Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures (Part 5)

By guest authors Irina Patterson and Candice Arnold

Brian: Our general thesis is that there are very few companies that are going to generate value north of $200 million. Most companies are being acquired in the $20 million to $60 million range, and there are great returns to be had there if you’re invested early and at the right price. It’s a great way to generate returns on a smaller fund. That’s the whole micro cap thesis.

You still want to have the opportunity – we call it the “option value” – to find a business where you have early ownership that can scale up and be a $1 billion opportunity. It’s just that those deals are coming along a lot less frequently these days.

Irina: How do you conduct your due diligence? You already told me that you consult with somebody in the space you’re looking at; what else do you do?

Brian: It’s working our individual connections to validate the pain and getting third parties to look at the solution and figure out whether they’d be customers or partners.

Then we look at personal references on the entrepreneur and talk to their current customers; we get validation that what they’re doing is unique and interesting, and we spend a fair amount of time looking at the business model itself. I don’t mean the actual projections.

And the hardest part of what we do is helping an entrepreneur figure out what’s the right amount of capital to raise to hit the next set of milestones that will attract the follow-on financing.

Having done venture [capital] for 10 years, we understand what the series A investors are looking for, and we can help tweak the financing plan to make sure there’s enough capital in the business that you don’t make it only halfway there.

That’s the bulk of the work that we do right in the initial phases. Then it’s a leap of faith and a belief that we know that not everything is going to go to plan, but the entrepreneurs are smart enough to shift and adjust appropriately and still find a way to scale the business.

Irina: In the past 12 months, you made about six investments. What was the range of dollar amounts you invested?

Brian: In our first fund, we’ve done as small as $40,000 and as much as $500,000. I’d say the average amount is about $250,000 at a first bite in the first round of investment.

Then we reserved the same amount for follow-on to protect our positions in those companies as they raised additional capital.

Irina: How long does it take for a company to receive funding from your group?

Brian: To get to a commitment from us can be as quick as two weeks, depending on the opportunity. It can also take three or six months.

We’ve been fortunate, I guess – not necessarily from the entrepreneurs’ perspective – but in this current climate over the past two years, and with the lack of competition in the local market, we’ve had an opportunity to test drive entrepreneurs for a while and see them make progress before we have to commit our capital to the deal.

Then, generally, when we do, we help them pull together the round of financing, we make our commitment, we set the terms and help syndicate the round with other co-investors. We take it up to Silicon Valley and invite some of those funds into the opportunities that we’ve now gotten excited about.

Irina: Are there any fees at any time for entrepreneurs?

Brian: No. Absolutely not. Again, venture people are only as good as their reputation, and if we were charging people for access and our input, we wouldn’t be in business.

Crosscut has to build its reputation on rolling up its sleeves, being hands-on, adding value – these are all buzz words, I know, but if you were to talk to the entrepreneurs we’ve backed, [they would say] that we are in the trenches, trying to help them put the partnerships in place that will justify the next milestones of value creation and attract the next round of capital.

So, whether we’re investing or not, we try to be that available, approachable resource here in Los Angeles to entrepreneurs because we may not like this idea, but their next one might be fantastic.

This segment is part 5 in the series : Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures
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