The Central Texas Angel Network (CTAN) of Austin, TX (www.centexangels.org) has been in operation less than 18 months, but has made quick progress. The group ended 2007 with 50 members and more than $3.6 million invested in 14 deals.“Austin has a history of angel investing,” says Hall T. Martin, CTAN executive director. “We had some strong groups in the nineties, so there is a long history of people who are interested in taking risks in technology and doing angel investing in general.”
When the Internet bubble burst in 2001, the angel community in Austin fragmented, but Martin says that 2006 marked the beginning of new cycle. “Jamie Rhodes, CEO of Perceptive Sciences and CTAN chair, was going to angel meetings in Houston. He noticed that about a third of the members and presenters were from Austin,” Martin says, “so he and others founded an angel group here.”
The Austin Chamber of Commerce helped with press and publicity and provides a room for meetings. “We were able to set up a fairly low cost virtual model,” Martin says, “and it’s turned out to be synergistic with the Chamber. What we do also contributes to the community.”
CTAN is a member-managed network
Central Texas Angel Network is a member-managed group, with each member making his or her own investment decision and investing as an individual. “We learned the hard way from the groups in the nineties not to live off sponsorship money,” Martin says. “This time we followed the example of the Houston Angel Network. Each member pays $1,500 in annual dues.”
The group has about a 50 percent retention rate. “The biggest mistake people make,” Martin says, “is that they underestimate the time it takes to do angel investing properly. After a year people come to understand that, and some of them do drop out.”
CTAN invests in Texas-based companies and targets rounds of $1 to $2 million, preferring to participate in syndicated deals with other angel groups such as the Houston Angel Network and venture capitalists who invest in early stage companies. “If a trusted resource brings you someone, the quality is much higher,” Martin says.
“With off-shoring, the costs of doing business have gone down dramatically, and new companies are figuring out how to be more capital efficient,” Martin says. “What used to be a $5 million investment deal in the nineties might be a $500,000 deal today. I call it the Golden Age of Angel investing.”
Several local venture capitalists are commercial members of CTAN. “They pay annual dues of $3,000 and have two chairs per firm at our deal meetings,” says Martin. “The VCs who are part of our group want to fund early stage and emerging technology businesses and play nice with angels, so it all works out well.”
CTAN receives 30 to 40 business plans per quarter
An entrepreneur pays $250 to submit a business plan on www.centexangels.org. “Before we had our site up and running, we received calls and plans for a lot of non-angel deals,” Martin says. “Now we have people really thinking hard before they submit. About half the deals we see are the type and quality that we want. In 2007we saw at least 15 good deals every 90 days; in 2008, we are going to have six deal flow rounds instead of just four rounds.”
Martin and others review the plans that are submitted and select four to present at quarterly screening meetings where the entrepreneurs pitch their companies. CTAN then forms a due diligence team. Three of every four deals that are presented typically have a term sheet already, but if there isn’t one already, a lead angel is named to lead the term sheet team.
Two of the four vetted deals are typically funded. Once the two are chosen, the group holds an angel investing lunch to present the term sheet, valuation, and tax consequences to the membership.
CTAN looks for companies that have a complete product and an entrepreneur who has invested some personal capital in the business.
“Our sweet spot is to invest $500,000 to $750,000 in a $1 million round,” Martin says. “Because we have such good deal flow, if a company doesn’t yet have a customer, they aren’t likely to make it into our top four.”
The group is open to all industries and tries to be as diverse as possible
“In Austin, it’s easy to end up with software and web businesses,” Martin says. “They currently make up about half our portfolio, but we are also interested in medical devices and healthcare. Some of our members come from the film/video/media industry, and we also do consumer products from time to time.”
Some of the key deals funded last year were Perception Software, which provides electronic design automation software; Displaypoints, an at-the-restaurant table digital media device, and Minggl, which is social networking software.
Martin says that the CTAN membership seems to favor certain terms—such as preferred equity, redemption rights, accumulating dividends, and liquidation preferences, but that all those terms aren’t achievable in every deal.
“This year we are making it clear what a term sheet is and can do,” he says. “People are starting to understand what they really want. They are learning that if you really want preferred equity, don’t vote deals with convertible notes into the presentation meeting.”
The group is working on a standardized term sheet methodology. “As we close more deals, we will be working on a process to identify the top three risks in most deals and choose terms that mitigate those risks,” Martin says. “We don’t have it all worked out yet, but the idea is to match terms to the risk appropriately.”
Education for angels and entrepreneurs is a CTAN priority
CTAN has held five angel education sessions focusing on topics such as valuation, due diligence, financial due diligence, angel/entrepreneur interaction, and planning for successful M&A exits. They ask local and regional attorneys and other service providers to teach a session at no charge.
“This gives them the opportunity to do a good job and meet the angels while the angels receive training in things they need to know,” Martin says. “The group also participated with the Austin Technology Incubator in term sheet education for entrepreneurs.”
CTAN also provides an introduction to funding seminar once a quarter. “These sessions started out with 30 people and grew to 100,” Martin says. “These meetings have been very effective.”
Martin says the group is working with other organizations in Austin to create a four- to eight-week fee class for entrepreneurs to teach term sheet, business plan writing, and other relevant topics. He also writes a blog called Angel Investing in Austin (www.angelinvestinginaustin.blogspot.com).