winnings from Arizona State University 2004 Entrepreneur Competition. "If we get the investment, we can really accelerate the process," co-founder Raghu Hiremagalur said.

Phoenix Analog Inc.
Business: Power-management computer chips.
Headquarters: Tempe.
Amount seeking: $1 million.
Use of funds: Hiring team, buying computers and software, paying for tooling of first two prototypes.
Plan B: "We’re going to just keep looking for funding. It’s going to work, or not," Chief Executive Officer Ben Adamo said.

Kinetic Muscles Inc.
Business: Devices for neuromuscular rehabilitation.
Headquarters: Tempe.
Amount seeking: $750,000.
Use of funds: Inventory, tooling to reduce manufacturing costs, and hiring an additional salesperson.
Plan B: Kinetic Muscles has grants and contracts, so it would continue but at a slower pace, President Jim Koeneman said.

Virionics Corp.
Business: Vaccine products to prevent and treat diseases.
Headquarters: Scottsdale.
Amount seeking: $2 million or more.
Use of funds: Launch clinical trials for hepatitis-C product and build corporate infrastructure.
Plan B: Pursuing grants and corporate partnerships. Virionics also would consider institutional investors, Chief Executive Officer Rob Kennedy said.

Reach the reporter at [email protected] or (602) 444-8280.