Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures (Part 9)

By guest authors Irina Patterson and Candice Arnold

Brian: I already mentioned how inundated we are just trying to keep up with the deals we have coming to us. I would never sleep if then tried to turn around on every deal that we pass on and try to make other introductions on their behalf. I can more possibly – and it’s usually more on the partnership side of things than it is on the “here are additional funding sources you should approach side” – unless I happen to know someone for whom I think the story would resonate particularly well with her particular background.

Irina: What form do pitches usually come to you in?

Brian: PowerPoint. I think a business plan is a good exercise for an entrepreneur to get his thoughts down in a comprehensive format. But it’s not something that venture capitalists or angel investors like to consume, a written Word document.

You should be able to capture the vision and the idea in 10 to 15 slides, and if you can put that story together where I can quickly consume it and understand what you’re trying to accomplish, that’s usually the trigger for me, along with the background of the entrepreneur, that gets me to want to take a meeting.

If it’s a 40-page deck, you’re probably not articulating the idea in a coherent way or in a concise way. You should be able to do it in 10 to 15 slides. You should be able to address all the normal key areas that any investor’s looking at to validate the opportunity. The more concise, the better. You don’t want to clutter the slide with multiple points, but the deck should be able to stand alone and clearly articulate the vision.

Irina: Will you name, again, the key sectors you prefer to invest in?

Brian: Sure. We are an IT-oriented fund, so that means no health care, no cleantech, no semiconductors, and no hardcore physical hardware and infrastructure.

We are focused on capital efficient businesses in the Internet and infrastructure sectors. The subcategories there are mobile, social, next gen publishing, ad tech, social gaming, analytics, infrastructure, new platforms for the consumption of media. Those are all categories that we think are very interesting. They also happen to be areas of expertise for the Southern California ecosystem.

Irina: What is your preferred exit strategy?

Brian: We certainly think about it as part of our calculations in our heads about what sort of return can be generated and who would be the likely acquirer of these companies.

But the reality is the world’s changing quickly, and there are new companies popping up all the time and new potential acquirers. So, we think about it; we talk about what are the potentials here. I think one of the unique aspects of a seed fund is they can honestly look at a $20 million outcome, and if you invest early enough, you can get a great return on that money, and it’s a meaningful return based on the total assets you’re managing in your fund.

So, I mentioned that we’re a $5 million fund. If we were to invest $100,000 and own 10% of a company and sell it at $20 million, that’s a 20x. That’s a $2 million return to a $5 million fund. That’s a very meaningful outcome.

Traditional venture funds can’t even contemplate hardly the size of the check nor that being the likely outcome for the deal. The big funds that are doing $100,000 seeds are doing them for the option value of being there in the deal when that company decides to go raise $3 million to $5 million.

Irina: The big funds also have big overheads.

Brian: Correct. And that $100,000, if it ends up exiting for $20 million, is a meaningless outcome for that fund. So, oftentimes, they force the entrepreneur to continue to try to grow and make it something that’s worth $100 million or $200 million when the opportunity doesn’t support that.

I have lots of stories of entrepreneurs who had offers in the $40 million range, but their investors wanted to see a $200 million exit, asked them to turn down the acquisition and continue to go for the big win. The big win didn’t happen, and they sold the company for change, and nobody won, whereas that $40 million exit would have been a life-changing event for the entrepreneurs.

This segment is part 9 in the series : Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures
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