Mike Chobotov's prayers were answered by an angel.
The Santa Rosa engineer believed he had developed a technology that would
revolutionize the way doctors treat a disease that weakens arteries within the
human body. But he needed money to prove the technology would work.
Friends and family did not have enough cash to bankroll Chobotov's startup
any longer, but his company still was too small and vulnerable to attract the
eye of the Bay Area's powerful venture capital firms.
``You get caught in no man's land, where self-financing won't go and the
venture financing -- especially lately- is looking for bigger deals,'' said
Chobotov, chief executive officer of Triad Vascular Systems.
Only angels rush in where other investors fear to tread.
Chobotov raised $760,000 last year after presenting Triad's business plan
to the North Bay Angels, a group of about 50 millionaires in Sonoma and Marin
counties who are willing to place high-risk bets on the future of young
companies.
It is a match made in heaven: New companies need capital, and angels need
new investment vehicles.
Nationwide, angels poured nearly $20 billion into 30,000 companies last
year, said Jeffrey Sohl, director of the Center for Venture Research at the
University of New Hampshire. Today, there are more than 250,000 angels across
the United States, and their numbers are growing as the stock market rises and
entrepreneurs cash out their stock options.
Formed only 11 months ago, the North Bay Angels have already invested
approximately $1 million in three local startups, said Steve Weiss, a
Healdsburg venture capitalist who founded the group with three business
associates. Several other deals are still in discussions.
``The concept is to invest both capital and time in helping young companies
grow and prosper in the North Bay,'' Weiss said.
Angels have long invested in new companies, finding ventures through
informal networks at cocktail parties and with business contacts. Now, wealthy
investors are organizing into groups to seek out startups that need their
money and advice.
The rise of the North Bay Angels is the latest evidence of two subtle but
powerful changes in the Sonoma County economy.
First, the county has experienced a burst of startup activity in recent
years, many of them spin-offs from the region's major high-tech companies,
said Dieter Thurow, a Healdsburg financial adviser who helped start the North
Bay Angels.
At the same time, Sonoma County has become home to a growing number of
millionaires with enough capital to invest in high-risk startups, Thurow said.
Some have made fortunes in Sonoma County in wine, real estate or high-tech,
while others are newcomers attracted by the region's rural beauty.
The North Bay Angels is secretive about its membership list, saying it must
protect members from unsolicited pitches for their money. However, the group
acknowledges it draws a different crowd than Sonoma County's traditional
business establishment. Most members of the North Bay Angels are newcomers to
the region or part-time residents who own vacation homes nestled in the
vineyards, said John Mackie, a Santa Rosa attorney who helped to found the
group.
Under federal securities laws, most angels must be ``accredited
investors,'' defined as millionaires, individuals who earn more than $200,000
a year, or large business entities.
Unlike venture capital firms, which invest other people's money, angels dig
into their own pockets to finance an entrepreneur's idea.
They play a key role in providing capital for young companies. Venture
capital firms often are reluctant to invest anything less than $5 million in a
company, while friends and family can usually spare only small amounts of
capital for an entrepreneur.
``Our goal was to bridge that gap,'' Weiss said.
Angels dream of finding a startup that could become the next Arterial
Vascular Engineering, the Santa Rosa company that was bought out for $3.7
billion in November only seven years after it was founded.
But like slugger Mark McGwire, angel investors normally rack up more strike
outs than home runs.
``It is very risky,'' Thurow said. ``Let's say you do five deals. In all
likelihood, in three out of five you are going to lose your investment. One is
going to break even eventually, and one is going to hit a home run. But by
hitting a home run, you are going to make up for all your losses and be amply
rewarded.''
In order for the investor to get paid back, the startup company has to
develop its product to a stage that attracts interest from traditional venture
capital firms. The process can take three to four years or longer, Thurow
said. Until then, it is difficult for angel investors to get their money back.
Because many ventures fail or underperform, angels need an 80 percent
compound annual return on their most successful investments, said Mark Zetter,
a Sacramento management consultant who spoke at a meeting of the North Bay
Angels last week.
Angels typically focus on local companies, investing in ventures that are
within a half-day's drive, Sohl said. They tend to invest in companies along
with trusted friends and business colleagues. Typically, each angel will
invest $25,000 to $100,000 in a company. Members of the North Bay Angels
invest individually, not as a group, and are responsible for performing their
own examinations of the companies they invest in.
``Each individual makes their own investment decisions. This is not a
fund,'' Weiss said.
Many angels are active investors, drawing on their own business experience
to guide a startup through dangerous waters. Some provide guidance through an
informal mentoring role, while others demand a seat on the board of directors.
This mentorship role is important to members of the North Bay Angels, Thurow
said.
``These fledgling companies couldn't possibly afford that kind of expertise
that is available for free,'' Thurow said.
That expertise can be valuable for a startup. Weiss, for example, became
chairman of Triad Vascular Systems, offering the company extensive contacts
from his experience managing and investing in medical devices ventures.
Those contacts can turn into cash. Triad raised about $250,000 directly
from members of the North Bay Angels, Chobotov said. Members of the angel
group introduced Chobotov to other investors, who sank another $500,000 into
the company, he said.
Triad now is attempting to raise $3 million to $5 million in venture
capital to proceed with product development, said Chobotov. Before forming
Triad, Chobotov was head of engineering at U.S. Electricar, a Santa Rosa
company that ran into financial troubles in 1995 and now is located in
Torrance.
Triad has developed a surgical implant for treating abdominal aortic
aneurysms, which occur when the walls of an artery weaken. Unlike the
scaffold-like stents made by Arterial Vascular Engineering to open clogged
arteries, Triad's stents work like a conduit to relieve pressure within an
artery, Chobotov said. The device can be easily inserted in a catheter, which
is much less intrusive than the surgeries used today to treat these aneurysms,
he said.
Triad, which has eight employees and contractors, hopes to win federal
approval for its stents in 2002, Chobotov said.
Although angel financing is helping Triad develop its product designs and
attract attention from larger investors, this type of capital is not for every
company.
Only 10 percent of startup companies attract angel financing, Sohl said.
Many angels are sophisticated investors who will demand aggressive terms from
entrepreneurs in exchange for their money -typically 10 to 30 percent of the
company's equity.
``Angel is not a benevolent term,'' Sohl said. ``It is a business deal.''
PHOTO: b&w by John Burgess/Press Democrat
b&w by Jeff Kan Lee/Press Democrat
1: Robert Whirley, far left, Joe Humphrey, center, and Mike
Chobotov received seed money from the North Bay Angels for their new
Santa Rosa company, Triad Vascular Systems.
2: Mark A. Popp, CEO of I-Mind Education Systems, makes pitch to
North Bay Angels.
Keywords: PROFILE
