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.

Irina: And how about dividends over a long period of time?

Bob: You know, that’s interesting that you bring that up. Again, that’s not something that’s been the norm, but with the new environment and with IPOs closed down and strategic investors not playing the game the way they used to, more and more often members are starting to look at a deal that if it returned 20% or 30% in dividends a year, that would be a stellar investment. So, we’re not opposed to it. I think the world’s changing, and I think those won’t be such a red herring anymore. I think that people will start looking at them more and more.

Irina: And what about debt?

Bob: We’ll do that generally when it’s convertible into an equity instrument. If it’s convertible debt, that’s fine. That just delays that valuation question is all.

Irina: What are your common terms?

Bob: We’re looking for some governance provisions. That’s why we do preferred stock. If it’s common stock, you’re in the same bucket with all the founders and everybody, that’s fine, too. We do a lot of deals with the Tech Coast Angels and other angel groups around the area and our terms, some are a little onerous, and I understand why an entrepreneur would think that, but they’re pretty typical from an angel perspective.

Irina: How long do you prefer to stay invested?

Bob: I think we’re looking to invest in a company a minimum of three years, probably an average of five. And as it gets up to seven years, we’re probably trying to figure out how to get an exit out of it.

Irina: And do you have any preferred exit strategy?

Bob: A profitable one [laughs]. And that’s not something we can control. The market dictates that. You know, IPOs are, theoretically, starting to come back. We’ll see. You know, those are always an interesting way to get out. A strategic buyer is a way get out, and the company may go up the food chain to a private equity company, if you have positive cash flow.

Irina: You said you haven’t been doing this for a long time, but can you give me any internal rate of return for Pasadena Angels?

Bob: Well, I can tell you what we try to target. So here’s what I tell the students – I ended up at Pepperdine and University of Southern California and UCLA a lot, giving talks to the entrepreneur classes, talking about what it takes to get an angel investment – and I tell them, again, to empathize with the angel. So, I’m expecting –again, let’s make up a $1 million portfolio. I’m going to do ten investments of $100,000 each. I expect three to five of those just to fail outright. I expect one to two of those to give me my money back; maybe one or two of those to give me three times my money; maybe one or two of those to give me five times my money; and I’m hoping one out of the ten will give me that ten times return. And if you run the numbers on that over three to five years, you get anywhere from a 20% to 35% ROI. You know, it’s an art, it’s not a science. There’s a lot of parameters, a lot of variables, so you can’t say, “I’m expecting a 35% return because, the odds are that this investment’s gonna fail anyway.” But if I get a plausible story and the entrepreneur’s passionate and listening and it’s an adjustable market that’s big enough to support that kind of return, I’ll go ahead and invest in it, knowing if I do ten of those, one of them’s probably gonna shake out.

This segment is part 9 in the series : Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels
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