Tom Weithman runs the CIT GAP Funds which makes seed-stage equity investments in Virginia-based technology and life science companies. Besides VC's there's money from the State of Virginia, the federal government, SBIR loans, too.

Advice for entrepreneurs? "It's a buyers market and the decision cycles are gonna be longer, the due diligence likely more rigorous."

Show #211 (31:34)

Upcoming events:
Fast Pitch at UCLA Tuesday Feb 24th 5-9pm

March 22-23, the SW Regional Angel Summit in Tucson hosted by the Desert Angels.

CANCELLED: UCSD's 6th Annual Entrepreneurship Conference February 28th.

Hi Frank, I found your show on iTunes a few months ago and have been listening to it religiously ever since. I work at a gold mine in Carlin, Nevada (just outside of Elko) and am able to listen to your show on my iPod while I drive an enormous dump truck around a giant hole in the ground. I thought you'd get a kick out of how far out in the boonies your show has reached so I attached a photo of my rolling "office".

Thanks again for the show; the information is invaluable. I'm still not sure how an isolated, blue collar worker like myself can attract capital and talent to my business - but at least now I know where to look and, more importantly, what you guys are looking for.

Sincerely,

Jeff Scott
Founder, Jobwash.com

PS. Shows 88, 92 and 94 have been my favorites so far - keep up the good work Frank!

Make your plans now!

Register at PitchtheAngels.com for the Feb 24th Fast Pitch at UCLA. Want to pitch? Don't delay, register today! Food, wine and great networking. A chance for entrepreneurs to give a 2 minute overview of their company to a panel of judges and 300+ attendees at Korn Hall at UCLA.

This could be your breakthrough!

(06:46)

It started with an email; Charlie Hobbs would renew his membership in Tech Coast Angels, but only after much soul searching. He was a founding member 11 years ago, so he's seen everything. As we get started he says "there's too much bureaucracy today". Today's interview offers a rare critical look inside the organization from a long term angel investor.

Show #210 (42:35)

Here's Charlie's email: "For some time I have been struggling with whether to renew my TCA membership for 2009."

Yesterday I made a decision and sent my check. This decision was probably made more on the basis of friendships than on the prospects of making money because I think the TCA model is broken. The Venture community has changed significantly since TCA was formed in 1997. The results of my thought process may be of interest to other members so your New Year Message prompted me to try to summarize it for others.

The original model was based on investing a relatively small amount of money in an early stage company and then spending a lot of time helping them get off the ground and to a point where a VC would make a follow-on investment at a higher price because of the value we had added to the company. At that time most of the VCs were experienced and ethical. Unfortunately, that is no longer the case. The last ten years has seen a rapid growth in the number of VCs staffed by partners with no, or limited, VC experience who do not understand the role of angel investors. We have failed to adapt, continuing to rely on the old model.

We have not adjusted our model to work with or avoid the new wave of inexperienced unethical VCs. Unfortunately, most of our portfolio companies are not attractive to the reputable established VCs because of slow growth rates. Thus we tend to get stuck with the second-rate VCs who try to make up on the front end what they can not accomplish on the back end. When dealing with VCs we tend to end up with ones who want cram-downs and pay-to-play without understanding the role of angel investors. Classically, our role has been to help companies get started -- not to fund them in later stages. We need to change our investment objectives to favor companies that can reach cash flow breakeven on money that we can provide looking toward an acquisition exit rather than a VC follow on.

A second major problem that we have faced is making investments that end up being life style companies -- comfortable for the founders and management but no exit for the investors. We have a number of those.

Fortunately, there are a few steps that we can take to improve our situation in both cases. We should:
* Include a mandatory redemption provision in all of our deals.
* Write term sheets that provide for TCA control of the board until specified milestones are met.
* Provide for adjustments in the conversion rate if projections are not met.
* Primarily invest only in companies that can reach a sustainable cash flow break even position on money that TCA can provide.

I can provide explanations and examples of each of the above if anyone is interested.

I hope this will provide some basis for reexamining our operations.

Charlie

Austrian economist Joseph Schumpeter called the lifeblood of capitalism "creative destruction". As the topsy turvy business world announces more layoffs today, this concept offers some cold comfort. Brad Stone and Ashlee Vance report in the New York Times, "A Broken Business Model?" on the impact of $200 laptops, streaming TV and free software and its negative impact on the fat margins of many tech companies, but the opportunities for many others. Is the era of ubiquitous computing upon us? Read the complete article...

Mission Ventures' Dave Ryan aptly describes the current challenges facing venture capital markets, "like catching a falling knife". Dave appeared this morning at the Orange County Venture Group's Financial Outlook for 2009. Also participating were PIMCO Executive VP Ramin Toloui, Clearstone Venture Partners' Jim Armstrong and Montauk Triguard's Sam Tang. If Montauk Triguard doesn't ring a bell, note that Sam manages Pacific Life's private equity portfolio.

What did they say? As the crowd dispersed I overheard, "there were a lot of direct comments, no spin". Direct indeed. Jim begins with a rhetorical, "are we at a crisis point?" then adds, "it's a bad time to sell a company, syndicators are gone, everthing is changing". And green tech funds are, "an absolute wipe out".

Tang gave an overview of his world which few in the audience had experience in. He's dealing at a different point in the marketplace; he places funds in VC funds. "The mega-buyouts overpaid and as a result, financial performance suffers. We're coming off an over-funded time" with pain and suffering ahead for many, "green funds are next". After ignoring the "law of fear and greed" these current times will become a "cleanup phase" with "less money raised and fewer venture funds. VC funds will be returning to their roots, if they can survive, and be more disciplined." Summarizing, he sees "a flood of insolvency".

Dave Ryan won the gray hair contest with 23 years VC experience dealing with early stage IT companies. Mission did no new investments in the 4th quarter, instead they focused on assessing their portfolio companies' runways and encouraging their CEOs to increase them. He, too, reported that "strategic syndicate partners have abandoned them forcing MV to invest more alone". And investing? "Why buy when everything is slowing?" Turning to advice for entrepreneurs in the audience, he offered, "husband resources, watch every dollar and outsource" if appropriate to keep fixed costs down. To entrepreneurs beginning their startups, "don't give up your day job", you may need it to finance your new company in the short term.

One of the most telling comments was part of a response to a question from the audience. Jim described "$90million and $80million valuation companies are approaching, looking for funds with valuations now at $20M or $15M". That's tremendous compression in the marketplace. Is it possible that some of those opportunities might look attractive to VCs? If so, making it more difficult for early stage entrepreneurs to gain VC attention and the funds they seek.

On a positive note, the meeting was well attended and it was nice to see everyone ;)

Got great technology? Shopping for venture capital, but need more than part-time mentoring? Meet Matt Ridenour, Momentum Venture Management's Managing Director. He'll show up with the capital and stay to manage the company for the next 6 to 12 months. Matt's making his return visit to the show. He's funded Tal Golan at Sendio and TCA portfolio company Thermark. Want more Matt? Listen to his earlier interview.

Show #209 (35:38)

According to Bill Payne:

The Vegas Valley Angels are changing our operating mode in light of the current economic times. We will continue supporting portfolio companies and looking at deals syndicated by others but are not inviting local entrepreneurs to apply to us for funding. We simply do not have the resources necessary to lead new deals at this time. During the coming year, we will be meeting less frequently than in the past. We intend, however, to return to our normal operations in 2010.

Alana Semuels writes for the Los Angeles Times today, "Venture capitalists apply the brakes" regarding the steep decline in fourth quarter investment in Southern California.

"Venture capitalists slammed shut their wallets during the last three months of 2008, investing 45% less in Southern California start-ups than during the same period a year earlier. The sharp fourth-quarter decline to $422 million from $764 million, turned what was expected to be a full-year gain into a loss, according to the Dow Jones VentureSource report. Venture funding to the region's businesses fell 20% to $3.2 billion.

"There was just one bright spot: investment in renewable energy continued its tear, climbing nearly tenfold for the year."

Full article Quoted: Aweli's Tony Katz, Palomar Ventures' Jim Gauer, Ernst & Young's Michael Schoenfeld and Frank

Can't get enough Bill Payne? Or maybe it seems like a year has gone by since you last heard from Dave Berkus? Today's show brings Bill, Dave and Houston Angel John Filla together to stare into the crystal ball and make those 2009 predictions.

What to listen for: Since it's a new year it's time to brush up on terms. For example, pay-to-play rounds, never popular, some say angels will see lots of these terms brought to the table by VCs. What are pay-to-play terms and why do they become popular when times get tight, like now? What's worse than P2P? We cheerily describe the dreaded down-round and onerous liquidation preferences. And are we doing ourselves a disservice when we do flat rounds? Oh, what a year this could be!

Show #208 (54:08)

Been thinking about the advantages of doing deals as LLCs? John Filla runs the Houston Angel Network, the largest angel organization in Texas. They do things differently in Texas, for example they charge entrepreneurs $250 to apply and then half of their deals are set up as LLCs or joint ventures, something unique to Texas. Why do these legal structures matter? They offer "greater leverage later on, for subsequent negotiations".

What to listen for: 2009 predictions, of course, but also how about valuations? John says entrepreneurs approaching for the first time have not factored in the new economic realities, but experienced entrepreneurs who are circling back for additional funds, they are more aware and their deals reflect that.

Is money still available for entrepreneurs? John describes that there could be more than before the meltdown! Exits? I'll let John describe his successes.

Show #207 (48:32)