Seed Capital From Angel Investors: Eric Pozzo, Fund Manager, Oregon Angel Fund (Part 6)

Irina: What percentage of equity do you usually seek?

Eric: I think at the low end we’ve been in the 5% to 8% [range]. But I’d say our typical equity percentage would be in the 15% range, you know 12% to 20%.

Irina: Do you think in terms of the return that you would like?

Eric: Yes. We like to see conceivable exits in the 10x range, five to seven years out. And conceivable is the operative word because nothing ever happens according to plan.

A conceivable exit of 10x means that you might get four times to five times, seven years from now. But if it’s not even conceivable that the company can do that well, then you have to discount based on reality from small, lower returns, which make you wonder whether you’ll ever have a return.

So, I’d say, based on where we invest, which is – we’re not the first money in. There’s usually $200,000 or $300,000 that’s gone in before us to help build out the website or the platform or whatever the product is – or service.

We’re not in the real early, low valuation stage so our infant [entrepreneur] mortality has been non-existent. We’re not losing ones after a half a year to a year. But on the other hand, in Oregon, we don’t really have that many home runs in this region. We’re shooting for 10x but the reality of it is we’re delighted when things come in at 3x, 4x, 5x, 6x, 7x.

Irina: Has any of the companies you invested in exited, yet?

Eric: Again, we just got out start in 2007. In 2007, we had a small fund and they were doing convertible notes. One of the companies had a suboptimal exit. It was acquired in somewhat of a distress situation but because the fund had a convertible note, they got their money back plus interest.

So, that was an exit – it’s not an exit that we’re ashamed of because we got our money back – but it’s not one that you point to and say, “Look at how great we did.” Other than that, no, we haven’t had exits.

We anticipate that maybe one over the next month. We have inside knowledge that either it’s going to be a very nice exit or there’s going to be a major VC funding. Some of the strategics – or some of their partners –talking to this company could either put money in at a nice valuation, nice up round or they could just say, “Let’s buy this company and keep it out of the hands of the competition.”

Irina: How many of your portfolio companies are doing great?

Eric: Jeez, I’d say maybe 25% you could put in the great category, and probably 50% in the good category, and 25% in the who-the-heck-knows category.

We almost always have a board representative from our group representing the fund in a series A. We do have active involvement through a board representative.

Typically, the person who takes the due diligence lead is the most interested and the most industry knowledgeable and by the end of the process knows the most about the company, and we appoint her as the board representative.

And who knows, a company you hope is doing $5 million a year in sales by now but they’re only doing $2 million and breaking even, but they’re growing at 20% a year.

Overall, we’re pretty darn pleased with the portfolio. We don’t know that we have any home runs in there, but we know we’ve got some winners.

Irina: At what stage of a company’s development do you prefer to invest?

Eric: Most of our companies are, if not pre-revenue, [they’re] just at that point where they’re starting to get revenue out there. One company we invested in last year just achieved $600 of revenue. I know that’s not much, but it just proved that someone was willing to start converting his little Beta site to paying customers at about $100, and he ramped from there.

What we don’t typically do is invest in just a business plan or a software specification that requires $500,000 just to engineer the software so that they can then get to market just to prove that they have customers. We do early stage investing, but we’re not usually the first $100,000 into it. We want a little bit more proof of concept than a business plan.

This segment is part 6 in the series : Seed Capital From Angel Investors: Eric Pozzo, Fund Manager, Oregon Angel Fund
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