By ADAM GIFFORD
Stephen Tolchin is an angel.
That means he invests in software and communications companies when they are still an idea on the drawing board, helps them with advice and contacts until they get a product to the stage it can be demonstrated, and then introduces them to the venture capital funds which will provide the funds for the next stage.
It is a high-risk business. Angels write more cheques than venture capital funds, but see 19 out of 20 investments go up in smoke. That is why the angel investors typically get 30 or 40 per cent of the company for their efforts.
Mr Tolchin says in 15 or so years of doing it, he has had to write off one of his 20 angel investments.
"Ten I don't know what will happen, and the rest have done well."
That strike rate is one reason Mr Tolchin is an advisory principal and director of Double Impact, a Silicon Valley "global venture capitalist" which is 10 per cent owned by New Zealand listed technology investor Strathmore Group.
In the deal struck last month, Double Impact got $US500,000 of Strathmore shares and the same in cash.
Mr Tolchin says changes in the venture capital market mean angels now do much of the work seed fund venture capitalists used to do, putting between $US500,000 to $US5 million into start-up companies.
"I see 200 to 250 deals a year," Mr Tolchin says. "They come from phone calls, e-mail, from people who used to work for me, people who know people who worked for me, people I used to work for, from lawyers I know.
"I look at the deal and if it is something that tickles me, I will take a closer look."
Unlike many angels, he does not have a template or set of rules to apply. "I have to be interested in the business itself, I have to like the people, I have to believe there is a large market and, most importantly, I have to believe if I put a little effort into it, it is capable of attracting following finance - because the key fear of an angel is not being able to get the money to cover your money."
In some investments Mr Tolchin just puts in money, banking on the abilities of another angel to help the business.
On about one investment a year he will take a board seat "and put the year into helping the company out until I lose interest."
He puts together the financing package, attracts staff or outside skills, and makes connections with other companies which may be able to help.
Entrepreneurs come looking for angel funds because they do not have access to venture capital funds. "You can't walk into a venture capital fund any more. Significant venture capital funds have rooms filled floor to ceiling with business plans they do not have time to open.
"The only thing they look at are deals brought to them by people they know - former chief executives, angels, or if the founders of the company are experienced."
That is where companies such as Double Impact and Strathmore come in. Double Impact, which has just opened an office in Sydney to add to its bases in San Francisco, New York, London and Tokyo, helps new companies do strategic partner identification, capital strategy, business development and other services which accelerate the development of the business.
Chairman and chief executive Michael Gale, an Australian, says it offers a similar range of services as an incubator, the venture capital companies which ready companies for sharemarket listing.
"The difference is the business model. An incubator is very much pick four or five things and hope one is a hit," Mr Gale says.
"The catalyst model is more a services model. We charge people fees. We don't supply the capital, but we have become aligned with capital providers and the capital often flows because we are involved."
While service fees are charged at a break-even level, Double Impact takes equity for its eventual profit. "We don't have to fund operating losses so there is less downside risk, and our upside is spread because we are working with a lot more companies."
The Strathmore tie-in allows Double Image to identify opportunities in the Australasian region, where there are few angel investors or other deal sources.
"When they are looking at opportunities in the region, they can say to us early in the piece `will this work in the US?'
"When they come to the US, they do not have to worry. If Strathmore says a company is ready for prime time in the US, we believe it is and we know the work is done, it is packaged properly, the issues are addressed and there are no nasty surprises in share registry. So we get this filtered flow of deal opportunities and Strathmore know once they pick a deal the follow-on is available."
Strathmore chairman Phil Norman said Double Impact was currently helping Strathmore signing Auckland company Genie Systems to take its procurement software to the US.
"We have qualified them and invested in them, and they now need to get established.
"There are usually more opportunities and options than these guys know to point a stick at, so Double Impact will identify where they will get most leverage and help them make some selections, develop a strategy and executive well."
Where others fear to tread
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