Tag Archives: Angel Investor

Technology

INTERVIEW OF STEPHEN FLEMING

SOMETHING YOU MAY NOT ALREADY KNOW

There are at least four programs at Georgia Tech that promote the growth of technology companies:  the Venture Lab helps Georgia Tech students, faculty and staff start businesses based on research from Georgia Tech, the Advanced Technology Development Center helps new startups that may, or may not, have originated from Georgia Tech, Tech Partnerships, which can be hired by any entity or government agency to exploit technology on a contract basis, and a grant application assistance program described in the next sentence.    There is a federal grant program called Small Business Innovation Research, or SBIR.  Grants can be as high as $100,000 in the first phase and $750,000 in the second phase.  A department  at Georgia Tech, that is funded by the state, will help not just Georgia Tech, but any qualified Georgia related entrepreneur,  to apply for SBIR awards.

ROB:          This is Rob Hassett with btobmagazine.com.  Today, I’m going to be interviewing Stephen Fleming who is in charge of commercialization activities at Georgia Tech.  You know Stephen, you’re the only person I know that went to Georgia Tech and majored in a science or engineering field and had a 4.0.  I don’t want to put you on the spot, but I’ve never known anyone else who did that.

STEPHEN:      It was a lot of work.  I enjoyed school.  I had a lot of people, you know, complain about their time at Tech.  You know, Ma Tech screws you and things like that.  I actually had fun at Tech.  I enjoyed it.

ROB:               And after Tech you worked for Bell Labs, right?

STEPHEN:      Right.  I worked for Bell Laboratories and I usually describe that as back when that meant something, back before divestiture, when we still had, I think it was, seven. Nobel Peace Prize winners on payroll, and I think three of them were in my building.

ROB:               And what were you doing for Bell Labs?

STEPHEN:      Working in fiber optic lasers.  My specialty is optical physics, and I was working on a new class of a conductor laser to be used for fiber optic telecommunications.

ROB:               And then you went to Nortel?

STEPHEN:      Nortel, in the early ‘80s, after the divestiture.  This was back when Nortel was still a fabulous company to work for.  Obviously, it’s fallen on hard times in the last year or two.  I worked through the engineering ranks, system engineering, and got into product management, and then into general management.  So I did a little of everything at Nortel.

ROB:               And you worked at other companies and eventually ended up at a venture capital firm, didn’t you?

STEPHEN:      Right.  When I left Nortel, I did a venture-funded startup which went spectacularly broke, and of course, that qualifies me to give people advice on how to do it themselves.  So I was recruited into the venture capital business here in Atlanta as really a spin out of the Georgia Research Alliance.  And it’s ironic because fifteen years later, I’m now working closely with the Georgia Research Alliance; in fact, with some of the same people.  We raised about $260 Million of venture capital, which in the southeast, made us a pretty substantial fund, focused entirely on early stage technology.  We did a bunch of deals mostly here in the southeast, made a little bit of money, and were, I think, a part of the ecosystem that flourished here for a while in the late ‘90s and early 2000s.

ROB:               That venture firm was Alliance Technology Ventures, right?

STEPHEN:      That’s right.

ROB:               How many of the companies that you worked on went public?

STEPHEN:      I did four IPOs.   I did 18 deals total and I think 7 or 8 of them got acquired at some sort of positive number and a couple of them went bankrupt.  I mean, you know, that’s the nature of the game.

ROB:               Can you name a few that listeners may be aware of?

STEPHEN:      The only ones that they might have heard of is RF Micro Devices, which is a semiconductor company up in Greensboro and Highpoint, North Carolina, which makes semiconductors for cell phones.  Now it’s for almost any wireless device, a big public company.  And the other which you’d at least recognize the brand name of, at the time when I invested in it, it was Sportsline.com.  It is now CBSSportsline.com.  It belonged to Viacom, and it’s the website for CBS Sports.

ROB:               Sounds good.  And then, at some point, was it about four years ago, you became responsible for the commercialization of inventions at Georgia Tech?

STEPHEN:      Right.  When I was in the venture capital business, I had pulled about 5 deals out of Georgia Tech research, so I had some familiarity with the other side of the equation.  As you mentioned, I’m a Georgia Tech alum.  I love Georgia Tech.  I’ve been involved with Georgia Tech ever since graduating.  And when I got out of the venture capital business, I started doing some volunteer work there on campus.  That volunteer work proved the axiom that if you set the price of your time at zero, the demand is, indeed infinite.  I spent a lot of time here at Georgia Tech doing volunteer work and somehow wound up on payroll.  I’ve been here full time for the last 4 years.

ROB:               Stephen, about how many inventions are made at Georgia Tech that you guys become aware of each year?

STEPHEN:      We don’t look at any of the classified research, and there is a little bit of classified research done at Georgia Tech, actually a lot.  But we don’t see any of that.  If you filter that out, we’re looking at probably about three hundred invention disclosures a year which, for a university without a medical school, is actually quite a lot.

ROB:               How many make it into the venture lab program that you are in charge of?

STEPHEN:      Usually between 10-20%.  So I’d probably say 30-40 a year have at least some combination of strengths, which would include both what our folks and those who have private sector backgrounds, we’ve all worked in venture-funded start ups, and believe there’s potential for a start up, and that there’s somebody on the invention side who’s interested in a start up.  You really need to have both — neither one is sufficient alone.

ROB:               About how many make it out of your program per year?

STEPHEN:      Well, we just had a graduation ceremony about a month ago where we graduated 7 for the year.  And that’s probably about right, assuming there’s a time delay.  So I wouldn’t say that, you know, 40 come in one year and 7 make it out, but it’s probably on that order with a couple of years’ time delay built in.  I’d like to get to maybe 10 a year, but you know, that’ll happen.

ROB:               And I know you can’t give specific figures but generally, what does Georgia Tech get out of the deal?

STEPHEN:      Well, there’s a couple of things.  The obvious one is the least important which is licensing revenue.  We actually own the intellectual property; that’s the way that federal law works.  We write a license, a contract, with the start up company, and Georgia Tech gets a mixture of equity in the start up company and some royalties on the sale of the products that are based on that technology.  And that’s a nice thing to happen, it pays a couple of bills around here.  The more important things we get are more difficult to quantify.  For example, these companies that form, maybe they really want the next generation of the technology, and they sponsor research back at Georgia Tech.  That will pay for graduate students to do their thesis work on building the next generation of technology.  These companies will hire Georgia Tech graduates, so it’s a place for both undergraduates and graduates of Georgia Tech to go find careers here in Georgia without having to leave the state.  If they’re successful, they’ll actually give money back.  You look at the Klaus Advanced Computing Center at Georgia Tech; it’s a gorgeous, quarter million square foot building, and the core gift behind that was given by an entrepreneur who started his company as a sophomore here at Georgia Tech.  So there’s a lot of benefits that flow back to campus other than just the licensing revenue.

ROB:               And also sometimes you license the technology directly to a large corporation, right?

STEPHEN:      Oh sure.  You know there’s a lot of technologies that don’t belong at a start up, and it’s kind of the reverse of what I said a few minutes ago.  Either we don’t think that the technology has stand alone potential, in other words, it really belongs as a feature or as a part of an industrial process for a bigger company, or it may be just that the inventors have absolutely no interest in being involved in a start up.  And in that case, it’s kind of hard to build a start up if the creators of the intellectual property aren’t at least neutral to supportive, and if they’re hostile, the idea is very difficult.  So we license things to Intel.  We license things to IBM.  We license things all over the map.

ROB:               And when the inventor starts a small company, you help put together a team if necessary, right?

STEPHEN:      Yeah.  We really focus on three things when we’re trying to get a start up out the door here at Venture Lab.  Those three things are:  First, pulling together a business plan that makes sense where all the numbers add up, and we can believe that in the face of the competitive environment that there’s justification for creating a new company.  The second is recruiting management as you said.  We’re not really big fans of having our professors become CEOs of companies.  We want them to be involved but we don’t want them to be the person in charge.  So we recruit and we play matchmaker and find successful entrepreneurs here in the community.  And the last thing we do is find some money.  We’ve got several little pots of money around that we can dip into for small amounts and help get the company through that very, very early period.  Some people call it the valley of death.  I think that’s over dramatic, but you’ll find that phrase a lot in literature for getting a company started up and ready to talk to customers.

ROB:               And many of the small companies, after they finish going through the Venture Lab program, they end up at the ATDC for awhile too, right?

STEPHEN:      It’s not required; it certainly is encouraged.  You know our graduation criteria out of Venture Lab happens to look a lot like the entrance criteria into ATDC; that’s not by coincidence.  You know we’re corporate siblings so we’re both part of the same organization, the Enterprise Innovation Institute at Georgia Tech.  And a lot of our companies do find that ATDC is the logical next step for all the benefits that it provides, both in terms of the bricks and mortar facility, but more importantly, in terms of the coaching and in terms of the connections they can develop while being part of the ATDC for a couple of years.

ROB:               And just for the benefit of the listeners who may not have lived in Atlanta a long time, the ATDC is the Atlanta Technology Development Center which is located at Georgia Tech in the same building as Venture Labs, right?

STEPHEN:      Except I’ll correct you on two things.  It’s the Advanced Technology Development Center, not the Atlanta Technology Development Center.

ROB:               I’m sorry.

STEPHEN:      The reason that’s important is we do have a facility in Savannah.

ROB:               Oh okay.  And you also do something, you run something called Tech Partnerships?

STEPHEN:      Technology Partnerships is another group here at Georgia Tech.  We’ve developed a lot of hard earned knowledge on how to truly commercialize technology, taking it from the laboratory to the market, whether it’s through a start up or through it’s licensing.  And that knowledge is worth something.  So we have a group, as part of commercialization services, that does that on a contract basis, and we’ve had contracts .  We currently have one with NASA; we’ve done it for the Navy; we’ve done it for a foreign government in partnership with a U.S. company.  So we actually will help other people figure out what their technology is, which of their technologies could be suitable for start ups, and help do things much like we do for Venture Lab with the exception that we don’t actually put money into those.  We only put money into the companies that have Georgia Tech intellectual property.

ROB:               Understood.  And then you also help small companies apply for research grants, right?

STEPHEN:      There’s a federal program which has been around for a while called Small Business Innovation Research, or SBIR.  This is a program where 11 agencies of the federal government essentially have to pay a tax of  2½% of their research budgets which has to go to qualified small businesses.  These are usually on the order of about $100,000 to start with, and they grow to $750,000 in the second phase.  This is wonderful money for start ups.  Because it’s aimed at start up companies, you’re not competing with the big boys; you’re only competing with other start ups.  There’s no equities; they’re not taking ownership, and there’s no debt component.  You don’t have to pay it back.  It’s a pure grant.  Really, all you have to do is find an agency that wants something that you have, convince them that you can develop it, and go through the solicitation and the competitive process, and it is competitive.  Once you win it, you have that money to work on developing the technology, giving back whatever deliverable the agency has asked for.  It has helped create or strengthen the growth of your company.  It’s a great federal program.  We do have a department here at Georgia Tech that is funded by the state to help anybody in Georgia, not just Georgia Tech companies, but anybody in Georgia who is interested in exploring or in applying for this SBIR awards and we help with that.  That’s a free service we provide.

ROB:               Stephen, what is the Seraph Group?

STEPHEN:      Seraph Group is a different hat that I wear.  It’s an investment vehicle aimed at high net individuals.  Mostly folks who have either looked at Angel Investing and decided that it takes more time and effort than they have because they have a day job, or they’ve tried Angel Investing and discovered that it’s a lot harder than it looks and they’ve lost a lot of money.  So what Seraph Group does is provide them a vehicle by which they can invest a certain amount of money.  Seraph Group is set up to make capital calls.  Seraph Group charges management fees and carries interest.  Seraph Group has full time due diligence staff.  Seraph Group has all the capabilities of a venture firm.  It simply does not take money from the large institutional investors so the individuals aren’t trying to compete with a pension fund to get into the mix.  Seraph Group targets early stage deals, not solely technology.  Although I’d say a preponderance of the 18 deals we’ve done have been technology related.  And the sweet spot is that between a $250,000 and $1.5 Million into a serious A-round.  That’s where Seraph Group is targeting, and that’s nationwide.  So we have 130 investors scattered all around the country.  And we’ve done deals in half a dozen states at this point.

ROB:               And you were one of the founders?

STEPHEN:      Well, I helped assemble it.  The true founder is the one full time partner.  I’m on the investment committee and helped to get it organized and helped to recruit some of the investors.  Now I spend a little of my time looking at the deals that come through Seraph Group’s deal flow and help them make the decision about which ones to invest in.

ROB:               What range of money does the Seraph Group generally invest?

STEPHEN:      Like I said between $750,000 and $1.5 Million is kind of the sweet spot for early stage investment for us.  And that’s an area in which a lot of funds have been kind of abandoned.  It’s really up to the Angel market and to new intermediate vehicles like Seraph Group to fill that.  So deal flow has not been a problem.

ROB:               So does Seraph Group invest in start ups or do they have to go through a friend an family round first?

STEPHEN:      They don’t have to.  A lot of deals do go through friends and family rounds just because that’s kind of the natural progression, but Seraph Group absolutely has been first money into several of the deals we’ve done.

ROB:               I believe you mentioned to me that sometimes, Seraph Group will invest in a deal, and then some of the Seraph Group investors that are particularly interested will buy the deal from Seraph Group, and take it over.

STEPHEN:      Yeah.  The way the model works, most of the investors that we have are involved in Seraph Group.  To be blunt, they have a lot more money than they have time.  So they don’t have a lot of time to look at individual deals.  They don’t have a lot of time to manage individual deals, but they do have significant financial ability.  So what we can do is we make the investment so that Seraph Group is the general partner and the investors are limited partners.  The general partner makes the investment.  Then it shows that through a showcase, that we do three times a year, to the limited partners.  And the message is essentially that if you like this deal, if you’d like to put more of your financial wherewithal into that deal, we’ll transfer a portion of  Seraph Group’s holdings to you at Seraph Group’s cost.  We don’t make any money on that transaction.  But we get our money back from the investment that we’ve made, and it essentially lets us recycle our money if we do it right, 4-1 leverage.  To be accurate, we’ve got 130 investors at a $100,000 a piece.  That means we have $13 Million under management.  But since we’ll do this 4-1 leverage, we get to act like we’re a $65 Million fund because we’re making investments that would be appropriate for a $65 Million fund.

ROB:               Also, you are involved with a group that’s trying to develop an airplane that can actually make it into orbit, right?

STEPHEN:      Well, I’m involved in a spaceship company.  I don’t know if I’d call it an airplane that makes it to orbit.  That’s going to take a little longer and cost a little more than we’re working on right now.  We are building a runway-launched vehicle, which takes off horizontally just like an airplane, then goes vertical and will go into space.  It does not go into orbit.  There’s a difference between being in space and being in orbit.  Space is just a matter of altitude, whereas orbit is a matter if speed.  You have to be going fast enough that when you fall you don’t hit the ground, which is essentially the definition of orbit.  But we are building a suborbital; in other words, just a straight up and down vehicle which will be a really fun ride for passengers.  And there’s also some scientific and industrial applications for the flight that we’re selling some seats for that as well.  But the one that catches everyone’s attention is obviously passengers.  The company’s called XCOR, X-C-O-R, and we have partnership with a company that is selling tickets for us.  So far, we’ve taken deposits on 22 tickets for this very fun ride.

ROB:               How much is a ticket?

STEPHEN:      $95,000 which is a lot of money, but it’s not the $20 Million which is what people thought space tourism was going to cost which, of course, gets you to the international space station.  We don’t go to the space station.  You don’t get to hang out in orbit for a week.  You are strapped into the seat of a small vehicle that looks a lot like a jet fighter except it’s powered by rockets.  And you get a really fun ride going up, and you get a great view.  You get a little bit of microgravity, which people call zero gravity.  And you come down and land at the same runway you took off from.  There seems to be a pretty significant category of individuals who believe that’s absolutely worth $95,000, and those willing and able to pay.

ROB:               Has the aircraft, the rocket, been tested yet?

STEPHEN:      The engines have flown in a winged vehicle that we built under contract to a private company.  So the engine has been flown, I don’t know the right number, but probably on hundreds of flights.   So it is a well-tested engine.  The actual vehicle is still under construction so that hasn’t been tested yet.  But I’ve gone out and sat in the cockpit of the vehicle being built, and I fit.  So I’m excited about getting a chance to ride it one of these days.

ROB:               Wow!  Stephen, if anybody wanted to get in touch with you about any of these programs, is there one number they should call, or a website?

STEPHEN:      I’m pretty easy to find on e-mail; just Google me.  You have to put “Stephen Fleming Atlanta,” or “Stephen Fleming technology,” or “Stephen Fleming Georgia,” because if you just put “Stephen Fleming” you will find out a lot about New Zealand Cricket.  There’s another Stephen Fleming out there who runs the Cricket team.  But I’m pretty easy to find and all my contact information is on my blog, which is academicvc.com.

ROB:               That’s all they need?  They could get all your information at academicvc.com?

STEPHEN:      That’s right.

ROB:               Well, I really appreciate your being on the program, and it’s been a pleasure Stephen.

STEPHEN:      I’m happy to do it anytime.  Thanks for the call.

ROB:               Thanks a lot.

 

 

 

Raising Capital

INTERVIEW OF VENTURE CAPITALIST – Said Mohammadioun

SOMETHING YOU MAY NOT ALREADY KNOW

Said says that the information that’s really important for a business plan is what helps somebody else understand the gist of your business: your market, why your customers would be interested, why would they want to pay what you think they would pay.  What is not useful is having a lot of pro forma information where stuff could be true or not be true about any company. A good business plan is more likely to be four, five, six or seven pages as opposed to forty or fifty pages.

ROB:            This is Rob Hassett for btobmagazine.com, and today I’m going to be interviewing Said Mohammadioun who is the managing partner of Tech Operators, LLC.  Tech Operators, LLC is a venture capital firm.  Said, good morning.

SAID:            Good morning, Rob.  How are you?

ROB:            I’m doing good.  How are you doing?

SAID:           Very well, thank you.

ROB:            Now Said, I know that you were previously an entrepreneur.  You were the CEO and founder of Samna Corporation which  developed one of the best word processing packages for the personal computer.  You ended up selling out to Lotus, right?

SAID:           That’s correct.

ROB:            Right, and you also were the CEO of Syncrologic, right?

SAID:           That’s correct.

ROB:            And that helped sync phone data on phones that were on the Verizon service to computers, right?

SAID:           That’s right.  We provided a service through Verizon to sync your calendar, contacts, and e-mail, so if you had a e-mail capable phone, other than Blackberry, and you wanted to have your e-mails pushed to you, that was through our service.

ROB:            And you sold that company to Nokia?

SAID:            Eventually, we combined with a company called Telesync and then sold the whole thing to Nokia.

ROB:            Said, who are the other partners of Tech Operators?

SAID:            My partners are Dave Gould, a former CEO of Witness Systems, Tom Newnan, a former CEO of Internet Security Systems, and Glenn McGonnigle, a former CEO of Vistascape.

ROB:            A strong group.  And how much have you guys raised approximately?

SAID:            We’re not finished yet.  We are hoping it will be somewhere around 30 million dollars.

ROB:            What size investments are you looking for?

SAID:            We’re looking for investments, companies that are early stage but past the concept period.  We’re looking for companies that have their product or service up and running, and have some number of customers, perhaps revenue of a million or two million dollars a year.  We think our money and our background will be helpful to businesses and that’s where we can make the most contribution.  Our investments initially may be one or two million dollars, but we expect that over a period of time, it’ll end up averaging about four millions dollars per portfolio

ROB:            And what industry are you targeting?

SAID:            Software.  Computer software, and specifically we’re looking for software as a service.  We like the small business market a lot, so we ideally are looking for software as a service to the small business market.

ROB:            And what is the advantage of software as a service to the small business market that you like?

SAID:            Well, software as a service in general is a good way of delivering an application to businesses because you can basically have a much, much higher effective rate of success.  The software is operated and run by the people who designed it, basically the people who are experts at it, and the businesses don’t have to go through a learning curve and they don’t have to spend their resources doing things that are not business critical to them.  The function of the software may be business critical, but running it and maintaining and so on, should not be.  This particularly applies to small businesses because small businesses don’t have IT departments, so they basically live vicariously through the services of part-time consultants or people who they know.  So they don’t end up spending a whole lot of time making sure that their computers and the data is well taken care of.  So for them, offering computing in general as a service is very, very important.

ROB:            And it’s provided over the internet; is that how it works?

SAID:            That’s right.  You’re connected through the internet, and basically all you need is the PC and a broadband connection.

ROB:            And you don’t need a server in your office?

SAID:            You specifically don’t need that server in your office; and therefore, you don’t need anybody to take care of it.

ROB:            It’s all taken care of at the site of the vendor, is that right?

SAID:            That’s correct.

ROB:            Said, I know you’ve mentioned this before and you alluded to it a minute ago, but what will you actually provide besides money?

SAID:            Our name is indicative of the strategy we’re trying to employ.  We’re all operators of companies; we’ve owned businesses in the technology market before, and what we want to offer to companies is money, but also the availability of us as experienced operators and our network.  We’ve worked with a lot of very good people, so we think we would be particularly useful in the stage of the company where the concept is proven and you know there’s a business, and the execution is the key point.  We can help them grow faster and maybe skip some of the mistakes that we’ve made, help them find the right people, help find distribution, help with strategy, you know to whatever help they feel they need, we are very likely to have had that experience before amongst the four of us.

ROB:            Will you guys actually visit your clients on a regular basis?  I said clients, the companies you are investing in on a regular basis?

SAID:            Yeah.  We expect to be quite available to our portfolio companies to the extent of,  if they wanted us to spend a day a week with them, we’d be happy to do it, as opposed to a typical venture investment where you tell them to show up for the Board meetings and maybe make a couple of calls in between.

ROB:            As far as the money you’re putting in, what form of investment do you expect to make?

SAID:            It will always be in equity form, preferred stock basically which is a normal easy type of instrument.

ROB:            And you’ve mentioned to me before that valuation as a criteria for a potential portfolio company is overrated.  What did you mean by that?

SAID:            Well, what I meant was that entrepreneurs, and sometimes venture capitalists as well, tend to focus on, you know, to put an inordinate amount of focus on evaluation of the investment process.  In my humble opinion, it’s a misguided focus.  You know, valuation has to be in the general ballpark, but whether it’s a little bit less or more is not all that important to either side.  What matters is whether there’s a good fit.  If you have the right investors and they help you, then you end up winning.  And if you win, everybody comes out okay.  And if you don’t win, it really doesn’t matter what the valuation is.  So it’s not the critical success factor.

ROB:            Said, in deciding whether to invest in a company that meets your general criteria as far as the one or two million a year in income and meeting the SAAS model, what are the factors that would make you choose one company over another?

SAID:            Well, there are some markets that we know a lot more about than others.  We know that two of my partners have strong security software backgrounds.  My background is enterprise software and mobile software.  Dave’s is primarily enterprise software, so those are areas that we know reasonably well, to the extent that some things in those areas are easier for us to evaluate. It’s more comfortable, as opposed to other software where we have to learn the space. Our experience still applies, but in a more general way.  We’re basically looking for software with viable markets.  We think there’s a lot of possibilities and services that would be good for small businesses.  We’d like to  have specialized apps for enterprises that are interesting and have a lot of growth potential.  Other than that, we’re hoping to look at all software services.

ROB:            How important is the business plan?

SAID:            You have to get the gist of what your business is across to your perspective investors, but it doesn’t have to be a big long document.  The information that’s really, really important is what helps somebody else understand the gist of your business, understand the gist of your market, why your customers are interested, why would they want to pay what you think they would pay, what is the competitive landscape, etc.  What is not useful is having a lot of pro forma information where stuff could be true or not be true about any company.  That really doesn’t serve a purpose being in your business plan.  It just adds bulk and hides the more germane factors that we really want to learn.  So I’m perfectly fine with a business plan that’s four, five, six or seven pages as opposed to something that’s forty or fifty pages.

ROB:             Do projections matter to you that are in a business plan?

SAID:            Having a model matters, but there has to be some substance behind it.  Projections that are just exercises, operating a spreadsheet, don’t add anything; we all know how to do that.  But the model that has some substance based on real data from the market is very smart.  And if they haven’t done one and we’re interested in the company, then we’ll help them do it.

ROB:            And it sounds like you really want the principals of your companies to understand their market.

SAID:            That’s the key to any business’s success.  Smart ideas, hard work and money, all of those help, but you’ve got to understand your market.  To be successful, you’ve got to figure out what it is that your customers are willing to pay for and other factors that are market related.

ROB:            Said, what do you think about these broker groups that tell entrepreneurs that they’ll try to find the money from venture capitalists? Do you believe they’re helpful?

SAID:            In most cases, I don’t believe that’s very helpful.  It depends on how much money you’re trying to raise.  At later stages where some company’s looking for tens of millions of dollars in a single capital raise, it makes some sense because your type of investors change and so you can have a banker who takes you to different kinds of institutional investors.  But for early stage companies, I think most venture capitalist are not predisposed to want to deal with a broker.  They want the money that they invest to go towards growth in the company.  They’re unwilling for that money to pay for intermediary fees and so on.  And generally, you know, if you’re an entrepreneur, and you understand your business, you’re supposed to be able to go out there and pitch it to people.  If you can’t do that and you have to have somebody else do it for you, then perhaps that’s a different problem.

ROB:            Are referrals helpful from lawyers or accountants or others?

SAID:            The referrals are helpful because … because depending on who’s referring you, then you know that the company’s already made it through their filter, so referrals are helpful.

ROB:            Said, if somebody is in a field other than what you’re targeting, other than software as a service, would you consider investing in them?

SAID:            It is unlikely.  If it is still software, we might because we understand the market.  If it is something other than software, then it’s very much not in our park.

ROB:            Said, if anyone believes they fit your criteria and they want to contact you, how would they reach you?

SAID:            Well, the best way would be through our website.  We have a website called techoperators.com.  There’s a way to contact us by e-mail there.  They could either send it to me directly at said@techoperators.com, or just send it directly to info@techoperators.com, which makes sure that two or three of us actually see it.

ROB:            Said, thanks a lot for being available today.  I think this is going to be very helpful to a lot of entrepreneurs.

SAID:            I hope so.  It was a pleasure talking with you Rob.

ROB:               Appreciate it.

 

Raising Capital

INTERVIEW OF HALL MARTIN

 SOMETHING YOU MAY NOT ALREADY KNOW

Among other things, Hall has taken a unique approach to encouraging angel investors to invest in video games.  He puts together panels of up to ten (10) investors who listen to pitches from up to ten (10) entrepreneurs.  This approach helps avoid investors being distracted, as they are at less focused events, by competing proposals from companies from outside the video games industry that have business models with which the investors  are much more familiar.

Q:           This is Rob Hassett with www.tellmesomethingidontalreadyknow.com.  Today I’m going to be interviewing Hall Martin, who is the director of the game funding forum in Austin, Texas.  Hall, I understand you got in to the gaming industry in Austin, Texas and you realized that there was a problem raising money in the industry.

A:            Well recently in the last four or five years, I’ve been watching the gaming industry grow, especially in Austin.  We’re now the third largest gaming community in the country for development, but have seen just very little attraction to investors for the gaming community for various reasons.

Q:           And you decided to try to do something about that, didn’t you?

A:            That’s right.  Well I noticed that gaming deals would come to our Angel network, the Central Texas Angel Network, but they would never really get traction, not even in to the follow up phase.  And I found that Angel investors just had a hard time understanding the business models and the technology, and the space in general  for gaming communities, and so I put together a funding form that’s dedicated just to gamers, and it’s only gaming companies that come and pitch.  And I find investors who are interested in funding the title as opposed to the studio, more the movie model of investing.  I find those people.  We bring them out and have them sit on the panel and listen to the deals that these gamers would pitch.  And it created a little bit more of an even playing field, because now they’re comparing one gamer against another as compared to comparing a gamer against a life-science company or a software product or a consumer product company.

Q:           I imagine one of the problems is the prospective investors are not themselves gamers.

A:            Most are not.  Most have family members or know people that use the games, buy the games.  And so they see it a lot, but they’re not immersed in it themselves, and that gives us another issue for bringing investors in to the gaming world is that they’re not that familiar with it from outside of the investment world.

Q:           So how many of these programs have you staged so far?

A:           Well so far one, but it went so well we’re about to stage another one in Dallas, and then a month later we’re going to be staging one in Atlanta.  And then we got calls from Boston and Seattle to stage them there.  So we’re seeing a circuit around the U.S. starting to form where there’s a strong contingent of gaming companies to bring this funding forum, because it doesn’t appear anybody else is doing this right now so it’s quite an opportunity.

Q:           We really appreciate your helping us here in Atlanta.  You’re going to be staging this forum in conjunction with our SIEGE Conference scheduled for October 7 thru 9, 2011.  The Forum will take place on October 6.   More info is available at http://www.siegecon.net/SIEGE2011/ .

A:           That’s right, yeah.  We’re looking forward to coming to Atlanta.  We’ve gotten some very good deals signing up so far to pitch, and investors who are also interested.  So the elements are there in the community; it’s just a matter of pulling them together I believe.

Q:           About how many people are you going to expect to have on the panel?

A:           We always look for ten analysts and ten entrepreneurs pitching, and we can have more panelists, but the ten entrepreneurs is really the limit because it takes about three hours to go through ten pitches, where each one gets ten minutes to pitch and a five minute Q&A, and that’s about as much as most investors can take.  And in addition to the investors on the panel, I sometimes put industry experts, people who can help ask the more detailed questions about the technology or about the market or about the strategy.  Because even with investors who are interested in the space, it’s a very fast moving space.  Things happen or change very quickly in this world, which is another reason why it’s been a challenge for investors to get their arms around it, because if you’re code base is more than 18 months old, you’re pretty well out of date, and that’s just too fast for the investors to keep up.

Q:           Now the Angels that are going to be on the panel, will most of them actually not have invested in games before and not necessarily be that familiar with games?

A:           Some have and some have not.  Some are new.  Like they say, it’s an interesting phase when you look at it from a distance because you see how much activity is going on and how many people are involved.  You know there’s good opportunities in there and so it does attract new investors from time to time who want to kind of be a part of that but don’t know quite where to begin.

Q:           Is there any charge for the investors to be involved?

A:           Oh, no.  There’s no charge for the investors to participate.  All we ask the investors and the panelists to do is if an entrepreneur asks for feedback on their presentation that they give them a good evaluation or a meaningful evaluation about what they can do to improve.  So we ask them to give feedback and that’s about it.  We’re mostly looking for people that are interested in writing checks, and so those who are interested and find a deal, they’ve got quite a bit of work in front of them doing their own due diligence before they write the checks, so we feel like that’s enough to do.

Q:           Understood.  And now with respect to entrepreneurs , there is a screening process as I understand it.

A:           That’s right.  Anybody can send in an application and send us their one page exec summary, but if we choose it to be one of the ten finalists, we have them sign up in a package called AngelSoft. That’s the standard packet that all Angel groups use and it’s a good way to capture all the information about a deal in to a one page exec summary.  And also having the deal with AngelSoft does a lot for us in that we can then later syndicate that deal on to formal Angel groups if we can find a lead investor and get some investor traction .  Whenever I send something to a formal Angel group, the first question they ask me is is there any interest in this deal; is there any lead investor in it?  If the answer is yes, well then it goes to their short list and it goes through very quickly.  So that’s kind of the function this serves is finding the lead investor, getting the pitch ready, and getting some traction behind it with the investment community.

Q:           One thing you mentioned to me was that certain game models are more interesting to investors right now, or more likely to do well in the market.  At least for entrepreneurs, they should be focused on certain areas, and one of them you mentioned to me was Facebook.

A:           That’s right.  Where you deploy a game changes very rapidly.  Four years ago, you deployed a game on  the Sony console or the X-Box.  And then two years ago, they were deploying games on the mobile phone, and they still do all of that.  But if you’re looking at the cutting edge business model, or go to market strategy, today they deploy it on social networks, in particular Facebook.  That’s where games are being deployed today.  And that’s another reason why investors have a little bit of a challenge with this space.

Q:           Now on Facebook, how is the money made?  I mean normally they don’t sell the games.  There’s nothing paid for the games on Facebook, or did I miss that?  From the ones I’ve seen there was no charge.

A:           Well typically there is the premium model.  What’s on Facebook is what brings people in to the game, and then there’s an upsell or a sell of virtual goods or avatars or what have you that come later.  So the deployment on Facebook is the channel in to the market or in to the product line, and once you’re inside, if you find engagement with that, later there’s an opportunity to charge the user for that interaction . So you’re right, most of them are free on Facebook, and it’s true of many games they’re free whether on the PC or on the mobile phone, or even on Facebook.  The initial entry is at no charge, and then once you’re inside, there’s an upsell.

Q:           I know that one of the popular games on Facebook …  I don’t know if it’s still popular, I imagine it is …  is Texas Hold’em, the poker game.  And as I recall, you get a certain small number of chips to start the play each day, but you can pay for more if you want.  I guess that’s the way to make some money on it.

A:           Yeah, that’s another upsell opportunity is to give people a little bit to get themselves going, but if they want to play more or play at higher dollar stakes then they have to start paying for that, and so it’s a way of starting them off easy but then moving up the curve if that’s what the user wants to do.

Q:           Now what about the iPhone?  Is that sort of passé now or is that still a very big opportunity for games?

A:           I think it’s still an opportunity for games.  I think there’s still quite a bit coming out on it.  The question is that there’s so many games on the iPhone.  If you go to iTunes and look, there’s hundreds or thousands, or by now tens of thousands, of games out there.  So how do you stand out is the big issue?  How do you get traction with the segment in the market place to get people using your game?

Q:           Exactly.  As I recall on the iPhone, at least the games I’ve seen that are popular, they charge about $0.99 for a copy of the game to download it.

A:           That’s right.  Yeah, $0.99 seems to be the magic number in the iPhone world, and then other games have other ways of monetizing it as far as selling avatars or selling chips like in Texas Hold’em, selling or being able to buy points in order to be able to play at higher levels in games.  You get a different experience.  These are all things that people use to try to monetize their games.

Q:           Hall, you know in Georgia we have an income tax credit for anyone who spends at least $500,000 producing a game, and it’s 20% if you don’t put in a logo for the State of Georgia, and 30% if you will put a logo in your game relating to the State of Georgia.

A:           I see.

Q:           Now I don’t know if these games would run that much money.  Do you have any idea what the general cost would be of a game for Facebook?

A:           They’re probably a little bit less than that.  The most common request for funding I get is someone who has put a little bit of their own time in to it, six months or a year, and have built the basics of the game, but it’s just not quite there.  So the most common request I get is a 150 to 250K raise in order to complete the product and get it in to the market place with marketing.  You can spend your time on the software and get it pretty far along, but eventually, you have to invest the dollars to get the marketing going and really move it in to the space.  And the sweet spot is about 150 to 250K to get that done.  So if you were to monetize all the efforts that go in to it, you could probably do a very substantial game for three to four hundred thousand dollars at this point.  And so $500,000, you could have a very nice game if you were able to put that much money in to it, of course.

Q:           So we need to try to get the legislature to drop that requirement, that threshold, a little bit or a lot.

A:           Well the interesting thing is that as business models evolve and business processes become more efficient, it costs less to start up a company.  Back in the 90s, people used to stand up and ask for $5,000,000 in Angels groups because they wanted to start a web company.  Well back then you had to go buy the computers and pay American salaries and code in HTML, and it was just very expensive to start something back then.  You had to build your own server farms in those times.  In the post-2000 era, those same people were standing up and asking for $500,000 because that’s what it costs to use bandwidth on demand and you are now outsourcing your product development, and the cost of starting a software company or web site have dropped dramatically, and that continues to devolve downwards.  What was $500,000 2, 3, 4 and 5, is now probably about 300, $250,000 to do the same thing because you’re able to get things at a much lower price, server farms and hosting systems, and you don’t buy computers anymore, you just lease them.  And therefore, it’s cheaper to start a company.  So I think it is a moving target as it devolves downward.

Q:           Hall, you mentioned to me, and you sort of alluded to it just now, but you mentioned to me on Friday when we talked earlier, that the entrepreneurs should develop a prototype of their game, or at least a working model of their game, before they even come to the program, before they even seek investors.

A:           That’s right.  Investors in this base are going to expect the entrepreneur to put their own time and effort in to creating the product.  It may not be final or complete or the full vision, but it’s working, it’s doing things, it’s able to show the experience and potentially monetize it a little bit.  And then they expect family and friends’ money to be used to do a little bit of marketing to try and get it out there.  And then Angel money is really for acceleration.  So those who stand to pitch in our funding panels, typically more than half of them have a product and a little bit of revenue and they stand a real good chance of getting follow up meetings and investments.  And three or four guys are very close to coming out with something, but they don’t have revenue but sometimes they get interest, and those who have just a PowerPoint slide and nothing developed really don’t get any interest at all.  You really have to show up something beyond just an idea, and a working product is really the next step after the idea, and then revenue is the next step after that.  And my recommendation is to have all three when you show up to an investor.  And it doesn’t have to be the final software and it doesn’t have to be great revenue, but to show that some people will pay for it and will be happy with it is a tremendous check mark to have on your list when you go to an investor.

Q:           Understood.  And you know you had explained to me, and you had alluded to it earlier today, how the revenue model works for investors in this space, and it’s different from what we normally see.  It’s not that they would own part of the company.  They’re going to get a percentage of the gross you mentioned as the normal model.

A:           There’s an evolution of the Angel model where Angels traditionally put money in and take a piece of equity, so when that company’s sold in the three to five year time frame out, well then they get their money back.  Well if you look at it over the last ten years, that three to five year payback has really turned in to more like an eight to ten year payback, given the way the economy and the markets have gone.  So some investors would like to have their money back a little bit faster, and so they’ve come up with what’s called revenue based funding that works very well in the gaming industry.  And in this scenario an entrepreneur takes an infusion of cash and the investor takes a percent of revenue, typically one to five per cent, in years two, three and four.  It doesn’t come right away, but there’s a time when it starts, and then you share the revenues with the investor, and then the investor gets paid back a lot faster.  And quite often that works well in the gaming industry because people are more funding the titles than the studio or the company, and there’s no intention of selling off a studio ever, and so the idea is you’re just going to sell off the title.  Well that sits better with the revenue-based funding model because we’re all aligned, both the investor and the entrepreneur on trying to grow the revenues of that title itself.  So revenue-based funding is a new trend that fits very well with the gaming model.

Q:           That’s one to five per cent of the revenue you said in years two, three and four?

A:           Typically yes, and it’s either capped on the maximum amount of return or on the duration of it.  And if you cap both of them then it’s just a straight loan, but if you cap one but leave the other open, then it starts to look a little bit more like equity where there’s a bit of a risk reward in there for the investor.  And so I’ve seen models on all three where it’s just a straight loan, and then some where you just get money from two to six, years two, three, four, five, and six.  And then there’s some that just say you’ll get money up to this percent and it’s over.  And therefore it’s a little bit more of a risk reward in that case and it looks more like equity in that.  But in any event, you’re getting the money back faster because it’s starting sooner and you’re not waiting for the final exit.  And in many gaming deals there really is no exit.  There’s no selling the studio; there’s no selling the title.  It’s just simply a revenue generator.  So revenue-based funding is the new model.  There’s even a group called the Revenue Capital Association that’s come out that people are joining to learn more about how this model works.

Q:           If someone is interested in participating in the program on October 6, what should they do?

A:           I’d be glad for them to contact me.  I’m actually taking the applications and running the screening process and will actually be at the event to run it.  So the best way is to have them contact me.  My e-mail is mailto:director@txenetworks.com.  Just send me an e-mail.  If you’re an entrepreneur, I’m looking for your executive summary.  If you’re an investor, I’m looking for your interests; what have you invested in before?  What might be a good fit here to make sure this is going to be a good experience for the investor as well.  But we’re looking for both.  We’ve got quite a few people already signing up as entrepreneurs, and the panel is shaping up very nicely.  We also look for some industry experts and we’ve got several people already signed up for that as well, but we’d love to have more.

Q:           Well, that sounds great Hall.  And what is your web site if people want to learn more about what you’re doing?

A:           It’s www.txenetworks.com.  And there’s a tab there called “Funding Forums” and you can click on that and read more about what the funding forum process is all about . And we’re basically a web-based portal that promotes networking, mentoring and funding of startup and early stage companies with an emphasis on the funding side.  Whenever we survey our readership, the number one thing that comes up is funding.  And so we wanted to focus on that by doing open funding forums to try to draw more people in to it, and get more entrepreneurs experience.  And the nice thing about a funding forum is that if you’re an entrepreneur but you’re not ready to pitch, well you just come in the back and you get to watch, so it’s a great place for mentorship as well.  You get to see other people pitch and you get to see how they pitch, and you can learn a lot through that experience to see if you’re ready for doing that on the next round.

Q:           Hall, thanks a lot for speaking with me today and thanks for helping us here in Atlanta to try to find a way to get funding for the video game industry.  It has been a pleasure talking to you.

A:           Thanks so much for having me, and I’m looking forward to seeing you in Atlanta on October 6.