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Wednesday, December 2, 2009
Thought Leaders
Common Angels' Geshwiler talks of angel investing's future
Companies born in the recession
MHT's Galen Moore: Hiring trends and opportunities
Breaking down the MIT $100K
James Geshwiler, managing director of Lexington’s CommonAngels and past chairman of the Angel Capital Association, was recognized for his commitment to funding and supporting New England startups with a 2004 Mass High Tech All-Star Award. With his experience managing the 70 investors that comprise Common Angels and chairing a much larger national group, Geshwiler is in a good position to reflect on the past year and discuss the future of angel investing. He spoke with MHT news editor Rodney H. Brown.
Q: Let’s talk about the recent past. What has the angel community been through over this last year?
A: One thing, particularly in volatile times, we need to think about is, What do we mean by “the angel community?” I think we really need to break it into two big groups, there are individuals and there are groups, and they act differently. What makes them all angels is that they are investing their own money.
The big difference between individuals and groups are that groups, by definition, have a charter, an organization, a mission and structurally just a lot more stability to them. You’re dealing with 30, 40, 70 people. It doesn’t matter if one or two or even 10 people drop out, because the organization is stable. It’s also harder to turn the ship, because you have to build consensus among all those people.
Individuals, they are acting on their own, they’re their own decision maker, so they can bow out or jump into a market a lot faster.
Q: Has either one of those two sides been more affected by this last year?
A: They’ve been affected differently. When I look out at the sea of individual investors — first of all, it’s much bigger than the groups — what I have seen is the typical thing that happens in volatile times: a lot of individuals checking out, and a very small handful who are steely and focused, who say, “I am going to take advantage of the situation.”
Within groups, what I have seen is sort of a similar effect, but in slow motion. There are certain groups like Common Angels who seized the bull by the horns. In Q4 ’08 we spent months in strategy and planning discussions. They were not easy. They were not pleasant. It was hard work, but we came out at the end of December with very strong consensus on what we wanted to do, which was, ‘It’s a good time to be investing,’ but the thing we could not tolerate was capital risk. Now the buzzword in the venture community is “capital efficiency.” For us, that means go-to-market (funding) is right around $2 million, and maybe up to $4 million to get to cash-flow break-even and that’s got to be it.
So you have similar reactions when you have big volatility. A lot retrench, and some take advantage and you see that spread bigger within individuals. That’s been the past year — it has been a year of decision, and 2010 and 2011 are going to be years of action.
Q: You mentioned capital risk. Talk about that.
A: One of the things we discussed was how risk had changed. You have to break it down and understand what the components of the risk are. There’s the risk around the people: Can you get the right talent? There’s the product: Will it work? There’s the market: Is it large enough? Then there’s competitive risk and there’s the financial risk. A year ago, three out of those five was positive, one was unchanged and one was negative. Everyone was going around in a panic — but that was about financial risk and about the wherewithal of follow-on capital. If you were selling luxury goods, yeah you had a lot of market risk. But a lot of what we have here in the Massachusetts high-tech sector is productivity tools. Most of the companies we are involved in, particularly in the IT sector, are either saving their customers money, making them more productive, or helping them sell more. What more could you want in a recession?
Now that financial risk piece is serious. Particularly as early-stage investors. From individuals there was not a significant diminish in capital, but they certainly were down. Venture capital went on hold for the first two quarters by and large. It’s come back, but you’ve got to look at the distribution and the long term trajectory of it, and it’s not pleasant.
The potential dark side of this is that there’s lots of things that we as a society would benefit from but they’re too capital-intensive or there is too much market risk too early to be able to merit capital from the private markets, and specifically the two that really stand out are drug discovery and this whole thing of clean-tech, even though there is a lot of money going into it. I have been concerned for quite a while that the proverbial cure for cancer won’t be lost in a laboratory it’s going to be lost in a failed financing round.
Q: What do you see as driving angel groups to action next year?
A: There are a couple of drivers. There are people who want to do this, will always want to do it, and in a downturn they form groups. I have actually already been contacted by a couple of people in recent weeks saying they want to start new groups here in the Boston area, which I don’t find surprising. The other thing, which I think is a bit of a twist, is that we have 20 groups in New England, so you will see more and more segmentation. Already in this town you have the Clean Energy Venture Group, you have the new Mass Medical Angels, and I expect to see more focused sector- or strategy-specific angel groups.
Q: So what are the hot sectors In New England for this capital to land in next year?
A: I am definitely seeing Internet-enabled business — some people say Web 2.0, some people say social media, but I think that is too restrictive — and mobile as incredibly intense and exciting areas, partially for cost reasons, but partially because the innovation’s opened up on both of them, mobile especially. The walled gardens of the carriers came crumbling down a couple of years ago and not a lot of people noticed. Now with a diversity of handsets and you have lot of extremely powerful and new computing platforms. Go to Mobile Monday: You can’t have a dull environment when you have 300 to 500 people who just show up.
Resources can be easily brought to those sectors, because there’s lots of people lots of talent, you are just going to see more and more innovation.
It’s harder, I think, with cleantech. Whether we like it or not, it’s not our historical core competency. We are not the oilpatch; we are not from natural-gas land. These are places that understand not just the production, but more important the distribution of energy — and that is something that is fundamental to the whole energy sector. I think something you will see here, though, are a lot more demand-management companies and companies that are using IT, be it smart grid or demand-response. I think that does speak to our historical core competency.
The up-and-comer is robotics, in my mind. I think the label kind of misleads a little bit. Most people think of robots and think things with wheels or arms, and really what you are looking at is computers breaking away from the desk and keyboard and moving into the real world. Talk about greenfield: That is totally uncharted territory. What’s making that possible is two things. One is the cost of the parts, which have come down by an order of magnitude. The other is the talent. We have now built up a critical mass of talent. You have a bunch of iRobot alumni hitting the street now, be it Rodney Brooks of Helen Greiner, and you have four or five more companies founded by iRobot alumni. I look back to the rise of DEC and Prime and Data General, and they grew up and people left and started new companies and you see that going on in robotics. Maybe there’s a couple more years there, but the capital markets have to figure that out.
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