The Angel View on San Diego’s VC Landscape: Q&A With Tech Coast Angels’ Mayer and Elconin
Ralph Mayer got involved in Southern California’s Tech Coast Angels almost as soon as he moved to San Diego a decade ago, after working on computer-assisted design technologies at Chelmsford, MA-based Adra Systems and its sister company, MatrixOne.
Now Mayer is chairman of the board of governors at the Tech Coast Angels, which bills itself as the largest angel investment network in the U.S. Since the angels group was founded in 1997, the TCA recently announced its members have invested a total of $100 million in about 125 SoCal startups—inducing more than $1 billion in follow-on venture investments.
When I met Mayer for coffee last month, he told me VCs initially didn’t like angel-funded companies, partly because they didn’t know who to deal with among a startup company’s angel investors. That’s because a typical TCA investment is about $500,000, with 40 TCA members each making individual investments of $25,000 in the deal. Nowadays, the TCA uses standard venture investment term sheets, and one member assumes the role of lead investor with each company.
Soon after I met Mayer, I talked with Mission Ventures founder Robert Kibble about the declining number of San Diego’s hometown venture capital firms. My post on that prompted San Diego Venture Group board member Carrie Stone to take exception—in an Xconomist Forum commentary that says, essentially, that if San Diego continues to build innovative companies, then the venture capital will come from somewhere.
Still, I was struck by the increasing importance of angel investors in general, and the Tech Coast Angels in particular—especially at a time when San Diego-based venture firms’ outlook is clouded. So I posed a few questions to Mayer and Mike Elconin, who is president of the Tech Coast Angels San Diego Network, about the shifting venture landscape in San Diego. (I knew Elconin from previous stories I’ve posted about investments by the Tech Coast Angels in San Diego.)
Xconomy: What are you seeing in San Diego’s venture community? Do you think it’s important for San Diego to have hometown VCs?
Mike Elconin: I have no data to back it up, but the VC “industry” in San Diego seems to be a shadow of what it was five years ago when measured solely by VCs doing new deals. In my opinion, this is a result of two trends: One is that VC activity nationally, and especially in California, is migrating to the San Francisco Bay area, something we detect not only in San Diego, but throughout the Tech Coast Angels’ footprint, which includes Orange County and Los Angeles. The other trend is that VC activity was trending down even before the current recession. I think both trends are painfully obvious and continuing.
Ralph Mayer: When looking at VC investment, one has to look at the type of investment. Some VCs just do seed deals, some do medium-size series A, some do large series A, some just do follow-on rounds, etc. VCs that are investing $5 million, $10 million, or even more per investment are very willing to travel to the source of those deals. However VCs (and angels) who are investing hundreds of thousands are much less likely to travel. There is an old truism that investors invest in the jockey, not the horse, and getting to know the entrepreneur(s) is a necessity. Even with modern communications there is no substitute for a few face-to-face meetings.
X: Do the Tech Coast Angels have a role to play in this scenario of disappearing San Diego-based VCs? If so, what is it?
RM: There is a trend among angel groups to do deal syndication, where multiple angel groups from a region, or even from around the country, invest in a single deal. It’s of particular interest to angel investors from areas of the country that do not have a lot of local innovation in equity-appropriate companies. Angel syndication may be the long-term replacement for some of the loss of local VCs, but it is taking time to figure out how to get it done across disparate geographies.
ME: In addition to syndicating with other angel groups, we’re joining in some deals with corporate investors, enabling the funding of larger deals.
X: What are you seeing in overall VC activity, including out-of-town VCs ? Are angels picking up the slack?
ME: No numbers, sorry, but I believe that we have a relatively healthy flow of VC dollars into our portfolio companies.
My impression is that San Diego has continued to grow as a “hotbed of innovation” and hence has held its own though all this. But the lack of local VCs definitely hurts. The best deals will always find financing, but it is easier for a local investor to find, poke at, and fund a local deal. More local VCs would improve our local innovation engine.
RM: I did take a look at some of the investment data I have access to—particularly the Southern California database of deals. However, I think the only conclusion one could draw is that their deal tracking in the past few years is much better than their deal tracking in the early 2000s. I was hoping to see something about the percentage or source of first-round deals over the years, but it’s obscured by the increase in their ability to track deals.
Face time with the entrepreneur seems to be a necessity in getting investors to write checks. At the Tech Coast Angels, we have found that investors rarely invest unless they have had at least two face-to-face meetings with the company, and we have structured our processes so that now we don’t bring in a company unless we can plan for multiple presentations and interactions. So we are back to the conclusion that having local investors really does facilitate early-stage investment.