Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 10)

By guest authors Irina Patterson and Candice Arnold

Irina: And what do you think angels could do to be more successful?

Bob: There’s a couple of things – fantastic question, thank you for asking that. One of the things I think that we can do better is not filter out the companies that we invest in based on presentations and slickness and the ability to have a great presentation, but more on content and substance of the companies. That’s much easier said than done. We need to get to companies that are really good, that may or may not have a good presentation. And sometimes I think we get sold on a slick presentation. Another thing that, I think, has to happen is after the investment, I think that the angels need to provide more value downstream. And that’s one of the things that’s a competitive advantage for the Pasadena Angels. Our tagline is: More than money, we’re going to provide capital and guidance to a company. So if we can open our Rolodex and give a company a contact that it wouldn’t normally have, if we can stay close to the company and give it that benefit of 35 years of running a consulting firm, those are the things that are going to make a company more successful than others. >>>

Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 9)

By guest authors Irina Patterson and Candice Arnold

Irina: What about your investment type?

Bob: Generally we’ll do a convertible debt into an equity instrument, but that equity instrument is usually preferred stock. We have done common stock deals. Maybe 25% of the deals we do are common stock. Some members are okay without the governance that comes along with preferred; some members would rather have a preferred instrument where they get a little bit more governance over the company.

Irina: And about royalties?

Bob: That’s not something that’s come up. I won’t say that we would never do that, but – at my previous company, Phase III, that’s exactly what we did – but I haven’t seen anything come through in the Pasadena Angels like that. >>>

Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 8)

By guest authors Irina Patterson and Candice Arnold

Irina: You already told me that for businesses that don’t get invested in, you send them a nice notice and maybe tell them to work on their businesses, right?

Bob: Yeah. We actually have a category that we put a lot of businesses into; it’s called mentoring. It’s part of our being a nonprofit organization – it’s a 506 3(c) or something. But the reason is that we have two parts to our mission. One is to find investment opportunities for our members, and that’s pretty obvious, but the other half of our mission is to educate entrepreneurs. So we really try to give feedback. >>>

Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 7)

By guest authors Irina Patterson and Candice Arnold

Irina: As far as the total available market for an idea, do you have any recommendations for that?

Bob: Again, total available market, total addressable market, and the amount of market you’re going to capture are all a function of what that return is and how much you’re going to sell the company for. So, if you’re only looking for $100,000 and you can turn that into $1 million by growing this to a $10 million company, then that’s a pretty soft market. And it’s a plausible story and we’ll listen to that. The number you’re looking for? We’re looking for companies that can give us an exit when they have a market anywhere from $35 million to maybe $60 million. >>>

Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 6)

By guest authors Irina Patterson and Candice Arnold

Irina: What is the typical valuation of the companies you invest in?

Bob: Okay. This is my soapbox, and this is what I tell entrepreneurs. This is what I told the guys last night. Valuation is a surrogate for return. If you can empathize with an angel and put yourself in their shoes and understand what I’m looking for is a five times to ten times return in three to five years, and you can tell me a plausible story that gets me to that kind of return, then I really don’t care what the valuation is or what the percentage of the company I own is. It’s all a function of the return. So, if you tell me that you’re gonna sell the company for $25 million in five years, and then you need $2.5 million up front, I’m gonna tell you I need 10% of your company. I’m gonna tell you the pre-money valuation is $7.5 million. If you tell me you can sell your company for $100 million and I’m giving you $1 million, now I only need 10% of your company, right? So, the valuation and the percentage ownership are all tied to that return. >>>

Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 5)

By guest authors Irina Patterson and Candice Arnold

Irina: How many investments have you done in the past 20 months? Well, I guess each member did a different number of investments?

Bob: Exactly. I’ve got some numbers at the high level for the group. We average about nine to twelve investments per year as a group. And last year, in 2009, we hit that exact number of nine. It was a little bit of a slow year for us. And I will tell you that of those nine, more than half of them were follow-on fundings for existing portfolio companies. We only had, I think, three brand new fundings last year, which is the opposite ratio of what usually happens. And we’re on trend for this year of doing, say again, our twelve – one a month – type thing, but I’m expecting, eight, nine, or ten of those to be brand-new companies. >>>

Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 4)

By guest authors Irina Patterson and Candice Arnold

Irina: And who does the screening?

Bob: Pasadena Angel members; they’re actually investors. Our executive director will look at everything that comes in. And, again, if the guy’s in North Carolina – and I’m not trying to pick on North Carolina or North Dakota or North Sasquatch – that’s not appropriate for us. That entrepreneur will get an email from our executive director saying, “Hey, thanks for the submission but it’s not an appropriate investment.” And if they get past that, they do get a phone call from a member. I’ve got something I have to do early next week. I’ve got to call an entrepreneur and talk to him and find out more about his company. So, everybody who applies on our website and gets past that initial filter saying it’s appropriate will get at least a phone call and a conversation with one of the Pasadena Angel investors. >>>

Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 3)

By guest authors Irina Patterson and Candice Arnold

Irina: You’re trying to bring some efficiency to the process, right?

Bob: Efficiency is certainly part of it. Effectiveness is another part of it; understanding correlations and causes is another part of it, so yeah, I think all those things go hand in hand.

Irina: So, you get them all to the website. And from all sources, how many pitches do you usually receive a month?

Bob: Usually we look at about 35–50 business plans a month. It varies. Last year, when things were really dark, we were down to maybe 20, but I think this month – we’re gonna have the meeting next week – we’re already at 35 and I’ve got a week to go. >>>