Most Nashville-area angel investors began their careers as young entrepreneurs. After gaining success with their companies, many want to “give back” to the local business community and, as such, focus on investing in fledgling companies.
However, there is a transition. These folks go from trying to convince investors that their companies’ products/services will be successful and thus worthy of investment money to — in a reversed role — investors trying to poke holes in an entrepreneur’s model.
Nashville Posttalked to four veteran investors to get their take on this interesting dynamic. Here is what they had to say.
G. William “Bill” Brown is CEO of Entrada, a Nashville-based workflow solutions company that provides services protecting physician productivity before, during and after the transition to an electronic health records system.
Of note, Brown once served as an investor and is now more so an entrepreneur, providing a perspective that is distinct given most angel investors were originally entrepreneurs.
Beginning his career at Price Waterhouse Coopers, from 1998–2005 Brown worked at PriCare, a $30 million physician practice management company. While there, he managed multiple simultaneous startup and growth operations. Success with that led to promotion to chief executive officer in 2000. As CEO, Brown oversaw a turnaround of PriCare from losses of $110,000 per month to stable cash flow while transitioning the company to a new business model.
From 2005-10, Brown grew a consulting firm that worked with growth companies, particularly with a health care emphasis. Specifically, he helped with investor-led growth companies with business planning, infrastructure development and structuring of capital transactions.
Since 2010, Brown has served as the CEO of Entrada, growing the company’s revenues by 20 times over a three-year period.
“I have worked on both sides of the fence, just in the reverse order [that might be more commonly seen],” Brown says.
When asked how he handled his approach to investing in a company, Browns says there are two considerations.
“First, whether you believe that the team has the skills and the intangible character traits to deliver — people with the mental make-up to persevere, people who are willing to do the hard work and last through the grind of growing the company, especially when you consider it always takes longer than the team thinks it will,” he says. “I often tell entrepreneurs that the writer of every business plan feels his or her projections are ‘conservative.’ ”
Brown says 99 percent of those business plans miss projections by at least a year. To an investor, the phrase “conservative projections” is an oxymoron, he says.
“Second, whether the specific niche makes sense and appears to be scalable,” Brown says. “Scalable means two things: Can the revenue model be replicated and is the revenue opportunity enticing enough to be worth the risk?”
Brown says he has seen many business plans that can be replicated; however, the revenue opportunity is often not large enough to motivate an angel to investing in a company.
“It is often difficult to stay emotionally independent here, because you might find you really like the team on a personal level,” he says. “So, the best way to accomplish this is to go in looking for issues and try to stick to the facts.”
When Brown consulted with companies, he says it was very tough to keep from “taking over” meetings.
“Since I was brought in by the investor, but the company was my client, I had to adopt a persuasive approach,” he says. “That led to frustration at times, and there was a constant dynamic tension as to when to take action and when to be patient. It’s a challenge even today, but I imagine that most highly engaged. entrepreneurial people struggle here too.”
President and CEO, CoreCommerce
Matt DeLong's Franklin-based company markets e-commerce software that lets small and mid-sized companies launch their own web storefronts. As an investor, DeLong says he must, to an extent, determine what about a company will and won't work. His entrepreneurial background helps in this process, he adds.
“As an investor, it’s your responsibility to ‘peel back the layers’ and understand the details and dynamics of a startup,” DeLong says. “Running a startup is typically a very stressful experience so I like to dig into what I call the ‘founder mix,’ which is comprised of many different aspects of a startup — such as how long the founders have known each other, the overall vision for the product and company, competitor analysis and more.”
DeLong understands the stress fledgling companies are under. He once live that stress.
“Our company bootstrapped so we were our own angels,” he says. “I personally guaranteed a $200,000 letter of credit from our bank to launch CoreCommerce. If the business failed, I’d be out of a job with a $200,000 debt I’d have to repay, personally. Founders often take enormous risks and they requires you (and your family!) to be ‘all in.,’ Years later, I look back and think that was a little crazy to do, but in the end, it all worked out well.”
DeLong says his goal as an angel is “toadd value” only when possible.
“I only invest in companies that I feel I can contribute beyond just capital,” he explains. “I like to develop a relationship with the founders and be available for feedback and making business introductions, if needed. When you invest in a company, you must trust their team and work. To me, staying out of the way shows that I trust them to do great work. As an investor, there is a balance to being available yet staying out of the way.”
DeLong still works as both an entrepreneur and as an investor, Yet he finds transitioning from one to the other relatively seamless.
“It’s important to be able to function in both capacities and perspectives no matter which role you’re in at the moment,” he explains. “As an entrepreneur, you’re in the drivers seat, whereas, as an investor, you have to be comfortable with other people in the drivers seat. At the end of the day, it comes down to three questions: Are you working with a team you want to work with? Is the team obsessed with the product? Are you doing something you really think matters? All of those questions are important both as an investor and entrepreneur.”
Chairman and founder, Stratasan
Tod Fetherling, a 24-year veteran of the health care marketing and technology sectors, is chairman and founder of Nashville-based Stratasan.
Formerly, Fetherling served as president and CEO of the Nashville Technology Council, leading it through a growth phase that included a re-branding, a 29 percent increase in membership, and an 89 percent increase in revenue. In addition, he helped launch the Nashville Entrepreneur Center in partnership with the Nashville Area Chamber of Commerce.
Previous positions have included: Chief Product Officer, ConnectivHealth; CEO Relegent; VP Business Development, First Consulting Group; CEO, Galaxy.com; President, The Health Network, and Director of Interactive, HCA.
When you consider investing in a fledgling business, what type approach do you take as it relates to considering how and why that business, hypothetical, will and won't be successful?
Most of the businesses I invest in, I either have a lot of confidence in the individual and/or it’s a business I now a lot about. The formula is experience in the management team or within the space. Fortunately, I’ve been in the tech field for a long time.
What do you bring to the table in addition to angel investment money?
Experience and connections. I’ve done this four or five times from start-ups to exits, selling different assets. I’ve also run my own business, a lifestyle business, so I have an appreciation for that. I have a sense for how the corporate world can operate. I understand the market size and the customer size for the company’s customers.
Which of your skill sets is typical the most useful?
My research mentality. I like to dig until I find the right number.
Which skills are you working to refine as an investor?
I’ve taken a couple of finance classes online. I’m trying to become more disciplined in my own portfolio.
What was it like cutting that first investment check?
The most recent was for Entrada, Bill Brown’s company. He has gone from start-up to investor to running a start-up so I can relate to that. With The Health Network (cable health Internet company). I wasn’t nervous. I would not invest if I didn’t feel comfortable.
Have you struggled to stay out of the trenches and strike that balance between being engaged and being too hands-on?
Currently, I’m invested in five companies, all Nashville-based. I’ve learned a lot of lessons. I try to get out of their way if they want me to but if they need help, I’ll spend nights and weekends with them. Every company is unique and I try to figure out what it is they need for me and try not to overstep that. Do they just need the cash or do they need help in specific areas. I tell folks thinking about angel investing to be upfront with their companies. There are so many angel investors that want to “stay in the deal.”
Principal, Tennessee Community Venture Fund
Eric Satz, a former investment banker and entrepreneur, has experienced life as both an entrepreneur and an angel investor. Here is his take on both.
"I think the thing you take from being an operator [of a business] is a greater awareness that it's not a straight trajectory up. It's not a straight trajectory down either. People are good in different stages of a company or business, and very few people can take [that entity] from 0 to 100. Most people don't make that complete journey.
”As a VC, it's important to have an open discussion with a founder about the various stages of growth and development and be able to say, ‘You did an awesome job to get us here. There are different challenges and opportunities from here forward and [we don’t know] whether you're the right person from here forward...’
”In the businesses where I've been the founder, I've been open to the idea whether everybody thought I was the right person. At the end of the day, when you take capital from others, you have to do what's right for the company as determined by your board. If it's your money, that's one thing. But as soon as you take capital from other people, you have to recognize there's a different set of fiduciary responsibilities. [As an entrepreneur] I was open to the idea that I might not be the best person. But that's not always the case. [As an investor], I always have that conversation up front.
”When I make an investment, I make it clear I'm not a passive investor. But that doesn't mean I want to be involved day-to-day. It means I want to be involved strategically. In some cases, I'm involved day-to-day by choice. And in others, I'm involved strategically. But the fact is I like doing both."
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