Interview with Steve Weiss, Co-founder of North Bay Angels
Published: Thursday, November 15, 2001 at 3:00 a.m.
Last Modified: Wednesday, November 14, 2001 at 9:00 p.m.
HEALDSBURG -- The North Bay Angels operates below the general public's radar, yet it has been responsible for a good deal of the economic growth the North Bay has experienced in recent years. Co-founded in 1998 by Steve Weiss, Harold Robinson, Dieter Thurow, and John Mackie, the organization is a group of individual investors who have banded together to evaluate and potentially fund and mentor local startups.
Mr. Weiss, who holds a BS and an MS in electrical engineering from City College of New York and an MBA from Fordham University, started out in the aerospace industry but quickly switched to health care. In 1970, he joined Cavitron Corporation, where he developed advanced proprietary systems for cataract surgery and neurosurgery. In 1977, he joined Edwards Laboratories, now a division of Baxter International, as director of marketing and was later named general manager of the Cardiovascular Diagnostics Division.
As the companies he worked for grew larger, he felt an urge to become involved in something smaller in which he could truly make a difference. Since 1985, Mr. Weiss has been a general partner in Montgomery Medical Ventures, an early-stage VC partnership focusing on novel, proprietary medical technologies.
“I've always been interested in developing innovative new products,” he says. “The problem is that it's difficult to have an impact within a multibillion-dollar company. No matter how great the innovation, we were just another item on the company's balance sheet.
“I love general management, but I wanted to work with smaller companies, where I could have a greater impact. It has been an enjoyable experience helping young companies just starting out.”
Mr. Weiss formed North Bay Angels with the goal of providing a forum where successful North Bay businesspeople and professionals could meet with entrepreneurs developing innovative products, services, or projects that needed investment capital and mentoring to flourish and grow.
In this interview, Mr. Weiss talks about the origin of angel groups, investment criteria and philosophies of the local group, and the future of the North Bay entrepreneurial investment market.
NORTH BAY BUSINESS JOURNAL: What is the goal of the North Bay Angels?
STEVE WEISS: Our goals are to provide our members with high-quality investment opportunities in strong local companies with national and/or global growth potential and create high-quality jobs within the local economy.
BUSINESS JOURNAL: How did angel networks form, and how are they different from more widely known venture capital firms?
STEVE WEISS: The formation of angel networks was as a direct result of a gap in the financing spectrum. Venture capital investing began back in the late 1970s. Before then, most young companies received funding through either a network of family and friends or under the auspices of very wealthy families. By the late '70s, venture capital investing became institutionalized, and funds were organized with numerous full-time general partners. These partners invested their time and investors' money in young companies, and the VCs were very much hands-on with these companies.
Over the course of their development, these organized funds grew to be quite large, sometimes infused with hundreds of millions of dollars. As these funds grew, they had to look for larger companies to invest in to generate a higher return. Because of that, the smaller companies were shut out of the funding cycle and had few places to go. Funding for entrepreneurs in the $500,000-$2 million range became scarce, and this resulted in the formation of angel groups.
BUSINESS JOURNAL: How does a company make a presentation to the North Bay Angels?
STEVE WEISS: Typically, we prefer a referral from a member or corporate sponsor or from an entrepreneur who has actually gone through the process. Prospects can also contact us at www.northbayangels.com.
Initially, we require information about the prospective company such as its business plan, narrative, and executive summary. This material is then funneled to the program committee, a group of members who review the written material, contact the company, and decide whether or not the company fits our profile.
If it does, we will visit the company and meet its key people, and companies that are favorably reviewed will be invited to attend a program committee meeting. Of the three to five companies that make presentations at this point, we'll pick two or three of them to present to our full group of members for consideration.
This selective screening process enables us to present only the best prospects to our members.
BUSINESS JOURNAL: Beyond funding, what additional help does your organization provide?
STEVE WEISS: We have invested in 14 companies to date, and one or more of our members usually becomes active within the company by serving on the board of directors or taking an interim management position. An example of our involvement was the investment in Alantro Communications by about a dozen of our members, led by Herb Dwight. Mr. Dwight served on the board, helped bring in capital during the financing round, helped with management structure, and so on. Alantro was eventually purchased by Texas Instruments.
Another example is medical device developer TriVascular, which we funded in 1998. I brought the company to the North Bay Angels, acted as chairman of the board, and helped develop the management team. We try to leverage our members' experience to fulfill the needs of the startup company.
BUSINESS JOURNAL: What types of companies are you looking to fund, and which types are you generally avoiding?
STEVE WEISS: We typically fund high-tech companies in such areas as health care, telecom, software, and information technology. They're generally companies that have proprietary technology with the potential to build a $50 million-$100 million business.
We're less interested in family-owned businesses and ones with a local, rather than national or international, market. Companies that don't have proprietary technology, a protected market position, and are not in a position where they're likely to grow to a high sales volume are usually not ones we invest in.
That being said, we have looked into projects out of the high-tech arena. We've looked at agriculture and wineries, for example, but these often don't get to our full membership. Instead, if there's an individual within our group who might be interested, we'd pass it on to him or her.
BUSINESS JOURNAL: What's your typical level of funding now versus the beginning of the year?
STEVE WEISS: We're typically in the $250,000-$1 million range for funding. During the last six to nine months, because of uncertainties in the economy, interest has been perhaps less than in the past. There's concern about what's happening in the public markets, the value of our own portfolios, and whether we should liquidate portions of those portfolios to invest in new ventures.
That doesn't mean we've stopped doing deals; in fact, we've had three or four deals come together over the last four to six months. It just means that people are being more cautious. The bar has been raised, meaning we have to look at companies with substantially more attractive opportunities and lower risk.
BUSINESS JOURNAL: Have you ever passed on a company that later became successful?
STEVE WEISS: Certainly. One I remember was a wireless service provider called OptaPhone Systems. The principals came to us, but we chose not to invest, and a year or so later, the company was sold at a substantial premium over what we would have invested.
This isn't a perfect process, but we've done pretty well at keeping the misses to a minimum.
BUSINESS JOURNAL: How do you select potential investor members for the North Bay Angels? Is membership limited to individuals, and if so, why?
STEVE WEISS: Our membership is generally individual, and it's limited to accredited investors.
Private companies have strict limitations on the number of nonaccredited investors they can have. So when our members invest in a private company, they fill out extensive investor suitability forms, showing they can be deemed sophisticated investors and know the risks of investing in private companies.
If a portfolio company brings in a large number of unsophisticated investors, that changes its reporting requirements substantially, which causes a greater burden for the company from both a financial and personnel standpoint.
BUSINESS JOURNAL: American business has frequently been criticized for taking a short-term approach focused on quick shareholder returns rather than a model that looks farther down the road. Can you comment on that?
STEVE WEISS: We don't look at short-term, “get-rich-quick” kinds of investments. The kind of investing we do is not short term at all. We are long-term investors. We invest at an early stage in a company's development and expect to be very active in that development over the next three to seven years. We also recognize that the success of the company depends upon our ability to bring in more money from banks, VC firms, and other sources as needed to help fund that growth and development.
The average company will be in our portfolio five to seven years before we start looking for a return on our investment. That's usually how long it takes to develop a company, product, and market.
BUSINESS JOURNAL: The North Bay has experienced an evolution from agriculture to high tech and now specifically to telecommunications. What's the next big area?
STEVE WEISS: The North Bay has a tremendous pool of talent -- scientific, research, management, you name it -- and I think this talent pool is going to drive growth for a long time. Every sector goes through peaks and valleys, and we recognize that telecom is in a valley right now. It could be two to three years before it turns around, but the knowledge base is still here. The same is true in health care because of the critical mass of talent in this area.
I think computer and information technology will also fuel a number of entrepreneurial possibilities as key people in large companies start feeling the urge to leave the ranks and start off on their own. Organizations like ours will fund the startups, which will grow and drive the economic expansion of the North Bay.
BUSINESS JOURNAL: What will be the long-term impact on entrepreneurship if the economic slump continues?
STEVE WEISS: Over the short term, I'd expect to see fewer people leaving the relative security of Corporate America to start their own entrepreneurial ventures, but some people with the entrepreneurial urge, who have seen the success of others, will still branch out on their own. I also think we'll start to see the entrepreneurial funding market loosen up as we head into late 2002.
Until then, entrepreneurs will continue to work out of their garages. Then, if history is any guide, some will come out with even better, more detailed business and technical strategies. When valuations drop and funding dries up, we typically see some of the greatest next-generation companies, because only the very best get funded.
BUSINESS JOURNAL: So, as venture money gets tighter, does this open up new opportunities for groups like yours? What are some of the cautionary factors you have to consider in a market like this as opposed to a more upbeat, aggressive market?
STEVE WEISS: What happens in a market like this is that opportunities open up that we might not have seen previously. Under other circumstances, a management team with a great idea might have gone straight to a venture capital firm and walked out with a $5 million check. Now, we have a greater opportunity to work with local people who might have turned to a VC firm.
To deal with the current market, we need to focus on projects with the highest possibility of creating successful long-term companies. Capital will continue to be tight for awhile, and our responsibility will be to make sure we have selected companies with the potential to be attractive to other sources of capital two years down the road, when their growth brings them to the point where they need additional funding to take them to the next level.
BUSINESS JOURNAL: What would be the impact on your business of either a prolonged recession or national conflict?
STEVE WEISS: I think the prospect of a prolonged recession would have a greater impact on us, because each member makes his or her own investment decisions, and if an investor feels guarded about his or her portfolio in a continued downturn, the amount of capital we could access might decrease.
As for some sort of armed conflict, and looking at it strictly from a business viewpoint, I'm not sure what impact it would have, though it might not be entirely negative. Because this looks to be a very different form of conflict than any we've seen, I think we'll see an increased need for innovative technologies. It might be advanced telecom technologies, smart electronics systems, or things of that sort that aren't called for in a traditional military conflict.
BUSINESS JOURNAL: How do you see the investment market changing over the next five years? What role do you see for organizations such as yours?
STEVE WEISS: A couple of things will happen in the institutional investment market. A lot of the venture capital funds that have grown very large in recent years will experience some contraction. Those who've been making significant investments are now seeing some downturns in those investments due to, for example, the crash of some of the dot-coms. As the size of the VC funds shrinks, you're going to see a greater intensity of focus by them.
These events won't affect us substantially here in the North Bay, because there hasn't been a huge amount of penetration into the market by San Francisco or Silicon Valley VC firms. Our role will be to continue supporting the North Bay business community and economy by investing in local companies with growth potential.
To be community-minded, we've also sponsored several internships from USF and SSU, where we took students from their MBA programs and exposed them to the VC process, and I see those programs continuing.
We plan to continue our active involvement in the entrepreneurial business community in the North Bay.
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