Seed Capital From Angel Investors: Eric Pozzo, Fund Manager, Oregon Angel Fund (Part 3)

By guest authors Irina Patterson and Candice Arnold

Eric: We start each monthly meeting with an hour discussion of the 8 to 10 applicants, and everyone has a little anonymous voting machine and we vote on which two we want to present at our next meeting.

Once we’ve selected the two to present – and there’s usually a third and a fourth pretty close in the running – we form due diligence teams around each of these companies. So, people in the room raise their hand saying, “ I’d like to learn more about this software company or this wave energy company.” We also see if someone from the group wants to lead the effort.

If not, I personally lead it. Before the company presents, which is about a month later, we have at least one meeting with the company. And in some cases, if we’re really excited, we have many, many meetings and drive the process quite far down the road.

Irina: What is a voting machine?

Eric: It hooks into PowerPoint. It’s called Option Power. It’s a little remote control, and it’s all anonymous. [For example], there’ll be something on a PowerPoint slide that says Company #1, Acme Power Supplies; Company #2, Acme Software, and you pick the two companies that you like the most, and there’s a little tab in the corner that says how many people have voted.

Then you press a button and a bar graph comes up just a numbered graph comes up and it ranks these companies. So, Acme Software got 20 votes, the next one got 18, but it’s all anonymous and it’s instantaneous, so everyone has a good count as to what most people liked. Again, there’s usually a runner-up that’s just really close. And it’s like, jeez a lot of people liked company #3, why don’t we do some more work on them as well.

Irina: What are you looking for in a company when you decide whether to invest?

Eric: We do a lot of due diligence. It’s just we have a long checklist. You know, you don’t do every item on the checklist with every company, but before a company even presents, we’ve met with the company and understand where their product is. Is it shipping, yet? Is it Beta? Does it still need funds to even start engineering the product? Do they have customers? Where’s the management team from? What’s the experience of the management team?

The engineering . . . if it looks like it’s a deeply engineered product, we get in and do code reviews. We understand the architectures, the software, whatever the product. We do a fair amount of due diligence before they even present. And at the meeting when they present, it’s followed by some Q & A.

After the entrepreneur leaves the room, the due diligence team presents three slides. The first slide just says what we did. We called customers; we met with the team. The second slide is what we liked; three things we liked in the three areas that left us with questions and concerns. And the third slide is basically what the deal structure is, and should we continue to do a lot more effort with the idea that we’re going to invest? Should we defer, let the company mature a little bit more, let engineering progress a little bit more? Or the last one, should we just pass? This company is never going to be quite right for us.

I mean, we’ll do everything, if we’re very serious, [such as] reference checks on management. We always do customers calls. We find that we can learn more from customer calls than almost anything. [With] almost all our applicants, if they don’t have customers paying yet and they’re Beta sites or other references that are working with them, other partners, again, we’ll do deep engineering reviews.

[We’ll do] a deep market analysis to understand the structure of a market. Each team is four to five to ten people, and each team is different, so there’s not this due diligence fatigue. Every team does a super, crack-up job on due diligence.

So, if they are then, at the next meeting, going to recommend an investment vote, they’ve got reams of research and other information that’s been posted on Angelsoft, and they’re prepared to defend their recommendation to invest. In other words, have a very thorough debate as to what they looked at and if there were concerns, how those concerns were mitigated.

This segment is part 3 in the series : Seed Capital From Angel Investors: Eric Pozzo, Fund Manager, Oregon Angel Fund
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