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Startup world: Finding funds, advice

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[caption id="attachment_101432" align="alignright" width="320"] Lindsay Austin, SoCo Nexus chairman and an active investor with North Bay Angels[/caption]

ROHNERT PARK -- Want to invest money in a startup in hopes of a big payoff when the company goes public? Good luck with that. Investing in startups is not for the faint-of-heart or for those who want their money back inside of a decade.

Lindsay Austin, a former executive of several technology companies that used lasers, including Uniphase, is chairman of SoCo Nexus, a startup incubator located in Rohnert Park’s Sonoma Mountain Village, and has been on the board for six years. Mr. Austin is also a member of North Bay Angels, a group of about 50 accredited investors who make at least $200,000 a year as individuals, or $300,000 as couples, or have investment assets of $1 million apart from their homes.

 “What are the right kinds of companies to start in Sonoma County? It’s not Silicon Valley,” Mr. Austin said. “It took awhile to figure out the success formula.” Initially they sought tech companies with intellectual property that could get to $25 million in sales in five years. There weren’t enough such companies.

“We rebranded as SoCo Nexus” about two years ago “to be more inclusive,” he said, embracing “makers” not just in technology, but medicine, food, cosmetics and other industries. “If you can grow your company to $1 million or $5 million in five years, that’s OK,” he said. “You don’t need to have intellectual property. It’s certainly desired, and will increase your chances of getting funding.”

They look for entrepreneurs with a decent business plan and the tenacity to grow a business. “Let’s create a robust community -- an ecosystem -- for entrepreneurs,” he said. Startup companies that need capital to build products usually struggle to obtain bank loans, and instead must attract venture funding from investors willing to stomach high risk.

North Bay Angels has turnover of five to 10 members each year. “Once you have made a number of investments,” he said, “it takes a long time to exit. People fill up their portfolios with angel deals, and they want to sit and wait, and harvest that over the next 10 to 15 years. There’s a natural churn.”

New crowdfunding legislation may open up venture funding for much smaller investors, he said, noting that Sausalito-based Breakaway Funding seeks to capitalize on that emerging market. Breakaway Funding was founded by Kim Kaselionis, formerly president of Circle Bank before it was acquired in 2012 by Umpqua Bank.

The problem with crowdfunding is that “I would want to invest in a company that has gone through due diligence,” Mr. Austin said. Some crowdfunding is almost charitable, he said. “You’re not looking for a return.” He expects to see more oversight of crowdfunding by the Securities and Exchange Commission.

“One of the benefits of North Bay Angels is you get to see all the best deals,” already vetted by a selection team of investors who test each funding candidate for viability. They talk to customers, check code, look at cash flow, inventory costs. “There’s a lot of lunatic fringe out there,” he said. “It safeguards being blindsided. What happens if you don’t quite meet the revenue for a quarter, then what? How resilient is this plan? Is it hanging by a thread?”

Less-experienced investors may want to follow lead investors who take a financial interest in a startup, he suggested. “The tires have been kicked. The CEO has been checked out. You have to be in the right deals.”

Startup investing is risky because these are not publicly traded stocks. “You can’t get your money out,” Mr. Austin said. “This is highly speculative. You have to have a very, very long-term horizon -- five to 10 years. It is very cyclic.”

When telecommunications companies were booming, nearly every idea and company made money. Then the market crashed, wiping out most startups. “You always hear about the ones that made it big,” Mr. Austin said. “The ones that didn’t -- they quietly lick their wounds.”

The due diligence process also helps to determine fair valuation for a startup and estimate reasonable prospects for a return on investment. Entrepreneurs often want to sell tiny portions of their enterprises for lots of money. “That doesn’t make for a very good return on investment,” Mr. Austin said. “You have to factor in the possibility that you won’t be here in five years.” Only 10 percent of startups may survive, he said. “There is a risk, and it’s not low.”

Sometimes thorough testing of a startup can be gut-wrenching. “But before you write that check,” he said, investors need a solid sense that the CEO and business plan have a decent chance of success. “The best people are diligent, and don’t do it on passion.”

Venture capitalists have to invest in multiple deals to spread their risk. “You have to be willing to take your lumps and realize that a lot of those are going to die,” he said. “When they die, you actually want them to die quickly, as opposed to keeping them alive, because they will bleed you to death. It’s very hard to cut your losses, but sometimes that is the best strategy.”

Having a company go through the selection process can weed out problems. “You may have it half right,” he said, “but there’s a fatal flaw. There are a lot of brilliant people who aren’t CEOs.” Engineers, especially, invent great ideas but fall down on business execution.

As an investor, “you often hear, ‘This product is so good it will sell itself,’” Mr. Austin said. “That sends up a big red flag for me.”

“Investing locally makes sense,” Mr. Austin said. He likes to take an active role in any company where he plunks his own money. “The best way to minimize the risks is to understand the CEO. You are betting on a horse jockey,” he said. No CEO is perfect, he notes. “Do they listen, take advice? Are they collaborative? You need to be a leader to grow an organization. Are they covering all the bases?”

He suggests that startup CEOs seek advice from “grey-haired mentors” who have seasoning in business management. “All it takes is one or two weaknesses in a plan and it can kill it.”

Many entrepreneurs come to venture investors and say, “I’ve got this great idea. All I need is a million dollars,” Mr. Austin said. “The answer is no, people don’t pay you for ideas. They pay you for execution, a plan that is viable, a team that is cohesive.” The best investment company is one where the CEO has already done market research to identify customers willing to buy the startup’s’ products as soon as they are available. “If you have cobbled together a prototype,” he said, “and it works and you have shown viability,” even better.

“If it’s a research project, no one wants to invest,” Mr. Austin said. They want “a real product, and people want to buy it. People are more apt to fund a working product. Show that you are scrappy and can get things done.”

Startups need to have a story so compelling that they can make actual sales to real customers before they approach venture capitalists for funding.

“I like to invest in companies that are in an incubator,” Mr. Austin said. “There’s a two- to three-times greater probability of survival in five years” compared to entrepreneurs who work alone at home. “You’re going to step in a pothole. You’re not going to survive. If you aggregate entrepreneurs, they will support each other, learn from each other. It helps stimulate innovation” and cross-fertilization of ideas.North Bay Angels links entrepreneurs, investors

North Bay Angels, a classic angel group based in Sonoma County, brings together accredited investors and startup companies desperately seeking capital.SoCo Nexus entrepreneurs

A list of startups in the Rohnert Park business incubator.Lindsay Austin: profile of a VC investor

ROHNERT PARK -- SoCo Nexus chairman Lindsay Austin was former vice president of sales and marketing at Uniphase, which merged with JDS to become JDSU. The company has a large Santa Rosa operation with some 400 employees, acquired in 2000 when it was Optical Coating Laboratory Inc. and a major JDS supplier.

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