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Seed Capital From Angel Investors: Dick Reeves, Executive Director, Huntsville Angel Network (Part 5)

Posted on Sunday, Oct 3rd 2010

By guest authors Irina Patterson and Candice Arnold

Irina: You were telling me about two companies in your portfolio that failed, and you lost about $1 million combined on both of them. What were the reasons for their failure?

Dick: Both failed for the same reason. They failed for factors that were outside of their ability to control. That’s always the biggest threat. The first company was an energy company trying to do a bio-diesel conversion  and it failed when the price of oil dropped more than 50% in 2008. The second company was marketing private-label prescription pharmaceuticals. They lived in a special little regulatory exemption that the Food and Drug Administration (FDA) had in place for this type of drug. They were a marketing company, essentially. They had a very successful first year, and the FDA changed the rule and forbade what they did.

So, the lessons from these two are: If you’re going to dance with elephants, you have to have very deep pockets and you have to stay away from commoditized businesses like the oil business. That’s a place for very big players. And the pharmaceuticals industry is also a place for very big players.

Irina: Do you think about exits in advance?

Dick: Oh, gosh, yes. We don’t invest unless there’s a well-thought-out exit plan, including having identified what acquirers are active in the marketplace and what have the economics looked like on the transactions that occurred previously, and what kinds of things are the acquirers looking for and the companies that they buy, and does this potential investee possess any of those attributes? Or can we help them become attractive.

We have a philosophy that says, exit early and exit often. In one case it was a partial exit. The acquirer bought out the minority investors, ourselves, and gave some money to the founders but left the founders still owning 40% of the company. That’s really very successful for all concerned and we like that kind of partial exit for a company. That happened less than two years after we made the investment.

Irina: What is your biggest investment success to date?

Dick: It’s that particular company, 230% gain on our money in 17 months. They’re in the e-commerce space.

Irina: Do you look for more e-commerce companies to invest in?

Dick: Yes. Shortly after we invested in that one that exited, we invested in the Web retailer of extreme sports gear. That happened in early 2009 and they’re doing very well. I would expect they will exit here in the next 18 to 24 months.

Irina: What does this company do?

Dick: They sell motocross and wakeboard and snowboard gear, clothing, gloves, boots and accessories, mufflers for motorcycles. They’re also getting into skateboards, elbow pads and helmets. They’re called Loco X , X standing for extreme sports.

Irina: When you look for e-commerce companies to invest in, what do you look for?

Dick: Well, again, those factors of scalability, using technology to gain an advantage over their competitors. What we like about the one that we’re in is that they have a branded website.

Their initial market is selling this motocross sports gear to 12- to 28-year-old males.

They have this website that has this fat Mexican guy named Sanchez and pin-up girls, which are attractive to that age group, and all sorts of branded things that bring young people to this website to do business.

They’ll do about $10 million in volume this year, and 40% of that will be outside the U.S. They sell in Australia, Eastern Europe, you name it.

Irina: How long have they been in business?

Dick: Three years. We invested in them when they were a year and a half. So they have almost tripled their sales volume in that time. This is in a market where the conventional store front retailers have been flat. So, they’ve been taking market share from the non-Web retailers.

Irina: Do you facilitate introductions to acquirers?

Dick: Sometimes we’re involved in that introductory process. We talk all the time to others in our industry. I had a long conversation earlier today, for example, with a venture fund up in Tennessee, 500 miles from here, but their interest profile happens to include one of our companies.

That’s an example of a contact that might facilitate the next round of financing for this company. And in turn, venture firms are talking all the time to companies that are prospecting for acquisitions. They’re much more disciplined about that than we angel groups are, usually.

This segment is part 5 in the series : Seed Capital From Angel Investors: Dick Reeves, Executive Director, Huntsville Angel Network
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