Seed Capital From Angel Investors: Eric Pozzo, Fund Manager, Oregon Angel Fund (Part 10)

By guest authors Irina Patterson and Candice Arnold

Eric: We’re very efficient with the way we work with our attorneys; we can typically on our side, do an investment for $20,000 to $25,000 in legal fees.

A lot of the documents are fairly templated. You know, you amortize that over $1 million, it’s not a huge part of the funding and the protective provisions are preferred. If a company does go south, the fact that you get your money back before the common shareholders, things along those lines. There are some basic protective provisions.

Irina: Do you think about exit strategy? Do you have a preferred exit strategy?

Eric: Yes. I’d say, we always think about exits, first of all. We wouldn’t go into a deal that was just a perpetual cash flow. Our fund has 10-year lives, and we can go into a couple years overtime, but the real goal is to exit after five to seven years.

The reality of it is, I think, all of our successful exits will be acquisitions. We have one where the company may want to stay private, and they put in some redemption rights. But they’re still redemption rights at a high enough return that we felt comfortable with it. In other words, after five years, they can say, “We want to buy you out at five times your investment.” And I think it goes up from there.

For the most part, our companies are, I hope, going to be acquired, and as part of our due diligence, we analyze who would want to acquire this company. Would it be a strategic partner, would it be a competitor? Who would acquire this company and what are the multiples?

We just looked at a company that we came close to investing in. We didn’t. It was part creative services, part software. The fear was that in an exit it would be valued as a creative services company multiple, which 1x, versus a software company, which is a 3x. So, no matter how well the company did, perhaps we wouldn’t get the exit we need. And who would buy this company?

We always try to figure out what a conceivable exit would be and what the multiple would be and make sure that we could get a return in the 8x to 10x range.

Irina: Do you prefer to invest in companies that have a large capital requirement, or a medium or small requirement?

Eric: I have a personal bias toward capital efficiency and lower capital requirements. But we are a democracy so . . . As I mentioned, [with] that wave power energy company, our $750,000 is going in as part of a $2 million close, so we don’t even want to put money in until they have $2 million. And we realize the next round will be $5 million to $7 million and third round, probably $10 million. In addition to that, they’re probably going to want a lot of grant money along the way. That to us is a very high capital deal where there’s going to be a fair amount of dilution as we go down the path with this company over the next five years.

But I’d say our series A offering is $1 million with the idea that in two or three years, they at their own discretion might want to go out for $3 million to $5 million of venture capital. I’d say that’s pretty modest as capital expectations go. And we’d really like to see the company to be able to achieve break even with the round of funding we’re involved in.

That’s not always possible, like with this wave energy company. As a matter of fact, [with] some of the other companies, we do know other rounds of capital are going to be required. But it’s always nice if it’s discretionary. In other words, we’re hitting break even, we can make this work without more money, but now to take it to the next step another round could be appropriate.

Irina: Which of your companies do you think has an interesting story?

Eric: We’ve got some real interesting technologies out there with traction with big companies.

One interesting story is we funded an airline about two years ago that was starting commuter service from Portland to Seattle. Little nine-seater planes that use the business people’s part of the airport and not the commercial part of the airport. So, people don’t have to go through TSA [airport security]. It’s an interesting story in that who the heck invests in airlines, especially two or three years ago?

This segment is part 10 in the series : Seed Capital From Angel Investors: Eric Pozzo, Fund Manager, Oregon Angel Fund
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