Street Talk Angels Alight in Dallas

SOME OF THE 40 OR SO MEN MILLING ABOUT THE PARK ClTY CLUB dining room are smooth-cheeked twenty-somethings who struck it rich with lightning-bolt success as made its name and fortune. Other men have faces wizened by a lifetime of experience at places like Texas Instruments, before they left to build businesses and real wealth. Some wear suits and ties; others are “business casual.” The talk is of golf games and grandkids, and sometimes grandkids’ golf games.

They’re also talking about deals: deals they did, deals they didn’t do, and deals they wish they had done.

They’re all multimillionaires and members of a loosely organized group that calls itself the Dallas Angels, and they’re here this October evening for more than cocktails and conversation. Three entrepreneurs have been invited to pitch business plans and try to persuade some of these rich guys to invest in their fledgling companies.

After dinner the entrepreneurs step one by one to the podium to deliver their pitches. First up is an obvi-ously nervous Ralph Brocata, whose Rush Creek Software Co. helps Businesses manage all the reports they produce. Once he gets going, Brocata’s computer-aided presentation moves smoothly until the last graphic appears on the screen. The word “exit” mistakenly shows up as “exist,” sending a buzz through the room.

Harold Boade is next, and his soft voice is hard to hear from the back of the room. There’s no sound system, and members of the audience lean forward in their seats, straining to hear his low-tech presentation that uses an overhead projector to display his points. His company, YourImporter.com, seeks to use the Internet to match importers and exporters more efficiently.

Last up is Chris Renner, whose graphics presentation is the slickest of the three. His 8-month-old Inc2Inc would use the Internet to make transactions between suppliers and food processors more efficient. Rentier’s nervousness is obvious. His voice cracks from time to time, and he pauses frequently to look for his next sentence.

The Angels sit patiently through the three presentations, and it’s hard to discern their reactions. There’s a knowing nod of the head when a particularly salient point comes across, At other times an attention-wandering head roll is all you need to know. The key is whether anyone puts his name on a signup sheet to spend more time with the companies. A few names appear there as the group breaks up for the night, but it’s hardly a groundswell of interest.

“Angels,” an investor term first applied by producers of Broadway shows as a form of flattery, now are more likely to be private investors who take equity in a company in exchange for much- needed cash. The companies typically have tapped out friends, family, and credit cards, but are too small or too early in their development to attract venture capital.

The Dallas Angels started forming in April when commercial real estate developer Roland Bandy and patent lawyer Jerry W. Mills met for lunch at the Crescent Club with Pat O’Brien of Rogers-O’Brien Construction Co., Cyrix founder Jerry Rogers. VMX founder Dal Berry, and Van Hubbard, who recently sold Technol to Kimberly-Clark.

“I kept reading about the Silicon Valley Band of Angels,” says Mills, who has practiced intellectual property law in Dallas for 30 years and has seen his share of business ideas from the patent side. “It sounded like fun.”

The Band of Angels was the result of former venture capitalist Hans Severiens and former Intel senior V.P. Jack Carsten realizing about five years ago that many companies need $200,000 to $1 million to get off the ground and grow to the point at which venture capital firms with mega-millions might notice. Severiens figured that, while individual investors might be willing to invest $50,000 to $100,000. getting several investors together would give start-ups the early-stage funding they needed.

“We really modeled ourselves on Silicon Valley’s Band of Angels,” says Mills, “and we operate very similarly. I asked Hans Severiens for some help, and about the only advice he gave me is, ’Don’t invite any doctors or lawyers or service providers, and don’t call it Dallas Band of Angels or we’ll sue you.’ That helped,” Mills laughs.

From that first lunch meeting, the six fanned out through their networks. “The main thing I’ve found over the years,” says Mills, “is that Dallas is scattered all over as far as little nodes of interest in the high-tech area, and none of them know each other.”

Telecom people don’t know software people, who don’t know semiconductor people, who don’t know the Internet people. And none of them know the video game guys. When the Dallas Angels gather, it’s also a chance to meet each other and find out about what’s going on in other fields.

The idea is that few investors are willing to put up $500,000 to $1 million on their own. But a group of 10 or 20. each investing $50,000,decreases their exposure while providing entrepreneurs with the wherewithal to take companies to the next stage.

There are no membership requirements for becoming a Dallas Angel. “We just kind of know one when we see one,” says Mills. “Members of your [Business Dallas 50 Richest] are probably too rich, and we’ve told several representatives of the top 50 guys that we know we’re not going to get to your guy. But we really don’t want someone investing somebody else’s money. We try to get folks who are going to be investing their own money.”

So while it’s unlikely you’ll see a Todd Wagner or Mark Cuban, you might see one of their early investors or perhaps some of the company’s first hires who made out when was sold and are now sitting on a pile of Yahoo stock.

About 85 people have joined, and membership will probably top out at 100. Mills and Bandy won’t say exactly who the Angels are. but not because it’s some mysterious cult with secret handshakes. It’s more practical: They don’t want entrepreneurs calling them individually.

The way it works is pretty simple. Entrepreneurs call a phone number that Bandy maintains. (It’s 214-520-3688.) A two-page questionnaire goes out with a request for a nonconfidential executive summary about the business. A screening committee examines the plan and decides whether to invite the entrepreneur to the Park City Club. Between 25 to 40 plans are received each month.

“We give you an electrical plug and a screen, and you bring your projector and your Powerpoint presentation,” Mills says. “You have 15 minutes, no more, to give us a somewhat extended elevator speech to hopefully set the hook and get folks to sign up.”

If a group of angels signs up, they meet with company founders and begin studying the business and decide whether to invest. Since April the Dallas Angels have funded two companies few people have heard of, RouTech and Asset Inter-Tech. With luck their investments and mentoring will put them on the path to success. Sometimes Angels are invited to become board members, but often they will assume only advisory roles.

The RouTech deal illustrates how the Angels work. A group of 10 Angels wanted about 10 percent of the company. They negotiated with RouTech’s founders what the company was worth. Then the investors had to track down all the stock options that employees had been given and shares other investors owned. The Angels invested $550,000 and received II percent of the company. “They created a new class of stock for us, convertible into common stock.” Bandy explains.

After 18 months the stock starts paying dividends, either in cash or additional shares. If RouTech is acquired or goes public, the Angels’ investment will have paid off.

“What made the RouTech deal so attractive,” Bandy says, “is that the founders had invested a lot of their own money. They had a product nearly finished and ready to come to market in the next couple of quarters. The patents were good. It’s not like someone saying, ’I can sell T-shirts over the Internet.’”

What the Dallas Angels are looking for are high-tech companies that can establish they have the people, something that can be patented, and they can erect barriers to prevent others from nipping at their heels.

Some of the plans they see are from companies that aren’t ready venture capital companies, such as Sevin Rosen, and others that have venture capital funding pending but still need additional dollars as a bridge or to I supplement the venture funding.

“Because we’re in the game now, we’re starting to see things like that that we as individuals wouldn’t have seen before,” I says Mills. “And we’re getting in at (he I same price as Sevin Rosen. You’ll do that deal all day long.”

There’s also a working relationship with Richardson’s StarTech incubator, which often sends the Angels business plans that i StarTech can’t fund because its resources limit the numbers of deals it can do.

But they’re also seeing their share of pie-in-the-sky dreams. A small conference table in Mills’ office is littered with plans ranging from two-page faxes to nicely bound, full-color summaries with charts and graphics.

“A lot of these are very early plans,” Bandy explains. “We will see at least 15 to I 20 Internet deals every month from someone who wants to sell X to Y. No sales, no nothing, maybe not even a web page. Just a concept. And they all start out by saying the e-commerce marketplace is now $3 billion a year and will soon be $20 billion. If we can get just, oh,one percent…,” he trails off smiling.

“We like the idea of giving somebody money to enhance a growing business,” says Mills. “You really hope you see one of these that’s really new, that you catch a early. doesn’t come across very often, but if il does, the chances are now good that we’re going to see it.”