By guest authors Irina Patterson and Candice Arnold
Tim: We [the Tamiami fund members] typically go through a more robust question and answer period inside of the fund structure [than the Gulf Coast Venture Forum]. When we’re done with our question and answer period, we ask the entrepreneur to leave the meeting.
We have a discussion among the members, and then I call for a vote on whether the company should be approved to enter a due diligence cycle so that I can give immediate feedback to the entrepreneur after her presentation on whether our fund is interested in her offering and, if so, enter into a due diligence cycle with her.
Then we go through a structured due diligence, term sheet negotiation process and final investment authorization from another vote from membership. It’s a much more disciplined, organized process intended to invest capital, whereas the angel investment network is a bit more spontaneous and ad hoc and takes more perseverance from the entrepreneur and the angel.
Irina: Do you think in terms of valuation when you are looking for companies to invest in?
Tim: I would say we’re typically going to be looking at investing in companies that have a valuation of under $5 million. There can be exceptions to this. But on average, we’re looking for companies with fairly attractive valuations, not inflated valuations.
Irina: Do you have in mind how much equity you will usually seek?
Tim: Yes. I think that each deal is going to vary, but typically, for whatever round we’re investing in, it would probably be between 20% and 40% equity in the company. Not every round is a $1 million, series A round. Sometimes they may be looking for $2 million, sometimes $1.5 million. But that round is typically going to be between 20% and 40% of the company.
Irina: Do you have in mind what kind of return you would like and over what period?
Tim: Our fund is organized as a five-year fund. That means we need to be invested and will distribute any profits we have during that five-year period. At the end of that period, if an investment hasn’t been liquidated or bankrupted, we will re-title the shares on the individuals’ names and the fund’ll be done after five years.
Our investments will, we hope, have some success within five years’ time. We also project for the fund an IRR of 25%. Now, I can tell you, and you probably have heard this a number of times, this type of early stage investing in private companies with unknown management teams, unknown products and unknown prospects is highly risky. So, there’s definitely the potential that all of our investment capital is lost.
Irina: In what stage of a company’s development would you prefer to invest?
Tim: Well, because we are fortunate in southwest Florida to have two angel organizations that are very cooperative and collaborative, what we’ve done with our deal flow is, where both organizations are working together effectively, we typically direct the pre-revenue companies to the Gulf Coast Venture Forum and the revenue producing companies to the angel fund.
Then if a company distinguishes itself at either meeting, we refer that company over to the other angel organization. From a fund perspective, we are looking for revenue-producing companies, which would put us in the stage that you’ve defined as validated with customers, because customers means revenue.
Irina: Do you look at the size of the market?
Tim: Again, it varies by deal. Certainly, with most business plans that we’re looking for, you need to have a substantial addressable market so that if your market penetration is in the single digits, you still have a fairly attractive and large company for M&A, which is the most likely exit strategy.
We will be looking at those marketplaces that have large addressable markets, I would guess north of $500 million. Probably more likely, we’d be looking at a $1 billion total addressable market so that you can, again, a fraction or a small amount of the marketplace and still have a profitable, successful company.