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Early-stage investing

Naples-based Tamiami Angels, which began as southwest Florida's first angel investor group in 2010, is now in the middle of a second campaign to fund early-stage ventures.

Made up of 48 high-net-worth individuals, Tamiami Angel Fund II launched 18 months ago with plans to invest about $9 million. So far, it has put $2.7 million into six startups, including three in Florida.

Fund Chairman Timothy Cartwright says an upswing in entrepreneurship is boosting deal-flow quality — about one in 70 applicants succeeds in getting money, up from one in 90 during the group's first go-around. Between 2010 and 2013, it had nine investments with $3.1 million.

"It's easier and cheaper to start a business than ever before," Cartwright says. "Computing power is at the fingertips of almost anyone, and you can be up and operational on a global scale fairly quickly."

The number of angel funds in Florida is small but growing. The Angel Capital Association counts 15 angel groups in the state, more than twice as many as in 2010.

Cartwright says his angel group looks for companies that have strong management teams and the potential to disrupt markets. The group solicits pitches on its website and meets monthly to discuss funding decisions. Recent investments include MassiveU, a Naples-based educational technology company that aims to adapt textbooks to mobile platforms.

Cartwright, a former Chicago entrepreneur who also chaired the Gulf Coast Venture Forum, a nonprofit angel investment network in southwest Florida, spoke to FLORIDA TREND about angel investing and the startup world.

Who are your members?

"They're retired or semi-retired individuals who typically were C-level executives at Fortune 500 companies, successful entrepreneurs who exited their own businesses and wealthy families."

What motivates them to become involved in angel investing?

"We talk about an angel investor doing double-bottom-line investing The first bottom line is ROI, return on investment. There needs to be a return-on-investment focus on angel investing. Otherwise, it would be considered charitable giving. But there's also some sort of psychic income they get from angel investing. It could be they still love to solve business problems, and there's nothing that gets their juices flowing like new technology or new ideas that can be introduced into the marketplace. It could be that they want to mentor new entrepreneurs. Most successful people will admit that they had a few breaks along the way."

Describe your process for picking companies.

"We review deals as they come in through our website. If a business plan is rated 50% or below, we'll tell the entrepreneur, 'No thanks, we're not interested.' Our selection committee then gets together to talk about the business plans that are rated 50% or higher. They'll make a recommendation on which companies to present at our monthly meetings."

How many companies make it that far?

"We usually look at two to four companies at our monthly meetings. They get 15 minutes to present. We then do a Q&A period, which lasts somewhere between 15 and 30 minutes. After all of the entrepreneurs are done, we have a member discussion about each company and call for a vote on whether to enter the next step, which is a due diligence period. Two-thirds of the membership must vote in favor to move into due diligence."

What's your average investment in a company?

"We typically invest $250,000 from the fund and then allow our members to do add-on investing. Some of our members may say, 'I really liked that management team or that sector. I'm going to put an additional $50,000 or $100,000 on top of the fund's investment.' Our average investment from Fund I through Fund II is about $500,000, when we count the add-ons."

What kind of companies do you look for?

"We invest in close-to-revenue or revenue-producing companies. We don't have an industry focus, but we tend to invest in software-related, high-tech-type companies. For our geographic selection, we will look at any company that's within the United States borders."

Do you have a preference for Florida companies?

"You don't really get extra points for being in southwest Florida. The pool of deals is just not large enough to restrict to a region. We want to bring in as many deals as we can. If we have a deal in Florida, we'd like to compare that to some of its competitors in other states. All things being equal, we'd invest in the company from Florida."

What kind of ownership stake do you take?

"We are minority equity investors. The rule of thumb is that for each capital raise, the entrepreneur should sell, on average, between 20% and 40% of the company."

How do you get your money back?

"The typical exit is an acquisition — the startup is acquired by a larger company. You're looking at probably a five- to seven-year investment horizon."

So angel investing is not for the risk-averse?

"You're investing in unknown management teams with unknown products or services. It's one of the riskiest things you can do. But with that risk, you're supposed to have an associated award. There are people who've gotten 100 times their investment back. More often than not, you lose money in this endeavor. For a high-net-worth individual or family office, angel investing should be a small percentage of their overall asset allocation. It should really be a single-digit percentage."

Have you had any successful exits?

"It's a good news/bad news situation. Out of the nine investments in the first fund, and the six investments in the second fund, we've had no failures, which is good, but we've also had no exits, where we would return money to our investors."

From your perspective, what are some common mistakes that entrepreneurs make?

"Not understanding their competition. We're not really excited by a company or management team that comes in and says, We don't have any competition.' There are very few monopolies in the world. Competition could also be, 'How did they used to do it before your product or service?' If you can't think that way, you're not going to think through your business plan correctly."