Seed Capital From Angel Investors: Michael Gruber, Founder and Managing Director, Cornerstone Angels (Part 10)

By guest authors Irina Patterson and Candice Arnold

Irina: Do you co-invest with other angel groups?

Michael: Yes. We’re very open to sharing deal flow with others as well as co-investing with other angel groups, with other individuals, even along with venture firms.

Irina: With the syndication, what size rounds do you usually participate in?

Michael: It depends. For Cornerstone, again, most of the companies we’ll look at are trying to raise between $500,000 and $3 million, which we’ll participate in. We’re not providing all the capital; we’re syndicating, so that decides size of the round. But we’ve been involved in some rounds that have been as large as $100 million. We were part of a syndicate for that.

Irina: What is your preferred exit strategy?

Michael: M&A, a large strategic partner.

Irina: Do you have any companies that have exited?

Michael: Yeah. We have several. We just had a company that just went public, through an IPO, a few weeks ago called Amyris Biotechnologies.

Irina: What do they do?

Michael: They’re focused on using biology to create a number of energy products. Right now, they’re creating a biodiesel product, the first being jet fuel. They’re doing a bunch of synthesis with sugar cane, and they’re able to create a variety of biofuels. It’s a biofuel company.

We had another company called RMI, which was acquired by a public company called NetLogic Microsystems, so all the shares got converted into a public company.

We have another company called Turin Networks, which merged with another company called Force 10 Networks. They had filed their S1 [the required Securities and Exchange Commission (SEC) pre-IPO document], so they’re waiting to go public.

Another company is called Organic To Go based in Seattle, Washington. They went public in a reverse merger, although they’ve since gone private. They’re a natural food retailer and commissary.

Irina: What is your biggest investment success to date?

Michael: I think we’re still waiting on our biggest ones to happen. Some of the ones we’ve had have been reasonably good. But some of the other investments hold the largest promise, including some that were made pretty early on. A lot of these are early stage companies, and it takes a while. We’ve been fortunate that we’ve had a number of exits. If I count all the exits or partial exits, I think maybe we’ve had six or seven already, which is great. Probably in the next two years is probably when a lot of the companies will start to have exits because it’ll be past the harvest time, especially since the bad economy has delayed a lot of things at the same time.

Irina: How many companies do you have in your portfolio?

Michael: I believe we have 18 companies now.

Irina: What do you think angels could do to increase their chances of success?

Michael: They need to invest in a portfolio of companies. Don’t put all the money riding on one company, as much as you may think that that’s a home run or a winner. The rules are that, if you make 10 investments, one investment out of the 10, typically, will return over 90% of your portfolio return. The problem is you never which is that one.

So, if you just make that one investment, hoping it’s going to be that one that’s going to be a huge winner, it may be the big dog, and you won’t have any others to balance it out.

The idea is to try to plan or balance as you’re allocating the money to a few different investments. Also important is understanding that every company, regardless of whether they say it’s going to be the last round of capital, typically, always requires more money along the way.

So, knowing that, you may want to have some dry powder in the future to back on or re-invest in the company down the road. You may be able to get a better opportunity in the future, or get a clearer view, or maybe participate in the company’s forging ahead after a great opportunity. That’s the biggest thing.

The second thing is there should be some level of due diligence, regardless of where the company comes from, of evaluating the company, spending some time with management, and reviewing the facility.

There’s been a bunch of research, even just among angels, that, typically, the better returns have come from times when, first, there’s been a greater number of hours spent on due diligence; and second, if you’re able to achieve an investment where there’s lower valuation.

This segment is part 10 in the series : Seed Capital From Angel Investors: Michael Gruber, Founder and Managing Director, Cornerstone Angels
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