As you and others start the process of reexamining our Tech Coast Angels deal process, I'd like to add a few observations from experience. I've led a number of TCA deals over the years as you know, including MyShape which closed just this month. The total must exceed 10 deals I've led over the years that resulted in investments ranging from $250K to $2.3MM into each by TCA members. Four of these have received follow-on VC funding so far. From that experience base, let me draw some conclusions...

I see only marginal correlation between "heavy" due diligence and deal success. Usually, the problems are revealed early and remain problems throughout the due diligence period.

Past successes of the management leadership team are the best indicator of success for the venture. Whether "intraprenuering" within a large organization or "entrepreneuring" past ventures, there is a strong correlation (I believe) between seeing it before and doing it again.

Too little money raised dooms a fragile startup more than simple bad execution. Management never takes its eye off the fundraising process long enough to concentrate on the business itself; and there is less than a 50% chance of a follow-on round in the average deal.

A deal without an enthusiastic lead or two languishes from the start. It is a fragile line between diligence lead and salesperson, but someone needs to step forward into the "selling" role early and be balanced by others on the team. Failure to find such a lead early should be enough to shelve the deal until one steps forward or is found by others interested but not committed.

A deal without a member with industry knowledge is at increased risk. Too many plans look good when TCA diligence teams don't know what they don't know. On the other hand, just to mark the point, too many industry veterans are jaded about most any startup in their field, knowing too much about the pitfalls.

Deals without some sort of strategic alliance in place at funding are the riskiest of all. Validation by a respected industry player on the supplier or customer side is another of the strongest indicators of success.

Overly aggressive due diligence teams kill deals for the wrong reasons. Every plan and every management team in every industry niche will not survive extended scrutiny over time. There is a point, usually earlier than TCA teams are willing to admit, when risk balances knowledge and a decision to continue needs to be pushed, letting investors make the ultimate decision.

New TCA members tend to invest in deals too soon, too heavily and without understanding fully the risks. We need these new members just for this reason, but we also need to protect them against themselves with good coaching and mentoring.

There should be a finite cutoff for the due diligence process. Some of our deals seem to create a never-ending process of additional input from members on and off the team, making those deals seem to be in trouble when in fact the information usually becomes less and less important to the decision if revealed late in the process. I do not care much whether the shorter time cutoff results in fewer or more candidates for investment, just that companies and members are put out of their misery more quickly than at present. It is usually the same few that drag out the process. A finite deadline would tend to send a message to those without singling them out.

Many members make their investment decisions principally by following successful deal leads into their subsequent deals. There is nothing wrong with that. It's a blessing to have members do well and some even join management either before or during the investment process.

The process is too well orchestrated and too much of a burden upon the candidate companies. One pre-screening session, one or two or more screening sessions and four dinners lead most companies that get this far to several follow-on meetings. A company in San Diego could easily schedule eight trips to make presentations and attend meetings for what they correctly perceive as a single investment effort. Between technology (video conferencing, podcasting, GoToMeeting, phone conferencing) and streamlining the number of appearances required, companies should be allowed more latitude to skip through the process when warranted by a strong deal lead or outside lead with skin in the game.

I could add more, but hope these thoughts help a bit. All the best,

Dave Berkus
April 5, 2007