Since the Tech Coast Angels (www.techcoastangels.com), the largest angel investment group in Southern California, is holding one of its several Fast Pitch competitions next week in Los Angeles (www.pitchtheangels.com), we thought it might be a good time to catch up with Mike Napoli, incoming President of the Tech Coast Angels, to hear the his thoughts on the angel investing environment in Southern California from the angels' perspective. Interestingly enough--despite what seems like a frothy environment in Silicon Valley-- Mike tells us that the deal environment his group is seeing is not nearly as robust. (Photo courtesy Frank Peters)
In your opinion, are your angels more or less active this year?
Mike Napoli: It's quality versus quantity. Our members are always looking for good deals, but I think we're a bit more discerning these days.
Interestnig. So do you think the environment still tough for startups?
Mike Napoli: Obviously, it's still tough. The debt market has pretty much shut down for people, though there is some money coming out of the SBAs that have been somewhat helpful. And, the equity markets are certainly a more challenging environment. The venture capitalists we look at to fund our deals are certainly tightening down, there's no question about that. The environment has gotten more constrained. That being said, the money is there for good deals. What is not happening, is those marginal deals that would have gotten funded a number of years ago, when things were better, are not making it. Investors are very focused on diligence, on business models that make sense, and those companies that have a definite competitive advantage and defensibility to what they're doing. Before, when things were frothy, people were not as discerning as we are now.
So you don't see as many people looking for funding now?
Mike Napoli: Actually, we are seeing entrepreneurs. Last year, we had a record number of applications, over 600 applications to our website. The ideas and people seeking money are out there in quantity.
How are you handling all those applications nowadays?
Mike Napoli: We've revised the way we review companies at the prescreening stage. It used to be there was a geographical composition to our prescreening panel--for example, if an LA company, regardless of what they did, applied for funding, the LA network of the TCA would process them. Now, the way we deal with processing and prescreening is we have industry specific panels. That has allowed us to be more focused earlier with these companies, and we can come to a decision much sooner to go ahead or not go ahead with an investment. We're processing deals faster now than we ever have, and we now have a process in place to identify good deals quickly and make a quick decision. I think that makes everyone happy, because even those who end up turned down appreciate knowing that quickly. No one wants to be dragged through a lengthy due diligence, and at the end of 90 days find out people really aren't interested. With our new process, we're coming to a conclusion earlier than later, and giving a thumbs up or thumbs down.
The Tech Coast Angels had great exit last year in Green Dot - anything which, in hindsight, made this one a home run?
Mike Napoli: I think it was the entrepreneur. I was around when we did the due diligence on Green Dot, and there were a number of investors who were very skeptical of the business model at the time. But, the entrepreneur really understood the space, had extreme passion, and understood the challenge he was going to undertake. He had a sense of determination that he was going to make this happen. The thing I learned personally in that deal, is it really focused me on how important the entrepreneur and management team are. There are lots of ideas we have seen that have sounded interesting, and very plausible, and where we've though that if a proper management team was put in place would be successful. But, we've seen too many who just didn't have the proper entrepreneur or management team in place, and have taken a pass. Looking back at Green Dot, I think I've really learned the important part is the management team.
We've heard some entrepreneurs who have had some difficulty figuring out how to work with angels. Do you have some advice for entrepreneurs on how to best get funded by the Tech Coast Angels and avoiding those issues?
Mike Napoli: The main thing is to do you homework. We often get applications that are incomplete. We've simplified our form, but we still get incomplete information. Also, be prepared before you even come to talk to us, or even better, talk to the members before you apply so you have a sense of what we're looking for. We're always happy to talk to people, and all of our networks have open networking events in a variety of locations. For example, our LA network is having the Fast Pitch on the 24th at UCLA. So, we're pretty accessible to talk to. It all comes down to if an entrepreneur has done their homework before officially applying for funding. They have to understand their markeing plan, know the competition, their competitive advantage, and how they are going to sustain that competitive advantage. If they can't answer basic questions like that it's a big, big turnoff.
Finally, what's your biggest goal for the group this year?
Mike Napoli: We're very sensitive to entrepreneurs and processing. We're continually looking to make our process more efficient in handling entrepreneurs, who we know are expecting a decision. The other thing, which we started a couple of years ago that has proven to be interesting, is we're also talking to people at an earlier stage than we used to. Those are companies seeking under $100,000, who are early stage, and might just have some interesting ideas. We're beginning to engage them more in mentoring and coaching, and we've been known to make very, very early stage seed investments to help companies finish up their plans or prototypes, and inch them along a little more. Even just five years ago, we probably wouldn't have talked to, mentored, or coached them--we might have sent them to an organization like TriTech and told them to come back later. So we're talking to people much earlier in the process.