We thought today for our interview, that we'd get an update on the angel investment environment here in Southern California from Scott Sangster, the incoming President of the Los Angeles Chapter of the Tech Coast Angels, the biggest angel investment group in Southern California. Scott sat down with us last week and gave us some hints and tips about finding angel investment nowadays, and how the economy has affected local angel investors.
It seems that the economy hit angel investors pretty badly over the last couple of years, along with everyone else--how has that changed things at the Tech Coast Angels, and with angel investing?
Scott Sangster: I think understanding how the broader economy impacts angel investors, is complex and interesting. It affects angel investors in their own portfolios, both their early stage investment, but it also affects them in how opportunities present themselves, and certainly it affects them in the long term, because of exit opportunities for their existing portfolio of startups. Broadly, just as any investor in the public stock market is affected by broad swings in public stock, angel investors usually view their early stage investments as one of a broader range of asset types inside their portfolio. As the markets went down, just like any other investor, they were very conscious of investing more carefully--but, that said, it also meant that there seemed to be more entrepreneurs, for various reasons, were newly interested in starting companies. We actually saw lots of startup activity in Los Angeles last year. That was very good for angel investors, because there were more deals to look at, and more opportunities to get involved in interesting things, and they got to meet more interesting entrepreneurs. It was actually a really good year last year.
That said, the ability to grow companies and reach some liquidity event is still to be determined. It's not necessarily impact by last year, but there are certainly trends over the last couple of years which are both good and bad for startups. We look at the multiples of publicly held companies, and their stock multiples, and that affects their ability to acquire startups. You also look at IPOs, and the long term trend there is still being played out and is still yet to be determined.
So, are angel investors making investments, and if so, is the bar higher to get an investment?
Scott Sangster: The Tech Coast Angels is still actively investing. We invested all through 2009, and are currently seeking investments to do in 2010. The TCA financed 25 companies last year, which was only down 20 percent from the number of deals we did in 2008, which was our peak year. If you compare that to the broader venture capital market--recent MoneyTree numbers said that VC deals were off a third in early stage--we were off by less. I think that's a good sign for startups. This year, we're going to be more aggressive.
What should startups be doing to get funding nowadays, versus a more normal year?
Scott Sangster: I would ask what a normal year is. I think startups need to do less in the boom years, and probably need to do more in lean years to attract early stage capital. I do expect that 2010 will be a year of back-to-basics, with a focus on building businesses. Startups that build good teams, and have good products, and are approaching big opportunities will continue to attract angel investment. Those are fundamentals that don't change. Angels, like other investors, want to see what they are getting for their money, and want to see their investments going into growing businesses. As you know, the Tech Coast Angels has never charged fees for helping companies get financing, with no finder fees or locater fees, because we want to see that money going into developing products, marketing, or whatever is required in the business.
Let's talk about yourself real quickly--what's your background, and how did you get involved in the TCA?
Scott Sangster: I'm a serial entrepreneur, and I have been angel funding personally. I've also raised angel as well as venture capital for my own startup. I was most recently in corporate development at Walt Disney Internet Group. In 2008, I began angel investing more actively, and found the TCA, which is just a great group filled with accomplished angel investors, looking to help CEOs.
How is deal flow quality so far this year?
Scott Sangster: It's only January 25th, so I'm not sure whether I'd like to opine on the deal quality for the year just yet, but we are seeing lots of people applying for our Fast Pitch event in February. If that's indicative of deal flow and the volume and quality for the rest of the year, it will be a good year. One of the priorities for me, as incoming President of the TCA LA, is I want the TCA to be the number one source of early stage financing for So Cal startups. That means we have to both attract and support great deals, and great startups. Is every deal we see going to be the next Google? Of course not. But, we want to make sure that if the next Google is going to be starting Los Angeles, we're talking to the founder and finding a way to help them with their business. By helping them, I mean the TCA will help founders with introductions, networking, mentoring, and of course capital; with business development, hiring, and whatever a startup needs. It's a bit different what a large angel group like ours can do, from an individual angel or venture capitalist, who is more likely time constrained and what they can do for portfolio companies.
Talk about what other things the Tech Coast Angels is looking at nowadays?
Scott Sangster: We're kicking of the year with our Fast Pitch on February 24th, but we are also focusing on the way the Tech Coast Angels works with entrepreneurs, and more broadly, on the role that the TCA can play in the Southern California venture community. By that, I mean that we want to make the process simpler and faster. We want the entrepreneurs to see the TCA as the de-facto first place to seek funding for their companies. We're already making some steps within the TCA to do that, and to simplify that process.
So you are trying to do something about the impression that getting angel funding is a fairly long process?
Scott Sangster: We've solicited feedback from CEOs who we did fund, and didn't fund, to improve the process and the experience of the process. We're already implementing things that should make us much more responsive to their needs. In regards to speed, we recently funded a firm in 30 days, that's 30 days from pitch to the check. We continue to learn how to make things much more efficient internally. That said, there will be deals that are faster than others. Then, there are the deals where there are less experienced teams, very complicated competitive environments, and who need a large amount of funding--and that will take more time to get through the process. That's just because those companies need to learn more, the CEOs might need more time to gather documents, etc. If a CEO has never gone through due diligence, we end up spending more time with that CEO to educate them about the process and the documentation required, which slows down the process.
What does get deals to go along smoothly? For example, the recent 30 day funding you mentioned?
Scott Sangster: In that case, it was a very prepared, and very experienced management team, seeking a level of funding that didn't require syndication. If a company is seeking more than $800,000 to $1M, the TCA can lead that round, but will potentially syndicate it to other investment groups. That process takes more time.