The number of private investors in San Diego who fund start-ups is growing, and that is helping entrepreneurs get their companies off the ground.
Hieu Bui may seem like one of the lucky few. In 2012, he raised $650,000 in seed funding from angel investors, a term used to describe affluent individuals who provide capital to start-ups.
Bui (pictured) used the money to jump start his company — Cashie Commerce — which spun out of WebAssist, an e-commerce software company in 2011. But it wasn’t easy getting started.
“It took about 200 meetings to raise the initial $650,000,” Bui said.
All of those meetings, however, taught Bui some important lessons about pitching to angel investors, and helped him plan and grow his business — which provides a purchasing platform for online merchants.
This December, he secured another $300,000 from the San Diego Tech Coast Angels, the largest angel investment organization in the region. His goal with the latest funding is to expand his sales and marketing efforts.
Bob Manning, co-founder and chief product officer at MedChain Systems, has a similar story to tell.
In June 2012, his company received $200,000 in seed funding from Merck & Co., to research the marketing opportunity for what Manning described as a “medical Coke machine for vaccines.”
It took another nine months to raise $3 million in angel funding to develop the prototype for an automated refrigerated vaccine dispenser for doctors’ offices.
“We had dozens of meetings,” Manning said. “We had a lot of meetings with people who ultimately didn’t invest and we had people who invested we thought wouldn’t be investors.”
Manning and Bui both said it is important to come prepared with solid arguments about a product’s marketability, provide evidence of growth potential, and show the commitment of the management team in the form of sweat and integrity.
Otherwise, angel investors will move on.
The number of angel investors has grown in recent years to fill a void in the market. These wealthy investors seek out promising start-ups that are too small to get the attention of venture capitalists, and too new to get traditional loans.
A recent report shows that California leads the nation in terms of such loans, with internet, healthcare and mobile companies receiving the lion share, or 79 percent of invested dollars. San Diego follows the San Francisco Bay Area, and pulls in most of the money for biotech and wireless companies.
Bruce Bigelow, editor of Xconomy Inc., a news website, said San Diego’s relatively large community of angel investors is growing. Though, he said, a lot of angel investors’ activity is based on market conditions.
“Angels become more active when they feel more flush and the stock market has been hitting record highs,” Bigelow said. “I do think that there has been new activity as a result of this.”
Gary Phillips, president of the San Diego chapter of Southern California’s Tech Coast Angels, a 14-year old group of 350 members, including 106 local members, agreed. He said his group invested $8.6 million in 9 deals in 2013, up from $7.5 million in 2012.
That included a $1.1 million investment in Mogl, a Web-based restaurant rewards program that closed this September; and an $854,000 investment in Senior Quote, a software service provider for seniors looking for Medicare supplemental plans that closed in October, Phillips said.
The group predominantly funds life sciences, technology and medical technology start-ups and requires each angel to invest a minimum of $50,000 a year. The typical angel investment in one start-up is $25,000 to $50,000.
Though Silicon Valley’s super angels, successful technology entrepreneurs, are known to invest up to $250,000 in a start-up, they also tend to invest closer to home, bringing their knowledge and connections to investments.
While San Diego doesn’t have the super angel power that Silicon Valley boasts, the local angel community spreads its wings afar.
Given that high net worth individuals prefer to fly under the radar, it is believed that angels, including former retired CEOs and executives, form their own networks.
Tim Rueth ranks among them.
The retired Qualcomm executive, who has been an angel investor for the last 14 years, described the local angel investor community as “very flourishing.”
“Most deals are made with people who know each other,” Rueth said. “I have a network of about two dozen members, mostly retired executives that I know from the tech industry.”
To get Rueth’s attention and that of the San Diego Tech Coast Angels, entrepreneurs must meet at least three minimum requirements: stellar management team in place with start-up and domain experience; proof of a good product and market fit with initial market attraction; and proof of a sustainable and growing market.
Bui and Manning are a testament on how entrepreneurs need to execute on meeting investors’ demands. Both have a solid track record of knowing the space they work in and have shown success.
Bui, a software engineer, and Cashie Commerce’s other executives, built software that “supported hundreds of thousands of merchants that processed hundreds of millions of dollars in transactions,” at their previous company WebAssist.
“We had worked together for a long time and knew each other and had success in ecommerce,” Bui said.
Today, Cashie Commerce’s eight full-time employees and three contractors support credit card and PayPal transactions for roughly 3,000 merchants worldwide.
“We work with a lot of large companies that have a lot of small business customers like Web hosting providers and email marketing companies that sell our products to their customers,” he said.
He declined to give revenue figures, but said the market opportunity is huge. There are 23 million small businesses in the U.S.
“And half of them [small businesses] aren’t selling online yet,” Bui said. “That’s a pretty big opportunity for us.”
Similarly, MedChain System’s management team, Manning and Gene Baker, also formerly worked together at San Diego’s CareFusion, which makes Pyxis automated drug-dispensing machines for hospitals. The public firm is a leader in medical technology.
“The single biggest reason they [angels] invested in us, is because they believed in Gene and myself,” Manning said.
They also believed in the opportunity, which Manning puts at 250,000 physician offices and another 50,000 retail pharmacies nationwide.
He also had to persuade investors that the storing of vaccines in conventional refrigerators was problematic on many levels.
“There needs to be validation, whether it’s in the form of market research or third-party validation,” Manning said. “It needs to come from an objective path that your idea is worthwhile.”
He presented investors with government documents that showed that storing vaccines in refrigerators at doctor’s offices posed problems in terms of spoilage and handling, and then offered a solution.
The prototype, developed with NOVO Engineering located in Vista and DD STUDIO, an industrial design firm in Carlsbad, works by dispensing vaccines without exposing them to light or heat. Vaccines are kept at a constant temperature and can be loaded by a nurse via a touch screen that also keeps track of the vaccine count, saving doctor’s offices time and money, Manning said.
Manning didn’t want to speculate on the cost of the machine, given that it’s not yet on the market.
He hopes to put the machine in doctor offices and generate revenue by charging a monthly service and maintenance fee.
Rueth said all angel investors try to minimize their risk of investment by doing their due diligence, but ultimately there are no guarantees.
“A person can do as much analysis as they want or look at the future value and calculate the return on an investment, but it doesn’t matter,” Rueth said. “You probably won’t be right, so you cut the check and pray.”
It is no accident, however, that investors bet on the founding team members most of all.
“There are so many things that can go wrong,” Rueth said. “You need to have that personal relationship to know that the CEO can endure and perform well in challenging situations.”
Bui and Manning are a testament that it takes both will power and perseverance to overcome the fund-raising challenges for any start-up.
“People will say ‘no’ and you have to keep going until you find the people that say ‘yes,’” Manning said.
His advice to aspiring founders: Talk to everybody. You never know where the money will come from.
“My next door neighbor is one of my investors,” Manning said. “Not in a million years did I think he’d invest, but he said ‘I believe in you and I have money to invest.’”
Top Angel Investors
Bruce Bigelow, editor at Xconomy, a news website that covers the biotech and high tech industries spent months tracking down the most active angel investors in San Diego. As he said, most of the time they want to stay anonymous. He finally published a list of the 20 most prominent in October. Below are the top 10. For the complete list with additional information on all investors, visit http://www.xconomy.com.
Team Group managing partner; Co-founder and CEO of Zui.com and Internet entrepreneur involved at Say Media, mSnap, and Infogate.
Investment focus: Consumer Internet, SaaS, B2B, Enterprise Internet.
Recent investments: Videoegg, Luxology, 6 Sense Insights, Chatmeter, DealStruck.
Investment philosophy: "I’m now investing capital and time through Team Group to help entrepreneurs, more like a fractional co-founder."
Barbara Bry & Neil Senturia, Blackbird Ventures
Investment focus: High-tech only.
Noteworthy recent investments: Lonocloud, Oberon Fuels, Dealstruck.
Investment philosophy: “We make an investment based largely on the founder, but we insist on a rational ownership structure---shared goals, aligned interests, and no crazy pre-money valuations.”
Wealth advisor, founder of GROWconnections, and member of Tech Coast Angels board.
Investment focus: Software, health and performance-related technologies.
Recent investments: Rock My World, MOGL, Virtual Metrix, Liquid Grids, Wyldfire.
Investment Philosophy: "I invest in creative concepts with dynamic entrepreneurs in fields that I like and understand. I look for productivity solutions with barriers to entry, large markets, and multiple exit opportunities."
Experienced networking industry executive and CEO at Coradiant, AirFiber, IPivot. An engineer and former Air Force aviator with 26 combat missions in Operation Desert Storm.
Investment focus: Enterprise systems only; almost exclusively Internet infrastructure.
Recent investments: DB Networks, Coradiant, Sanera Systems, IPivot.
Investment philosophy: Limit the trust of others to the amount of skin they have in the game. Invest in opportunities that leverage big markets, significant problems, customer requirements, recurring revenue.
Co-founder of T2 Venture Capital, Kauffman Fellow, Co-founder of Global CONNECT at UC San Diego, Co-author of “The Rainforest: The Secret to Building the Next Silicon Valley."
Investment focus: A generalist investor in high tech and healthcare.
Recent investments: Biomatrica, Somark Innovations, Liquidity Corp.
Investment Philosophy: “We invest in the synergistic potential of extraordinary talent, disruptive ideas, and a defensible competitive advantage. I view our entrepreneurs as partners, and believe in fairness, not advantage.
Founding CEO of Tourmaline Networks. Investor and adviser.
Investment focus: Mobile, software, IT.
Recent investments: VirtualMetrix, GroundMetrics, Cashie Commerce, LiquidGrids, mSIGNIA.
Investment philosophy: "Innovative technical solutions that solve real problems. Must be exclusively profit-driven, something I understand, and preferably includes IP."
Hedge fund manager and investor. Co-founder and Chairman of StockTwits.
Investment focus: Financial Web, Mobile, Consumer Web, New Media, and eclectically in great teams and entrepreneurs.
Recent investments: Apptentive, MobileDevHq, AnyoneHome, ChartIq, and Kensho Finance.
Investment philosophy: "I invest in companies that make products I use and love. I look for big trends, and invest along the valuation line from angel to public markets."
Allison Long Pettine
President & Founder of Crescent Ridge Partners.
Investment focus: Mobile, SaaS, Internet, Healthcare IT, Biotech, Energy.
Recent investments: Embarke, Saambaa, Ground Metrics.
Investment philosophy: Rock Star entrepreneurs + disruptive technology, and “How I can add value.”
President of family office Malloy & Co., Addepar investor and advisor, avid surfer, and co-founder of PEERs Network.
Investment focus: Financial technology, Social Media, Biotech, Health Care, Cleantech.
Recent investments: The Backplane, Addepar.
Investment philosophy: "While profitable investing is a must, I am always looking for ways to make a positive, lasting impact on local communities through business."
Engineer and early Qualcomm executive, now focused on technology commercialization as an advisor and consultant.
Investment focus: No preferred fields, but highly selective.
Recent investments: MicroPower Technologies, Leading BioSciences, Liquid Grids, DriveCam.
Investment philosophy: "I like old-school plays that have real IP and address a real need. The management team is critical in terms of domain expertise and trust, especially the CEO. What is the market size, growth, and maturity? Then, what is the product or service, and what is the IP, value, and stage of development?"