Eric Gasser joins Nick to discuss startup ecosystems and how his high-tech & high-touch screening process works at the Tech Coast Angels. We will address questions including:
- Can you start off by talking about the startup funding environment in Sand Diego a decade ago and where it has evolved to today?
- From your standpoint, what are the key components necessary to create a healthy startup ecosystem?
- Do you have a position on whether it’s the capital or the entrepreneurs that are first necessary to catalyze an ecosystem?
- Some areas that had very strong venture ecosystems 10 years ago have either declined or have lost a significant % of their share of startup funding. Any thoughts as to the factors that may adversely impact regional ecosystems after they have been established?
- Do you think that regional ecosystems will increase in importance or decrease in the coming years as barriers to capital have decreased?
- What thoughts or advice do you have for investors in smaller markets trying to establish and build their startup ecosystems?
1- Connectivity of Capital Sources and Entrepreneurs
Eric cited a key factor, for the success of the San Diego Ecosystem, being the collaboration between key players. When an entrepreneur is raising a seed round or a series A, it is clear where they need to go and who they need to speak with. When investors review a startup, regardless of whether it’s a fit for them, it is clear how to direct that startup and who to link them up with. This seems to be a very supportive ecosystem where many are working together and not against each other. Often we think about deal-flow as a competitive advantage and thus it becomes competitive. But, today’s material can show that organization and collaboration between the investment community and entrepreneurs can move past a zero-sum game to more value creation for all.
2- The Mismatch of Expectations
Eric talked about the great businesses, up and down the coast, that fall into the lifestyle business category. They are very promising businesses that should be supported and encouraged. But he did cite that there’s often a mismatch of expectations with the startup founders. While these are great businesses that are have high potential to grow, an investor needs to make, at least, a double-digit multiple on their investment. With most lifestyle businesses this will never be the reality, so fundraising for equity is not the ideal path. For both investors and for founders, we all need to understand each others expectations. It can be much less painful if the discussion is had, upfront.
3- Three Types of Investors
Eric’s advice here was for startups to understand what types of investors to target and how to position themselves with each. It seemed to him that there can be a lot of time and effort wasted with a shotgun approach toward raising capital from early-stage investors. Are you targeting people with experience in the sector or vertical? Do they need to intimately understand and have felt the problem being addressed? Or is the startup providing some sort of benefit to society that may get a critical mass of passion investors behind it?
Eric’s three example investors included:
The Passion Investor
The Industry Investor and
The Academic or Analytical Investor
So, to paraphrase Eric, when a startup is asking for money, they should’nt be asking how many deals you’ve done, they should be asking what types of businesses have you invested in and are passionate about. We often think about passion when it comes to founders, but this plays both ways.
Tip of the Week: The Value-Add or the Value-Suck
Nick: #Eric Gasser joins us today from San Diego California is co-founder of #Seed San Diego manager at #High Camp ventures and is a vice president of the #High-Tech screening board at tech Coast Angels #Eric we really appreciate you making time for us today.
Eric: No problem.
Nick: So can you start off by telling us how you got involved in venture and start-up investing?
Eric: Sure I started probably in early 2005 and I made my first investment and then realized I was in way over my head when I was living in San Francisco and decided to take a step back went back to work and only in the last three years or so I’ve been hitting it harder than normal owning #Tech Coast angels I decided to just sit back and see how things unfolded I guess six months in joined the board and I thought I would be again really around how we screened ideas and how we interacted with the ecosystem so I spent another 4-5 months really just talking to founders and what I found out was that there was this huge gap of perception between the money and the founders and I don’t think this is uncommon in any startup ecosystem so what I wanted to do was give people more opportunities to really meet the angel community if you want to capture the #Tech Coast angels last 36 months which based on our numbers really are transformative we go from right around 4.5 million dollars in funding to where we’re at now closing 2014 at 8.3 so we put point three million into the San Diego ecosystem just in 2014 which considering we only did five and a half million in 2012 is pretty substantial think about it from the perspective of the founders. And that’s what I try to come at it from the founder says I’m in this environment and I’ve been pounded if they’ve been around prior to 2012 that there’s really no money and I need to go to the valley because they’re going to understand my technology idea and so they go to the valley and you get beat up and they come back and then when they come and meet with either seed San Diego which had been around San Diego longer than I had but they go to #TCA and then they say hey we passed they don’t really get to see the output is 8.3 million dollars and 16 companies just in San Diego it is 200ks and fifty companies this is real money for companies that eventually will be something we are super selective because one we do more due diligence than most and I could leave it up to #Sergio who run kind of our due diligence process good that process is what drives our ability to fund deals at higher amounts in relatively short periods of time.
Nick: Why is that?
Eric: We have a hundred plus members here in San Diego and we have an active group of say fifty to sixty who show at all the meetings view all the screenings they participate to ask
really hard questions they get involved from an engagement perspective but then you have this other quarter of the people that I would say is another 20 within this fifty to sixty people were a nonprofit organization we don’t get paid we actually pride ourselves on making sure we can get it right because we have another eighty people relying on those 20 to actually get it right so our diligence reports are some of the more thorough reports I would say in the industry I haven’t seen due diligence reports as thorough as #TCA outside of some of the major hubs and I think people drive to the due diligence work first they’ve read it they know they’re interested in the space just from what the company does and that due diligence support gives them a level of comfort and helps mitigate some of the risk they would normally not have access to if they weren’t part of a group or weren’t part of a larger network resulting in higher average check in all the other metrics that are gauged honor investment group or network.
Nick: That’s one of those big areas where give founders had a little peek into what that looks like?
Eric: They would go I should be coming there for every idea the first time and I spend most of my time doing that I’ve rewritten or revamped our high-tech screening process and we can go into that into a little bit more detail but it’s actually really exciting it’s a higher level of touch point I’m actually calling every applicant that applies to #Tech Coast angels San Diego on the high-tech side and I’m spending between an hour and four hours on the phone with these people walking through what their idea is does it make sense is it hitting all the data points that are relevant to what they’re trying to build or what they have built clearly we’re investing a little bit earlier than most three revenue and all those other variables but I would challenge our process to any other process as far as the whole amount of touch points we have any day we are more engaged in our last 36 months than I think we have ever been.
Nick: What are some of those variables and what is that screen process look like that you engage in early on?
Eric: So let’s start at the very beginning say we were on a social event we meet an entrepreneur he’s doing something interesting and we say you know what this looks really interesting we’d love to meet with you it’s clearly too early to kind of put them through the application process so we had office hours we bring him in 45 minute kind of casual conversation really just get to know the founders and that meeting consists of an analyst myself typically another angel when we’re done with that 45 minutes we walk away with three things one is we really like this person and we want to bring them through the process now we want to keep an eye on this person or there’s something wrong we’re not missing anything just we can pass on the next phase is going through the application process which would be pre-screening that’s a pre-screening application you apply online on TechCoastangels.com and that application goes to a screening committee that committee then makes a decision on if we want to bring them in for a 12 minute presentation 12 minute presentation twelve-minute question-and-answer so we get between 10 and 30 of those applications a month from there we pick five from those five we typically only pick one or two to move on to the following meeting which is a general session meeting which then you end up with more members usually between 50 and 75 members same format 12 minutes presentation 12 minutes question-and-answer throughout the whole process on the tech side you’ve engaged with me at three meeting points you have someone to call and that’s one of those things that allows them to be more comfortable hit the data points that are most relevant we’re not giving them the answers we’re just saying look tell us about your business we want to help you grow it and I’m a huge fan of that energy that you get when you realize that they’ve got it right and that you’ve helped them better articulated remember we’re considered thoroughly see to see deals see basically anything prior to series a the generic definition you think about that that’s what drives my phone bill
I’m on the phone 32 to 34 hundred minutes a month we’re looking at like three to five hours a day some days on the weekends depending on what’s going on I’ll be on the phone back to back, back to back and so this is new for #TCA this is not something that we’ve done before it was kind of a brainchild of few of us internally that we said what if we did this and I’m not doing it on my own I’ve got internal support from #TCA and external sources one of the local incubators in town were giving me some space to allow me to meet with these people on their terms one of the other things that was a little bit of a disconnect was being able to get to the
founders are founder community lives closer to downtown San Diego but the money is in Delmar la jolla and if you’ve been to San Diego you know that’s only 30 miles but it could take an hour why are we doing this I’m calling a founder and saying hey meet me at this restaurant on the coast in la jolla when I should be actually downtown and I can do three meetings in the same amount of time and I could take a less time out of the founders day so I park my butt a seat there I’m available all day usually go from 9 to 3 come in ask a question sit with me tell me what you’re doing tell me what’s going on help me understand what’s broken is there somebody I know that I can help connect you with to solve a problem so yeah I would say that over the last 24 to 36 months there’s been a significant change in the way we stream deals on the technology side for tech Coast angels in San Diego.
Nick: Most of the deal flow is coming in just through the application process on the website?
Eric: The bigger drivers more recently have been our outreach founders have realized that things are changing what they’ll do is sometimes they reach out to me and say hey can I get 30 minutes at office hours or could I get 30 minutes downtown they’ll lay out the plan on how they want to go at raising capital I support and provide feedback based on that and say hey look you need to make sure you dress these three data points to make sure that you’re successful at raising capital have you identified who your target angel investor type will be and those usually really helped prepare the applicants for the process and then we’ve got this kind of early look in it who’s out there and what’s happening and how we lost some because they’re too prepared and someone else write the check sure but in the macro sense we’re actually doing a lot better good for the founder community in the startup ecosystem than maybe we have done in the past.
Nick: Got it so the topic today is venture ecosystems #Eric you’ve been an active participant in the emergence of Southern California namely LA and San Diego as one of the most vibrant ecosystems in the states only about ten years ago people would not have included Southern California in this discussion can you start us off by talking about the startup in startup funding environment a decade ago and where it has evolved to today?
Eric: Sure I think one of the things that I’ve noticed especially when I started in the
earlier days I guess let’s look at 99, 2000, 2001 was typically a buddy buddy system less academic and more which is get this thing going and see what happens and I trust this guy I went through three of those failed attempts between 99 and 2002 worked for three different startups and bombed-out horribly now there’s a whole lot more level of friendliness and partnership and wanting to make sure that everyone finds a home if you will and specially since we’re here in San Diego and experience that I have in my circle the level of excitement is a lot higher than it was let’s say 99 to 2002 it seemed that everyone is making more money back in those days but we all know where that went more recently I think the ecosystem is thriving here in San Diego it’s growing and #TCA has done a lot to kind of help improve that process especially over the last 24 to 36 months increasing our touch points to founder community more outreach more visibility and 40 more capital work than we ever had in the past.
Nick: Yeah so from your standpoint what are they key components and/or players that are necessary to create a healthy ecosystem?
Eric: One is making sure this connectivity between capital and the founders there you need to know where to go if you’re raising series seed or you get this great idea you need to actually know where to go organizations and individual communities here in San Diego there’s connect there’s even access and a whole slew of others they pride themselves on having a community free thinking and the ability to go there say this is my idea and I really wanna make it work that’s becoming the standard based on a white commentator and all the other incubators and accelerators out there they all have their formula one of the elements that has to happen is the ability to connect those thinkers with the capital I want to say that there’s a lot of people out there that have gotten it right but I’m probably gonna be 98% wrong right let’s just say it in San Diego you know where to go if you want to look for Series A funding you go to #San Diego Venture Group those guys can align you with the people to talk to you and what’s happening if you’re looking for Series C and kind of that first round after friends and family you go to #Tech Coast angels we’re here we’re visible that’s what creates ecosystem it’s actually knowing where to go when you’re ready for the next step incubator accelerator depends on where you’re at and where you sit in the country the next thing is that seed funding and there’s lots of folks out there that help with that specially tech Coast angels and the next element would be what do I do with that Series A and it’s one of the things that San Diego has that other ecosystems maybe struggle with is that structure on where to go.
Nick: Yeah I get entrepreneurs in Chicago email me all the time asking who to connect with perceive enhancing its not clear it’s surprising to me because I’m living it so it’s clear to me but a lot of folks don’t know where to go for that seed capital.
Eric: I also think it’s the partnership capital piece I need to engage my counterparts at let’s use even Nexus or connect as good examples if that connection is strong and you work together as a community people know where to go the great ideas and the great companies get funded it’s quick it’s painless and it works the folks that sometimes make the most noise are the ones and it maybe a working towards a lifestyle company but have different hopes for what their company is this is the mismatch of expectations and we have even ecosystem up in San Francisco it’s the same thing if I’m in LA it’s the same thing if in orange county the same heads had bounced around looking for cash and they’ve been told you’ve got something great just keep doing it and print money you’re going to be successful can be really difficult for an investor to get their money back I don’t think that’s uniquely San Diego I think that’s general to the whole ecosystem of startups there’s always those.
Nick: So aside binge risk connection of entrepreneurs with capital other components that you think are important or may be necessary whether it be regulatory government components taxes and others a lot of tax breaks both here in California for angel investors can you talk about some of these factors in the part that they play in the overall funding ecosystem?
Eric: Let’s start one with taxes in the circles I mean typically we don’t talk about tax we know that it’s important and we know that it’s there’s a level of complexity that’s added to every exit I’m not too worried about it and I don’t think counterparts are too focused on it as a majority in the regulatory element I think might be kind of looking at crowdfunding things like that I’m a huge fan of it I had two exits in the last year they were crowdfunding coffee was bought by #Twilio and #Lift labs will be bought by Google lacks one was in a rock health incubator in
San Francisco the other one was a syndicated deal I believe in that kind of element and has its place in the ecosystem to broaden the reach of a startup is really important if you think that your community is not understanding your message and you tapped all the resources it’s best to step back and take a real hard look at are you aligning with the right investor community the investor is kind of like a customer of yours and I see this gap all the time my angel suggests no because my numbers make sense I’m in a twenty billion dollar market and I’m gonna get thirty percent of the market I’m going to be extremely well that’s what they tell you let’s move the decimal around and let’s talk about that so to be honest I focus on making sure that you align your message with the investor group that makes the most sense to it and this is kind of off topic a little bit but I kind of bucket into three types of investors a passion investor and industry investor and academic or analytical investor and industry person or product person they’ve got experience in that industry and they really like it they say oh you’re making the coolest whichever and I see that it makes a lot of sense and it’s not a really big problem it’s really easy for them to write a check the matrix behind it only validate their decision and the passion
investor could care less okay man you’re really good guy I really like you had a great Cocktail and write you a check so you get these three demographics in my opinion and you need to determine where your organization or where your startup hits and then you can target and built the demographic of your investor looks like and you start filtering and that’s probably the better route to go the shotgun effect on investors I think it’s a waste of time.
Nick: We hear this debate sort of a chicken or egg debate on what’s necessary first to create a thriving ecosystem is it the Capitol in the investors or is it really successful entrepreneurs have some exits in sort of kick-start everything I do have a position on what is necessary to sort of catalyze an ecosystem and get it off the ground?
Eric: I think it’s just getting organized that was one of the elements that was struggling say three years ago the ability to get organized and once you’re organized and you have the structure things start moving so back to the early example of incubators early seed funding and an ability to cap that series a follow-on around that’s the biggest fear as an angel you write the check though small in aggregate it could be bigger than normal especially considering our group we could step into a deal at two million dollars and lead around and have our other partners close it out that’s a substantial round for a new group did definitely on a smaller scale relatively big pie but it’s big relative to other groups so I think it goes back to just staying organized and knowing your community or once you can work through that process it just clicks and next pieces capital yes you have to have the right capital players involved otherwise none of that works so there’s a few successful founders that have kind of come back to San Diego and said look I’m gonna put my money to work there’s a few retired senior folks within organizations at home back to San Diego and said look I’m gonna join #TCA and I’m gonna sit back and I’m just going to cherry pick deals the ecosystem supports all that and as long as you’re organized where to go based on where you want to put your money to work it works you also need\ people to understand the risk factors I’ve known a few people to kind of step into this space and make a lot of heavy debts real quick and they’re gone right they’re here for eight months and then they disappear so you gotta kinda save on at least on my end the difference between the folks that are going to be back and the people that are actually gonna be here and actually help.
Nick: Who is it that provides sort of the organization at San Diego is it #Tech Coast angels is it an investor group agreed there’s this necessity of organizations that startups know where to go to get financing in the capital sources can connect with each other how does this go about formulating and how does the organization occur?
Eric: So one of those elements is plug into the educational element so as a startup regardless of your phase reach out to anyone of the public figures who are public entities within San Diego so if you reached out to #Evo nexus and said look I’d like to apply you’ve got a whole slew of information available on their website that actually aligns you with where you need to go so that early level of entry is what does the dissemination of information if you go to tech Coast angels website where five chapters spread out from Orange County or LA to San Diego you’re not going to get some of that specific San Diego focused next steps if you raised your Series C or some seed money and you’ve got put to work million and a half two million dollars you proved out in NDT you got some traction you’re ready to raise a little bit more money or maybe you’re thinking gonna go Series A if you were in tune with one of those accelerators incubators they would actually say look #San Diego Venture Group is the right way to go so I rely on those guys pulled back piece together and then those other organizations like seed San Diego a part of that I’m one of 4 and we brought that together based on a few things one we saw that the four of us were invested in a lot of deals together and we’re like there’s gotta be something here overlap is just too tremendous over about a year we spent a lot of time together and then more recently we decided we should really formalize this and go out to the community and say look we invest in all areas we’ll go all the way to Series C if we can get in and we’ll go it really is an Atkins ok and we’ll do everything in between if we get a good deal and once we put it all together we said look we can do this week spectrum we realize that what San Diego was missing is the gel that piece that you were referring to you like we want to not just be the capital but we also want to say if we find your deal we’re gonna give you the Lightning exposure to as much stuff as possible because we’re out in the field we want you to focus on growing the business you let us deal with some of these peripheral things that you spend your time doing which is raise money we have access to that element we set milestones that kind of align us so that we can best position that company for their next round of funding from a seed San Diego perspective it’s all about staying focused on what we’re trying to accomplish relieving some of that founder time when it comes to what they need to do to raise the next round of funding because we’ve done it so many times and when they do get to that funding element where they’re gonna raise money we actually do a lot of the background for them so we’ll schedule payments will share of taxes will go out and meet people will do whatever it takes to get that next round.
Nick: There’s some venture ecosystems regional ecosystems that have either declined or lost a percentage of their share in the overall funding landscape of the states any thoughts on factors that may adversely impact regional ecosystems in their level of funding activity?
Eric: Take us angels we and you can talk to Jeff jury is president of #Tech Coast angels San Diego we actually looked at this what could impact the ability for angels to come not exist what happens of crowdfunding and deals syndicate on angels list there’s a slew of them right there is what 12 or more now how does that impact our ability to grow our own ecosystem come back to an earlier comment good deals get funding so if they’re gonna go raise money from the crowd I don’t mind it actually mitigates risk it allows them to prove out MVPs get a little better traction and I would say a year ago I applied more weight to say angels list or our crowd or some of the other platforms and are probably more unique than the rest but I’m not too worried about it I think it actually helps mitigate risk for the angel community and buybacks one hundred and twenty or something kickstarters because I love it I’m addicted and just a Kickstarter junky and from an angel list perspective I’ve done 4-5 deals on there and I do it really just as a token of like I support what you’re doing here’s ten grand or here’s five or whatever I don’t do it from a perspective of this is actually going somewhere I need to step in heavy cause I can’t really help them #Mcafee and #Lift labs which were the two exits I believed their greater causes I didn’t think that they are actually getting exit so quickly I mean the accident in 10 months that doesn’t happen I wrote the check in November and then literally the following November I got my notice and off he was almost the same way I think it was January or something and I got my notice the following January and I’m not saying these are tremendous exits I’m just saying they validate the model and they also validate the crowd actually could pick a winner I mean off the raises two million dollars or something some would argue that they should have kept going maybe they would have done better I disagree I think those exit actually validated the model and will be plenty more.
Nick: So if it’s not crowdfunding that’s going to disrupt regional ecosystems any factors that have and things to look out for?
Eric: Sure I think it’s one of the elements is the uprise of all of the incubators and accelerators we’ve got this massive explosion of these organizations and a lot of our backs either by for-profit seems to be the trend there’s a few that are non profit which I actually tend to focus more towards if its academic or nonprofit I actually feel that they have a vested interest in the entrepreneur more because there’s no motive before profits all they want to do is generate cash so I do biased the nonprofit but I think eventually if we have a financial downturn it can be really hard for these people to continue to entertain their LPs and grow the for-profit side if they’re not having any exits because those exits are what generate typically the capital sustain life so I would just take a look at how their functioning ultimately what’s going to happen the nonprofits are gonna have a few wins and they’re gonna go you know what this is super worth it our backers see value and great and some would argue and downturn would mean that their contributors wouldn’t contribute anymore I get it but ultimately I believe everyone is really good hearted person and I think that those elements in a non-profit ones will kill it and do well the for-profit what ends up happening I think long term is they end up getting to a point where instead of having 15 and shared spaces and I’m using accelerators and incubators together though I think your listeners would argue and probably yell at the screen already but the thought is that they’re adding value is just I think there’s a different motive and if they don’t have those exits they’re not going to exist.
Nick: I get a number of emails from angels many in smaller markets give any advice or thoughts on what investors in these small markets can do to help establish in support or help grow their ecosystems?
Eric: It comes down to organization staying organized if there’s ten-year or five-year to you I was at the ACA which is the annual convention for credit investors here it was in San Diego this year and I was on a panel which was the power of angels like the very first day in the morning it was should I angel investor or not there were a lot of smaller organizations under thirty members I had a tech Coast angels badge on and they were going hey you guys are doing something right can you share and answer is yes I’m happy to take any calls for any small group that wants to start something anywhere in the country the world working with a few people right now based on that conference and really comes down to organization if you feel that you have what it takes to lead an organization then great start this group within your community reach out to counterparts that are doing something similar in the nearest biggest city and then make the time to coordinate within syndicate deals that’s how you’re gonna bring the smaller organizations and kind of connect them to the grid if you will you’re saying I’m small and I’m gonna work on my own community but also need deal flow and also need standards and also need some things that maybe I don’t have now but I can kinda connect with this group in a more urban environment that seems to be helpful I did something similar to that when we lived in LA because the vibe in LA was basically there’s too much traffic I couldn’t get to the meetings on time I live in South Pasadena there’s gotta be something around there for me and there’s a great group in Pasadena but I had this travel complex thing and I was like there’s no way I can get there in an hour so anyways I’m a big in-person fan and I like doing things in person connecting those small groups to a larger network and they don’t have to be affiliated it just have to understand like there’s a larger group in town and here’s what ends up happening our troops based in San Diego our meetings are in the Del Mar area we get applications from people in Temecula which is an hour away if there was a group in Temecula now there probably is they’re gonna call me. I know there’s a lot going on in Temecula so I’m using this example we don’t want the founders to drive all the way to San Diego and twenty-minute meeting right that doesn’t make sense why don’t we have a group in Temecula take a look at the deal tell us what they think help us we’re happy to participate we’re happy to help with the diligence especially if it’s a deal aligns with our members we’re happy to do a lot of things that help empower them to make the right decisions as long as ultimately it impacts our members remember driven organization and my responsibilities are to make sure I get as many closed ideals in front of our members as possible smaller groups in the little more remote communities kinda tap into the nearest largest city and say look we won’t.