L. A. SECTION ENTERPRISE CHAPTER

Small businesses are often privately owned by a very limited number of individuals. They may be viable but incapable of rapid growth for lack of capital. To grow, they need jump-start financing which, because of the modest amounts involved, large venture capital firms often are too disinterested or too cumbersome to provide. Thus there has existed a gap in capital availability for small businesses.

The May 6 program of the Los Angeles Section Enterprise Chapter addressed this gap. Innovative financing organizations known as angel investors have been established to fill this financing niche. The speaker at the May 6 meeting, Bill Collins, Vice President of Tech Coast Angels (TCA), described how angel investors operate. One major distinction between angel investors and typical venture capital firms is that angels rely on financing by individuals to a greater degree. TCA, for example, operates out of three centers in southern California, and consists of over 200 members who invest as individuals. These individuals are diverse in terms of their knowledge of specific market sectors. Most have served in line or staff management in industries involving various technologies. Different individuals are attracted by different business opportunities, so the makeup of the investor group generally varies from deal to deal.

These investors are careful with their money and seek a favorable risk-return environment. They are ready to provide early-stage financing to bring the budding business to a cash-positive status, and to provide coaching, mentoring, recruiting, and active management as required in aiding company expansion. They hope to realize a good return on investment permitting an exit within two to five years, and to pass on the company to venture capital affiliates who can raise more capital for further expansion..

TCA is looking for disruptive, advanced technology that can form the core of a new business. They want to see well-defined market niches that the new business can dominate.

Meeting such criteria demands a rigorous screening process. In a typical month, about 50 funding requests are submitted to TCA. Of these, 25 merit pre-screening by about three to four TCA members. Normally, only 10 of those are selected for screening, a process in which the applicants present their business plans in sessions involving 25-35 investor members. Typically only one of these ten gets funded. Not all funded ventures are successful, so that it is evident that returns result from a very small proportion of original funding requests.

The amount of capital involved and the short time horizon (2-5 years) imply certain characteristics of the products (or services) involved. They must be sufficiently developed to avoid a large time interval before production. The unit cost must be low enough not to stretch limited financial resources to the breaking point in building up inventory. Furthermore, the production span time must be rather short to assure enough sales and inventory turnover to generate a payback within the time horizon, and the markup above cost must be sufficient to generate a good return within the time horizon. These time and funding constraints tend to limit the ventures to small components rather than large systems.

Angel investors also work with universities and large companies, acting as "technology spotters". They help filter technologies at campuses and company research laboratories to identify commercial applications, and help coach and mentor start-up teams and spin-offs to bring new products to market. For example, TCA has such working relationships with UCLA, USC, Cal Tech, Boeing, and Raytheon. Recent applications include a new welding technique for aluminum and an advanced computer translator of spoken languages.

In certain cases requiring additional liquidity, angel investors augment their own resources by affiliating with other venture capital firms and other angels. If growth continues to the point where large venture capital firms are needed, they provide a handoff to those firms. Hopefully, with this larger infusion of capital the company will then continue growing and attain a rate sufficient to merit an initial public offering (IPO), and the company ends up going public.

For more about angel investors, click on the Archives of Speaker Presentations etc. button on our web site www.aiaaenterprise.org and then click on angels.pdf to view Collins's slides. On our web site you can also view previous presentations by:

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