Six Angel Investors Share Lessons of Wins & Losses at Zino Society Investment Forum

9/16/10

Every year the Zino Society‘s Zillionaire Investment Forum is a must-go event for entrepreneurs looking for funding opportunities and investors looking for new projects. The one-day forum is a chance for startups and young companies to pitch five minute presentations, rub shoulders with potential investors, demo products, sit in on panels with local venture capitalists and angels, and—for two lucky ones—win $50,000 awards from Zino, the networking group for angel investors.

As I looked through the agenda in an attempt to pick the panel session with the most value for Xconomy’s readers yesterday, I was faced with the same question that many startups grapple with: Do I go with VCs or angels?

Talk of shifting tides—the waxing of angels’ activity and the waning of VCs’—has been floating around the tech world for a few years now. A year and a half ago our now Boston editor Greg Huang raised the issue with one of the Northwest’s own prolific early-stage investors (and former VC), Geoff Entress. Entress attributed the changing investment climate to the two factors: the economic downtown and lower startup costs. As more and more startups need less seed capital to get going, angel investing has become an increasingly appealing option for entrepreneurs—and for independent investors. Just last month Silicon Valley angel investor Ron Conway encouraged angels to get out their checkbooks and start investing. “Angel investing is the most interesting thing you will ever do,” he says.

While I have no doubt in my mind that there is—and likely always will be—a place for venture capital financing in the Seattle tech community and elsewhere, I decided to check out the angel panel. The participants, all angel investors, included Gregg Bennett, Charles Finkelstein, Brad Harlow (managing partner of B. Harlow & Associates), Byron McCann (managing partner of Ascent Partners Group), Dan Rosen (president & CEO of Dan Rosen & Associates), and Peter Ueberroth (chairman of Contrarian Group).

The six angels were asked to comment on the successes and failures of their own investments, and to explain what attracts them to startups, CEOs, and entrepreneurs, what turns them off, and what ultimately gets them to sign that dotted line. The hour-long session was jam-packed with advice including and beyond the age-old adage “bet on the jockey, not the horse.” Here are some of the highlights:

—Dan Rosen talked about Seattle-based online video startup Delve Networks (acquired by Tempe, AZ-based Limelight Networks (NASDAQ: LLNW) in August), which he lists in his loss column. “It started its life with a good bunch of angels around it,” Rosen said, but then “they switched businesses and went silent on us.” Six months later, Rosen said, the company began a series of unannounced transactions, including a $1.2 million carve-out for the management team, and eventually sold the company without shareholder approval. Rosen got nothing in the deal. “I can blame the CEO—he was a first time CEO and his actions were unethical,” Rosen said. “But the board on this was also to blame,” he added. “Be very careful to make sure your companies communicate with you, and that you hold the board responsible.” For the Delve CEO’s response to Rosen’s comments, see this TechFlash post.

—Byron McCann, in contrast, was relatively sanguine about his tale of loss with a startup that competed with Netflix during the dotcom bubble. When the bubble burst, McCann said, “the capital for that kind of business just died, and it would have required subsequent funding.” The company closed down, McCann said, but “they did a good job of communicating. It was a great idea, the [business] was proven to work, but it was just too young in its cycle.” Ultimately, he said, “we didn’t lose 100 percent, just 99 and a half percent. But that half percent means a lot, because it means that there was some ethics there. They came to a point where they could have dug the company deeper into the hole, and they decided to pay the bills and return some money back to the shareholders. I got a check for less than $1000, but that check was meaningful.”

—Gregg Bennett talked about what attracted him to Bellevue, WA-based Coinstar. “It was a paradigm deal—no one had thought about it, I hadn’t thought about it,” Bennett said. “I had a sock drawer full of coins at home—it was a need I could relate to.” The fact that the startup’s team included three MBAs, two with previous startup experience, and a first-class CEO sealed the deal, Bennett added. “That ended up being a good investment. It ended up being six- or seven-X in 18 months.”

—Brad Harlow listed Bellevue, WA-based ultrasound developer PhysioSonics in his win column. Involved from the very beginning—Harlow has served both on the board, and as CEO for two years—he attributed the success of the still young startup to a strong team of people who were interested in building a company, and not an exit strategy. “In some cases you need to make sure the jockey is brining an entire team with them, that is the horse, the trailer, and the guy that drives the truck,” Harlow said. “I was never worried about where will we sell this and how will we get out.”

—Charles Finkelstein reiterated the need for strong leadership at the startup level. He described (but did not name) a company that made him “feel like such a fool” in retrospect. “I saw signs that the CEO was a lunatic,” he said. “Part of the CEO’s lunacy actually helped him become an evangelist for the product—the product was gaining strength, so for a while no one cared that a total lunatic was running the show.” The lesson, he said, is to live and learn. “It’s kind of a heartbreaking story, but man, I should have known better than that.”

—Byron McCann provided a mnemonic device for use in evaluating potential investments. “The test I use is what I call ‘torque’—you want to get it tight enough so it doesn’t loosen, but you don’t want to get it too tight so you strip the bolt,” he said. “Torque,” McCann explained, stands for traction, opportunity, relationship, quality, uniqueness, and execution. “Does the product have traction with customers? Is the opportunity worthwhile? Is it big enough? Meaningful enough? Is the risk-reward tradeoff enough? Is this a relationship that you want to be in through thick and thin? What’s the mindset of the team—will they do it right, and do it right the first time? Is it unique in the sense that it’s disruptive within in the industry? Is there an execution toward excellence?”

—Gregg Bennett summed up the current climate with a twist on the old jockey-versus-horse metaphor. “Most people are looking for the jockey not the horse, and I’m saying today there are enough good deals out there that you can find a good jockey and a good horse,” he said. “You shouldn’t compromise—you should get both.”

Thea Chard is a correspondent for Xconomy Seattle. You can e-mail her at theachard@gmail.com or follow her on Twitter at http://twitter.com/theachard. Follow @

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