Wednesday, December 1, 2004

Interview with Luis Villalobos, Tech Coast Angels and ACA

The Tech Coast Angels (www.techcoastangels.com) and the National Angel Capital Association (www.angelcapitalassociation.org) recently announced that they are going to work together to improve angel deal flow and best practices. Luis Villalobos is a founder of the TCA and sits on the board of the National Angel Capital Association. I caught up with Luis to get a better idea of how the groups are working together, and also to gain some insight into the art of angel investing.

BK: For those not familiar with the groups, who are the Tech Coast Angels, and what is to the National Angel Capital Association?

LV: Tech Coast Angels is a 7-year old group of angel investors, we fund startups and early-stage ventures -- in high tech, in life sciences, in retail and more generally any venture with potential for high growth and where our members can add value.

We have funded 80 ventures with $51 million of member capital, and an attracted an additional $530 million from co-investors into those ventures.

We have ~230 members, in Orange County (where the group started), Los Angeles and San Diego; and we are launching a new network in Westlake/Santa Barbara.

The evolution of organized angel groups fills an important funding gap between informal investors of family and friends, and formal venture capital -- typically $200,000 to $1.2 million. Moreover, angel groups provide far more than capital -- with their extensive operating experience and networks of contacts.

The ACA (Angel Capital Association) is an organization of angel groups. ACA's mission is to advance angel investing by supporting the development of successful angel groups, sharing best practices and industry data, building public awareness, and establishing professional standards. Currently, 60 angel groups throughout the United States and Canada are members of the organization, including 48 founding groups.

ACA itself does not provide funding to entrepreneurs but advances angel investing by supporting the development of successful angel groups through the sharing of best practices and industry data.

ACA is currently working with the Kauffman Foundation to design a confidential survey of angel groups and individual angels to get insight into regular deal flow in the angel community. A secondary aspect of the research program is to gain greater understanding of the number of individual angel investors in the country, where they are located, and how much they invest, among other things.

BK: I see you recently announced that the two groups are going to work on angel deal flow. How do you see the two groups working together?

LV: ACA is an intermediary that facilitates interactions among angel groups. So ACA will help Tech Coast Angels work with other angel groups across the country. In some cases, groups will share deal flow; and in other cases just data about the deals they are doing.

BK: I've found that Southern California has a very well organized angel community, thanks to groups like the TCA. How does this compare to the rest of the nation, and to other groups in the ACA?

LV: TCA is recognized as one of the groups with the best processes and is one of the largest in the country. There are great groups in most of the areas that have well-developed venture communities; like Silicon Valley, Boston, Texas, Chicago -- the ACA website shows nearly 100 groups across the country.

The goal of ACA is to enable these groups to interact, so that they can learn from each other and enhance the process of angel investing.

BK: What kind of end results do you expect theTCA/ACA relationship?

LV: Personally, my goal is to help increase tenfold the number of angels in organized groups from the current level of ~5,000 to 50,000. What few people realize is that there are nearly one million "informal investors" in the US, these are individuals who invest between $20,000 and $250,000 per year in ventures, and in aggreagate invest over $40 billion per year. Note that the $40 billion includes investments in all kinds of companies, not just those ventures with high-growth potential (which is what angels and VCs fund).

BK: What do you find is the hardest part of getting an angel to join a group like the TCA?

LV: Making/having the time to be active, like TCA requires. We expect members to attend most screening sessions (2 per month from 9:30 to 1:00), most dinners (1/month), be active in due diligence, sit on a board or two, and participate in one or more of the various committees (membership, education, events, administration, etc). Most of our members are not otherwise employed.

BK: I often run across prospective angels who would like to start investing but are unsure how to start. What advice would you give them on the best way to start in angel investment?

LV: Join a good group. Or if that won't work for them, make sure they invest together with experienced angels. And in any case, educate themselves; eg TCA does an annual workshop for angels, whether or not they are TCA members or members of any group -- the next one will be coming up in February or March.

Also they must understand both the high risk, and the fact that you need a portfolio (eg 15-25 investments) to reduce the risk from volatiliy of this asset class; ie think of it as a game (for which if you are good) you might get odds roughly like:

1:100 of making 100x
1:25 of making 25x
1:10 of making 10x
1:5 of making 5x
1:10 of making 3x
1:20 of making 1x (getting your money back)
1:2 of making 0x (losing your investment)

which would have an "expected value" of 4.35x (somewhat like angel investing -- for good angel investors). But you have to place a lot of "bets" to approach that expected value with consistency.

BK: Finally, what do you think is the most important criteria for a successful angel investor?

LV: Recognize that it takes a lot of time and that great investments are almost impossible to find -- an angel has to take promising opportunities and help shape them into great investments, by working with the entrepreneur to build a great venture around delivering significant value to some niche of customers.

The angel must be able to pick great entrepreneurs, be willing to monitor the ventures after investing (don't wait for train for fall off the tracks), be willing to mentor the team (to help them develp their skills and to help them avoid some mistakes), and provide connections and contacts throughout.

BK: Great insights. Thanks!