Nov 28, 2023
Arizona Tech Investors w/ Bob DeLean
AZ TRT S04 EP46 (209) 11-19-2023
What We Learned This Week
- ATI - Arizona-based investors committed to supporting capital needs of early stage high growth technology driven companies within Arizona
- Applicants for Funding need to Answer many Q’s
- What Problem does your Product Solve? Who is your Competition? How Big is the Market? Who are Your Advisors? What is the Business Plan? Sales Plan?
- Building a Company takes longer than you think, & costs more $ than you expect
Guest: Bob DeLean, Executive Director of Arizona Tech Investors
LKIN: HERE
https://arizonatechinvestors.com/about-us/leadership/
Bob DeLean has been an investor with ATI for more than 11 years and currently serves as the organization’s Chairman. He spent eight years as a Senior Equity Analyst with Morgan Keegan & Co., Inc., a wealth management and capital market firm. It’s now part of Raymond James Financial Inc. Since moving back to Arizona in 2004, Bob has made 28 angel investments in early-stage and startup companies, the majority being based in Arizona. Bob is an outdoors enthusiast who enjoys road trips and spending time in nature.
In the summer of 2022, he and his life-partner Maria took a five-week driving trip through various National Parks, including Arches, Grand Tetons, Yellowstone, and Glacier National Park. They love wildlife and were fortunate enough to see a handful of black bears during the trip. Locally, Bob enjoys hiking through the Phoenix Mountain Preserve and seeing the occasional rogue coyote. He is also an avid mountain biker, but it never feels like he gets out enough. Bob loves to read (although the nightstand book pile is always growing), and is an expert coin collector.
Arizona Tech Investors (ATI) was founded in 2007 by Arizona-based investors committed to supporting capital needs of early stage high growth technology driven companies within Arizona and neighboring states. ATI members have invested in over 90 companies, and, today, is comprised of over 100 men and women dedicating their time, knowledge, and resources to deliver the advantages that angel support can provide.
ATI seeks opportunities where new capital can move young businesses to the next level of growth and success. To maximize the probability of a successful company, ATI goes beyond just making investments. Members also participate in support of portfolio companies through advisory roles, strategic guidance, as well as resource and partner referrals and more. Members of ATI invest individually, collectively through dedicated LLCs, and through sidecar, or pooled investment funds allowing for best alignments of investor objectives and portfolio company needs.
What advice do you have for founders or companies looking for funding?
Clearly communicate your business plan. It’s surprising how many pitches we receive that fall flat simply because we can’t decipher “what” the business actually does. Explain the business to me as if I'm four years old…especially if your organization is a highly technical product/service. You might be an astrophysicist with incredible accolades in your field, however I am not.
During the pitch, the questions you receive from the group will illuminate how well your audience understands your field. And, your answers will allow you to dive deep into your area of expertise when appropriate.
Second, understand what investors are looking for.
- What problem are you solving?
- Is it a real problem?
- Yes, you think you have a better solution, but can you really convince others that are going to risk their own capital that it's better?
- Do you really understand your competition?
- How big is the market?
- How much of your personal money is in the company? (This gives investors an idea of your walk-away pain.)
Wait, you want me to fund your dreams, but you have no personal stake in the business? Yes, every company has sweat-equity, many of us want to see your own hard-earned cash invested in the business as well.
Notes:
Seg 1
Arizona Tech Investors has 100 members, and when they invest in a deal, there is one name on the company cap table. They are a group of angel investors who pull their money in an SPV for each deal. An SVP is a special purpose vehicle typically incorporated for the investment.
The group chooses deals on a deal by deal basis, and not all the members will necessarily invest in a deal. An example of a current deal is GT Medical which they have invested in all 5 rounds for a total of $660K.
When an investment is brought before the group they have to determine whether this is a viable business with a good product for commercial purposes vs something interesting more akin to a science project. Does the Founder presenting understand their product market fit.
Core question investor always ask, how do I get a return?. What is the exit strategy? Is this a lifestyle business where the founder is supporting a job or are there long term plans to build the business and sell it? Many companies especially in the tech industry may not be profitable when there is a sale exit.
Arizona Tech Investors are a diverse group with many backgrounds. Often when they look for a deal they want someone in their group to have domain expertise. This way they understand the subject matter of the product. Half of their deals are in med tech and the other half are in software SaaS type businesses.
Seg 2
Bob ‘s background, went to University of Arizona in Tucson and got his MBA at Indiana. He spent 8 years as a stock analyst working in finance. About 2010 he learned of the Arizona Tech Investors. He loves capitalism and entrepreneurship. Jim Goulka, the former Executive Director stepped down and Bob stepped in to take his place in 2021.
Any investment they look at needs to have an MVP, or minimally viable product. They’re looking to be in a deal for 3 to 5 years. Deals that they will avoid are in biotech and drug development. It takes many years, 10+ and lots of money to bring a drug to market.
They expect any deal to be easy to follow. The request is to make the founder’s pitch simplified, talk to the group like they are 4 year old.
Initially, if a founder wants the group to look at a deal he sends the pitch idea for Bob to review and advise. If Bob believes it’s a deal they could invest in, he has them go to their portal and fill out an application. Arizona Tech Investors has an 11 member committee that reviews all deals.
They were always leery of founders who bring them a ‘me too’ type application. There are lots of competitors in the space and they are just jumping on the next trend.
It’s very important for founders to understand who their competition is. Everybody has competition on some level. If a product is totally new, inertia could be the competition. The status quo, where people might do nothing, rather than adopt a new product.
Arizona Tech Investors is concerned if a founder tells them they’ve got the most unique product and there’s no competition.
The idea in business that being first to market is the best, sometimes is a myth. For example, Yahoo had a search engine prior to Google but over the long term was overtaken by them. Google understood their business better than Yahoo did, and at their core were an ad platform.
Seg 3
Founders are often blinded by their idea. It’s hard for them to take constructive feedback. Typically the valuation for their product and their own thinking and belief in their idea is way too high.
Investors are looking for an appropriate IRR, internal rate of return. Can they get a good adjusted rate of return on any investment.
What is the viability of the product? Does the founders IP have a sufficient moat, where competition can’t come in and just creep on them to take the product away.
They are looking for founders with coaches and mentors. Did they build it good board of advisors with experts in different areas. A one person company is a hobby. You need a team to run a company.
Does the business have sales or at least some traction with customers? The market is the referee and tells you the value of your product.
In the book Zero to 1 by Peter Thiel, he talks about the startup business is not just building a unique product but also how you sell and market the product. Many businesses fail because they don’t have a good go to market plan.
Founders have to have a unique set of skills where they can create a company, grow a company and manage it through maturity. Often they have to go through different CEOs for each phase.
One cannot just build a product and assume people will buy it.
Seg 4
You want to see what the coachability is of the founder. Are the investors messages resonating. You don’t want the company staff to have group think. What is their business plan over the short and long term?
Do you understand your product? Is the business a product or just an add on feature. You must do market research to really understand your competition.
When the founder believes they have no competition, they usually have two possible types and just don’t realize it. The first type is they just don’t even know who their competition is. The second type is their market may be too small so other businesses are not interested.
You have to understand the size of the market or the TAM - total addressable market. There’s also the sales attainable market or SAM.
If the market is too big then the founder needs to niche down with who they’re going to market their product to. Create an initial vertical. You cannot have the shotgun approach and think everybody is your customer. Need to focus.
When an investor writes a company a check, now they are partners, and the investor may even want a seat on the board.
Arizona Tech Investors does not invest too much in VC deals as you have limited control and are just along for the ride. They typically invest only in Angel only type deals. VC’s care about their limited partners, and the people with the most money in. They don’t usually care too much about the GPs or general partners.
OT
All deals in business always take twice as long as you think, and cost two times as much money or capital.
A tech company over the long term, if they need a larger raise they’re probably going to bring in a VC to invest money. In this instance they may cash out the early angel investors.
Software businesses are very good businesses in the tech industry. Good opportunities with high margins. They tend to be very capital efficient and scalable.
Software businesses can create recurring revenue on an annual basis, or ARR. Valuations tend to be higher, not only because of the product but also because of the data they collect.
Understanding valuations are very important, and typically a valuation of the business is based on a multiple of cash flow. In the current environment the cost of capital is up, interest rates are up and it is tougher to raise money.
The current valuations for technology companies need to reflect what the market is. What’s actually going on or down rounds where there is a cut in valuations. It’s very competitive to raise money.
When the founder borrows money whether it’s from VCA or a bank they are the partner. This can lead to CEO turnover if the investors are not happy.
Angel investors want to be out of a deal in five years are not looking for a company to go public or an IPO. It takes a long time for a company to go public and that’s not what Angel investors want to hear.
Public companies that file a 10 K or liquid and you can buy the stock or sell the stock within the same week. Angel investors invest in deals in the early stage and typically the money is illiquid and tied up for a long time.
Founders also need to understand how important their product is and what type of IP or moat that you have. Typically a patent is not going to protect your IP.
Arizona Tech Investors have a series of screening questions for Founders looking for money. Sample questions are:
What is the problem?
And what is your solution?
What is the commercial viability of your product?
What’s the sales cycle to town to sell your product?
What is your cash burn rate? Cash flow?
What is your go to market plan?
Who is your competition?
What is your market series?
What is your competitive position?
What is your management team?
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Business Topic: HERE
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More - BRT Best of: https://brt-show.libsyn.com/category/Best+Of
More - BRT Best of Tech:
BRT S02 EP52 (99) 12-26-2021 – Tech for the Holidays – BRT
Best of Biotech from AZ Bio & Life Sciences to Jellatech: HERE
Biotech Shows: HERE
AZ Tech Council Shows:
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‘Best Of’ Topic: https://brt-show.libsyn.com/category/Best+of+BRT
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