Ken Goldberg pushed back his chair, placed his linen napkin on the table and rose to make his $750,000 pitch. As a member of Sarasota's Startup Florida Dinner Club-a venture capital group of angel investors-and CEO of Real Digital Media (RDM), he found himself in the unique position of potential investor and presenter.
Despite being a colleague of the 15 men and women before him, Goldberg, 45, was anxious. This was his third time before the group. Granted, he would not have made it this far without some approval of his project. Still, he was asking for big bucks and this was check-cutting time. Think of it as taking an oral final exam in front of every forbidding professor at your university. Or asking your parents for the keys to the Porsche on prom night. Would it be yes or no, thumbs up or thumbs down?
Startup Florida members originally passed on Real Digital Media, a company that makes digital signage technology for in-store marketing and promotions, because its Orlando-based founders, like many brainy inventors, lacked some of the nuts-and-bolts business experience angel investors require. But Goldberg-who started a national retail consulting business before selling in 1999-believed so strongly in the concept that after hearing the first pitch at the dinner club he stepped forward and quickly restructured the company, was hired (sans salary) as CEO and now, much like other prospective entrepreneurs, had reached the stage where it was time to ask for money.
The odds are against people like Goldberg. Angel clubs' rigorous screening process weeds out most entrepreneurs, and of those who make it in front of the group, only 10 percent receive funding, according to Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.
But Goldberg was prepared. He described a stylish flat screen television monitor placed in every department of a major retail store with hip, savvy commercials to entice customers to buy that day's, or that hour's, special. The content could be rotated at will. Real Digital Media produces the hardware and software to make it happen.
"Wherever you see a sign indoors, it can be replaced with a flat screen, with managed content changed over a secure Internet connection, cable or wireless," Goldberg explained to the group. "This will allow stores and companies to present advertisements and content outside the home and closer to the point of purchase."
Silverware clinked as fellow members finished lamb chops and salmon and settled in for coffee, dessert and a good grilling. Suddenly, the meeting became an interrogation. Goldberg was peppered with questions on revenue models, content management, screen costs, network platforms and competition.
If club members were simply playing devil's advocates, they were kicking RDM's tires hard; but then, angel investors have good reason to pummel hopeful entrepreneurs. They're investing large amounts of cash in a startup in exchange for a big chunk of the company. It's a high-risk investment. On most deals, says Sohl of the Center for Venture Research, they will lose money or, if they're lucky, only recoup the original investment. Only one or two deals out of 10 provide an annual return between 25 to 40 percent-and that's five to seven years down the road after the company has been sold, acquired or gone public.
Established a year ago by Sarasota entrepreneur Rich Swier, the Startup Florida Dinner Club is a group of 17 wealthy men and women who have pooled their money into a formal investment fund. They meet each month at the University Club on the top floor of the Bank of America building in downtown Sarasota to listen to presentations by companies (mostly in the high-tech field) in the early stages of development-either pre-revenue or up to a million in revenue. It is the only angel dinner club in Florida, says Swier. (There are 200 active angel clubs in the country, according to Sohl. Venture capital clubs, by contrast, focus on later-stage companies that have been in business for at least five years and are making at least $5 to $10 million in annual revenue.)
The members are a varied group, with backgrounds in both private and public sectors and in fields from marketing to operations. The group includes a doctor and a CEO. Most have served on boards-both nonprofit and for-profit. Two are female. Most are retired, all are successful and none wants to be put out to pasture. Members must commit $100,000 in cash to the fund. The club runs on strict majority rule, but Swier strives for unanimous votes-probably a wise strategy, says Sohl, since most angels are highly independent and don't join funds because they don't want to get locked into an investment they don't agree with. Whether the club votes yes or no, a Startup Florida angel can still invest in the business individually, called a side-by-side investment.
Dan Miller, Startup Florida managing director, has made a career out of startups, both on the entrepreneurial side and the investor side. (He sold his online job search startup PlanetResume.com to CareerShop.com and then to Personnel Group of America for more than $10 million in 2000.) While he still invests as an individual, he says Startup Florida's dinner club model has several advantages. If a person invests $25,000 in a company that needs $1 million, he or she doesn't have much leverage over the company's direction. "As part of a fund, we can take the whole round," he says. And because the fund brings a variety of successful investors with a wealth of experience together, the investors can rely upon each other's expertise to evaluate proposals. "Power in diversity," Miller calls it. And the fund also has paid (?) managers-Miller, Swier and Jason Broom-who professionally and methodically process the applications-something most angel investors don't have the time or inclination for.
In the past year, Startup Florida's three fund managers weeded through more than 300 companies in an effort to bring one presentation each month to the dinner club. "We do a lot of the heavy lifting for them," says Swier.
Among the 15 that reached the voting stage last year, the club agreed to invest in two. Both are now headed by club members: Goldberg took over Real Digital Media and Swier took over Highwall Technologies, a wireless security company that sells hardware and software products for detecting unauthorized wireless devices on computer networks. (Miller says the fund doesn't have a policy that members run the approved startups, and it's too early to identify a pattern of investing.) Highwall has grown to a valuation of $3.3 million based on its last round of funding. Both companies, Swier says, have increased revenues and are expected to become profitable by the end of this year.
Startup Florida's membership will be capped at 20 members for a $2 million investment potential; once 85 percent of the $2 million is invested, Startup Florida will start a second fund. Miller says it was challenging pulling in the first four or five investors, but getting the most recent two was easier. (Members have to qualify according to SEC criteria-xx and xx). Miller says making money is the primary reason members get involved, but being an angel is also about the excitement of making deals. "We are turned on by entrepreneurs," he says, "to see someone walk in with an idea and a passion that they are going to tackle the world. We want to build their business."
Marty Fine, a retired textile company executive, joined less than a year ago and stops by Startup Florida's Central Avenue offices every two weeks or so. "It's very, very intellectually stimulating. Instead of being in la-la land down here, it keeps you engaged," Fine says.
Patrick and Lydia McKenzie typify the range of experience Startup angels bring to the table. After moving to Sarasota from Sacramento, Calif., this year, they went to the opera where they met one of Startup Florida's members. An engineer, Patrick's background covers the operations side. Lydia built her career in sales and marketing.
"I don't know if there's anything truly altruistic about what we're doing. We're in it to make money," Patrick says. "But the best investments for us are when we can use our expertise."
As the group's grilling heated up, Goldberg remained focused. He grabbed an ice cream dish and finished dessert as members asked rapid-fire questions. The mood had shifted toward consensus, but now the group wanted to know when Real Digital Media would become profitable.
Goldberg hedged slightly before laying out the revenue streams, the overhead expenses and detailing how RDM should be profitable by next year-he figures the company will have $3 million in revenue with a profit margin of $80,000. Already the company's products are in L.L. Bean in Maine and Meijer stores in Michigan.
It was a winning performance for a CEO who didn't have a RDM business card yet. In all, Goldberg received $250,000 from the fund and $230,000 in side-by-side investments. A $50,000 check peeked out of his shirt pocket from one of five side deals made with individual members.
"It's not just thank-you for the money, it's thank-you for the confidence," Goldberg said. "That's the gratifying part of what we do as a club."
Tips to Getting in Front of Angels
Define your market. Angels want to know you have a product that is different from all the others. Tell them why they should invest in you and not another company.
Cultivate management talent. Angels require evidence that you can execute your vision and that means a solid management team. If you don't have one, identify the gaps and put a plan in place.
Prove that your business is a reality. Outline the amount of work that has gone into your company up to this point. Provide evidence of patents, your product and revenues.
Sources for Startups
Center for Venture Research, University of New Hampshire, www.unh.edu/cvr
National Venture Capital Association, www.nvca.org
National Association of Seed and Venture Fund, www.nasvf.org
Angel Capital Association, www.angelcapitalassociation.org