What better way to learn about investing in tech ventures than to tap into the perspectives of an angel group chairman who’s also a 38-year veteran in the tech industry?
This week, Venture Hype caught up with Bill Warner, chairman of the Triangle Accredited Capital Forum (TACF) and managing partner of Paladin and Associates. Prior to founding Paladin and Associates, Warner served as president and CEO of LiveWire Logic, took on an executive vice president role at Dialogic, as well as held senior executive positions at Banyan Systems, SystemSoft and IBM, among other big names and impressive titles too exhaustive to list. Without further ado, let’s dive right into Warner’s experience and learn a bit more about angel investing.
* Edited interview
VH: How did you become an angel?
BW: I became an active investor in the early 90’s and co-founded TACF in 2004 in order to fill the need of introducing entrepreneurs to serious angel investors.
VH: What can you tell us about TACF?
BW: TACF is an angel network of nearly 100 members mainly in the Research Triangle Park area of NC. Our investors predominantly focus on high technology and biotechnology opportunities, but a trend is emerging where many of them are quite interested in considering much less complex and lower risk opportunities that take less money to start and may lead to earlier exits. Simple businesses seem to be more popular as time goes on.
VH: What makes technology startups unique? How do you identify high-potential startups?
BW: Technology startups are very high risk with high barriers to entry that hold out the possibility of very high returns. Research Triangle Park is rich with technology and biotechnology opportunities. We learn about them through referrals from our members and through our website.
VH: Some people say business plans aren’t important. What’s your view on that?
BW: We use the business plan summary as the first form of communication with us. We believe that an entrepreneur should be able to summarize the essential elements of their entire business in a 5 to 7 page summary. If they can’t, then they probably don’t really understand their business and won’t be a good investment. A full business plan then becomes a due diligence item after the entrepreneur has been selected to present to our group.
VH: What about patents? Are they part of the equation when evaluating an investment opportunity?
BW: To most of our investors, a defendable patent position is quite important. It represents the necessary defense of the entrepreneur’s intellectual property.
VH: How do you conduct due diligence?
BW: Since we operate under a network model, once we’ve established interest from a group of our investors, they become the due diligence team and organize themselves to perform the due diligence tasks that are necessary. Both the entrepreneur and the angel group need an attorney to complete the investment transaction. Competent accounting is also needed.
VH: Say a startup has passed the litmus test and you’re interesting in funding it; how do you value the company?
BW: This is always an enlightening experience for the entrepreneur. It’s sometimes hard for them to understand that this process is simply a negotiation and that the valuation is whatever the market will support. Of course, startup valuations are quite depressed compared to this time last year, with most of them below US $2M. Angels are in a buyer’s market.
VH: Can you explain the common ways to structure an investment and under what circumstances would you choose one over another?
BW: Most of the deals we see are quite straight forward preferred equity with the typical terms that go with that. We sometimes see bridge loans and convertible notes, but most of our investors aren’t interested in those kinds of deals.
VH: Let’s talk about term sheets. Can you walk us through the process and the recommended timeframe to close a deal?
BW: Term sheets are quite typical of preferred equity. The due diligence, negotiation and closure process can take 3 to 4 months.
VH: What’s happening in the angel field right now?
BW: Angels are much stricter about making investments in today’s economic situation. This means that entrepreneurs have to be much more disciplined in understanding and communicating their business. Angels are making fewer new deals while a larger portion of their investments are going into their current portfolios.
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* For series, references are published in the last installment of the series.
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