By guest authors Irina Patterson and Candice Arnold
Irina: How many pitches do you receive per month, on average?
Dick: In a month, I’ll hear from 12–15 capital seekers.
Irina: Out of those 12–15, how many deserve a closer look?
Dick: One or two.
Irina: What would be your next step of engagement with them?
Dick: We’ll get some initial information from them in terms of an executive summary, non-confidential information, a phone call where we can explore a little bit. The telephone call eliminates eight or ten of the typical twelve that I’ll hear from in a month.
Either they’re outside of our geography or they’re not in our business interest profile or they’re not at a stage of life where we are interested in them; there are lots of reasons why they can fall off.
If it looks really interesting, I’ll ask for a business plan and a PowerPoint presentation, and if it still looks interesting, then we’ll schedule a screening meeting to hear a 12- minute presentation, 15-minutes of questions and then the members vote up or down as to whether or not to go into due diligence.
Irina: How often do you have those meetings?
Dick: As needed, typically every other month or so.
Irina: Do you have any other regular meetings where you meet entrepreneurs?
Dick: No. The incubator does that and we participate in a lot of their functions.
Irina: When you look at those promising deals, what factors get the most weight?
Dick: What’s the management team like? What’s the market space that they’re working in like? What sort of technology are they working with? Is it an incremental change to something or is it an attempt to revolutionize something?
Those are the three factors that become most important. Of course, the business, in order to meet our return requirements, the business has to be very scalable upwardly.
Many folks fall off the wagon because they’re looking to generate a 10 or 15 or 20 employee company and make a nice income from that and go forward, and that’s not our interest profile.
Irina: How do conduct your due diligence?
Dick: We have a process that we have put together over the past five years that’s pretty formal. We make a big documentation request of the capital seeking company, we put together a committee of four or five of our members, we spend about 50 to 75 man hours in total on due diligence for a typical deal, a number of committee meetings.
Finally, it culminates into one great big meeting where all the principals of the company get together with our committee and we just go through their plans from one end to the other exhaustively.
Irina: Is there any fee at any stage for the entrepreneurs?
Irina: How many investments have you made in the past 12 months?
Dick: We made four. Two of those were new companies to us and two were follow-ons.
Irina: When you invest, what is the average dollar amount?
Dick: It varies a lot. We’ve done as little as $130,000 and then as much as $1.25 million.
Irina: So, $130,000 is your lower end?
Dick: We say $250,000 is our lower end and $500,000 is typical.
Irina: So, you don’t do small investments like $50,000?
Dick: No, we don’t.
Irina: How long does it take for a company to receive funding from you?
Dick: From first contact to closing and investment, 90–120 days.
Irina: Do you think in terms of valuation?
Dick: We would expect a minimum valuation of $1.5 million or so. We’ve invested as high as $20 million.
Irina: How much equity do you usually seek?
Dick: It varies greatly. In very early stage companies in the first round, which is typically $500,000 to $700,000, we would expect to get 25% to 30% ownership interest.
Irina: What are your usual terms?
Dick: We use very venture-like terms. We have a standard term sheet that we start with on every deal and it’s a preferred stock participating with a dividend and protector provisions and provisions for a board seat for us. We aggregate all of our members’ money into a single investment entity and make one investment in the company rather than having our members invest individually. It simplifies things for the company and gives our investors more power.
Irina: What return do you seek over what period?
Dick: In an early stage company – a startup company – we seek a 10x return in five years. In a later stage company, we might accept as low as 4x or 5x potential in five years. That’s for a company that’s got revenues already established. They might even be profitable. A lot of the risk has been removed, so we would accept a lower return potential.