Monday, 22nd of October 2007 at 04:36:53 PM
I had an opportunity to catch up with Kala Marathi, Managing Director of the Houston Angel Network recently. Here are some excerpts from our chat:
Josh: Can you give me a little history behind the beginnings of HAN to today?
Kala: The Houston Angel Network was founded in 2001 by prominent angel investors and business leaders in alliance with the Houston Technology Center. We have grown, with the help of our members and alliance partners, to become the largest and most active angel investor network in Texas.
Josh: What are the typical deals the HAN members prefer to invest in?
Kala: Our members prefer deals that meet the following criteria:
- The Company must be based in Texas or must be willing to re-locate to Texas;
- The Company must be raising between $250K and $3.5M in equity or debt with an equity component (i.e. convertible debt);
- Our members tend to focus on companies in the IT, Life Science, Energy, and Consumer Products sectors; and
- Companies raising more than $1M must secure a lead investor for their raise before going through the HAN deal flow process.
Josh: What is the general process that HAN has prospective companies go through before presentation to the HAN general assembly?
Kala: One of the biggest challenges I have is to find interesting investment opportunities to share with our members. I would like to invite entrepreneurs with companies that meet our criteria (listed in the question above) to contact me if they are interested in learning more about our investment screening process. The application process usually starts with a conversation with the entrepreneur. This way, we can determine if there is a fit between our members’ interests and the entrepreneur’s company before the process starts. If there is a fit, I will request that the entrepreneur fill out our application and submit an executive summary to us. The Company is reviewed by our members, who then select 3 companies each month to give 10 minute investment presentation at our monthly meetings. I will work with the entrepreneurs who are invited to present, to fine tune their presentation for the HAN audience. After the presentation, if HAN members are interested in learning more about the Company, they will approach the entrepreneur and request a follow-up meeting or additional information.
Josh: Can you provide some data on deals you have done over the past few years?
Kala: I can’t provide data on specific deals, but since HAN’s inception, HAN members invested almost $30M in 54 deals. Several companies have raised multiple rounds of capital with HAN.
Josh: Is Houston generally supportive of HAN and its efforts? What hurdles have you all had to work through over the years?
Kala: I strongly feel that the community in Houston has been supportive of HAN. We have solid partnerships with organizations such as HTC and the Rice Alliance, as well as the local investor community. We hope that we are doing our part in putting Houston on the map as an attractive place to start a company and raise early stage capital.
Josh: What advice can you offer to startups on seeking capital here in Houston?
Kala: Approach investors with a clear understanding of their needs. Prove to them that your company is a good investment. Remember that you are asking for them to part with their personal savings in order to invest in your company. The investors that I know are not swept away by “big ideas” and “future trends”, but tend to focus on growth, profitability and ROI-related issues. Other key issues that investors tend to focus on are the long term sustainability of the business, and the ability of the entrepreneur/management team to execute the business plan.
Josh: What would you like to see more of here in Houston to further your efforts with HAN?
Kala: I think Houston is doing a lot of things right. With top quality institutions such as the Medical Center, HTC, and the Rice Alliance, and the support of the business and investment communities, I feel that we have a great “ecosystem” in which to thrive and grow.
Josh: Kala, thank you for your support of the Houston startup community and your time for this piece.
Nice interview, Josh. I just talked with Kala last week and she was incredibly helpful and insightful. I recommend anybody looking for angel funding to give her a call.
We presented to HAN back in February – Kala was instrumental both in helping us get on the agenda and preparing us once we were selected. Thanks again, Kala!
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If interested I will send a business plan, budget and shooting schedule.
I am certain that many have found the Houston Angel Network to be very useful. However, in my case, my experience was different. They did not serve the purpose that I thought they were supposed to serve especially since they are listed as providing “early stage financing”.
As many of you entrepreneurs know, there is a crucial stage in the development of a business where it goes from a great idea on paper and in PowerPoint to something tangible that can be demonstrated and capable of attracting some marketshare. To go from “great idea on paper” phase to “tangible market ready product” obviously requires some funding and that is a significant reason why so many ideas just forever remain on paper because of lack of funding the get the idea off the ground.
Organizations such as the Houston Angel Network won’t even deal with you unless you have a tangible product to show. With insufficient funding to build that tangible product, a potentially great idea remains forever on paper.
I am glad that the Houston Angel Network exists but I believe that that it would be worth their while to set aside a subset of their funds to address the needs of the hundreds of companies that need just a small amount of funding to get off the ground. Presently, there seems to be a gap in the process that requires companies to have gained some market penetration with their product before qualifying for funding but in order to get to that stage, these companies require startup funding. Hopefully this gap will be closed at some point in the near future.
HAN investors have less risk tolerance than VCs! You’ll be badgered about your pipeline if it doesn’t exist and badgered about the terms of your deal if you get past the pipeline hurdle. If you’ve got a solid pipeline, I’d suggest going elsewhere for funding–i.e., more conventional sources. I will say that HAN fills a niche for smaller deals–good luck finding $500K from a VC. And presumably the loss of control risk is smaller with a pool of small investors.
I had a similar experience as Sean and Joe Blow when I contacted Houston Angels network about a business plan that had already been favorably reviewed by Draper Triangle but was below their lower funding limits. It turns out HAN is nothing more than a shill for the Rice University good-ole-boy network, a tool they use to cherry-pick and/or stymie those ideas that might compete with the family business. This is not news – there’s been a saying around for a long time: Every business plan created by Rice University starts with the same eight words, “Go get some money from your father, then…”
Silver spoons must contain mercury, because the brain damage is undeniable. So I suppose I shouldn’t have been surprised when Kala Marathi, managing director of the Houston Angels Network and a Rice University graduate (can you be a graduate yet still need your diapers changed regularly?) said to me, “Oh, we’re well beyond that level, we leave that kind of funding to individuals, we see ourselves as more like venture capitalists for the higher-end technologies”. That’s an exact quote. In other words, Houston Angels Network won’t lower themselves to provide angel funding – it’s beneath them.
When I got frustrated with her, she actually had the nerve to say to me that if I needed money for the project, I should have gotten that first before starting any work!!! She treated me like I was defective for not having money, and stupid for thinking I could do anything without it. Incidentally, the same mental midget sits on the Rice University technology startup board – when about good-ole-boy network did you not understand?
Bottom line? If you’ve got anything truly innovative and it doesn’t involve oilfield and your daddy isn’t a Bushie Republican with money to burn, don’t waste your time with HAN. In nature owls are actually predators of low intellect, and will feed on carrion if live game isn’t readily available.
Scott Deaver, Joe Blow and Sean seem to be missing an important step in the start-up funding process: one’s own funds, and friends and family. the kinds of deals HAN funds are not too different in maturity from the kinds of deals funded by angels across the nation. as far as risk tolerance vs VCs, of course angels accept higher risk than VCs. the companies funded by angels are not infrequently pre revenue, and are of course much smaller in terms of capitalization than VC deals.
But, i do agree with Joe Blow, that if you’ve got revenue, and you’ve got orders, you probably don’t need angels, in a normal situation. normally, banks would lend you money.
If Deaver’s heated comments in this very public forum are a valid sample of his interpersonal skills, I guess we can all detect the reason friends and family funding was not an option for him.
Mr. Steakley’s personal denigration of people who rail against the system misses one salient fact – it works. “Heated comments” tend to filter out the incompetent, and attract those who feel the same. Because I refused to accept HAN’s abuse (Steakley forgot to mention he is a member defending his turf, though we from the Midwest might instead call it “sucking up”) I was able to fund my company, even in this down economy, without going hat-in-hand to the good-ole-boy crowd. If your adaptive awareness is such that you wear a cowboy hat indoors, drive a pickup truck nearly always empty, or can’t find your turn signal while talking on the cell phone and tailgating, HAN may be for you. If you have intellect, maybe not so much…
A little education about how codified racism works in the Deep South: Behind all of these conditions that you must first get money from friends and family is the presumption that friends and family of persons of color, or people born in other contries, of handicapped persons, or of persons whose language, religion, or learning path are “different” are not going to have much money. Therefore, these privileged elitists assume persons having family money challenges (if they can’t afford to go to Rice, what good could they possibly be?) won’t be able to jump that first hoop, and therefore the fine egalitarians won’t have to dirty their hands within the rabble. And we all know, of course, that blacks, Mexicans, or Irish from poor families (like me) never have good business ideas, right? Right… Welcome to the attitudes and mindset of River Oaks, Rice University, and HAN!
Oh, and Mr. Steakley, investment from my family and friends were good enough to carry me through three years of state-of-the-art research and development – without doubt more depth in my friends, and more of them, than you could show.
Readers out there:
When you listen to the comments of the entrepreneurs who approached HAN and did not get selected to present, do you hear an undertone of bitterness at the rejection?
Anyone can understand that sentiment. It does not feel good to put yourself, of your business, out there, and have someone say “no thank you.” But the misunderstanding seems to be that HAN is some arbiter of excellence–that if they invite you to present and choose to invest in your company, that is a signal it’s going to be a “success,” or the converse, that if they’re not interested then your company WON’T be successful.
HAN–or any Angel Network, or any individual Angel for that matter–does not exist to give out gold stars. When Mr. Deaver says he was able to self-fund and get funding from friends and family for multiple years in a down economy, my question is why in the world would he WANT HAN? When you make a deal with an angel, you give up some percentage of ownership in your company. If you have the money yourself to keep yourself going, why would you want to be in the position to have to share your future earnings with some angel bloke (or woman)? And it’s almost guaranteed that “Friendly” (i.e., family, colleagues, your dentist) investors are not going to be as savvy and as hardlined about how many shares they ask for in exchange for their money. Or, as Mr. Steakley suggests, open a line of credit at a bank.
I used to work with an organization like HAN, and it always seemed so unfortunate that entrepreneurs viewed an angel investment as a gold star. You have to understand that the individuals involved in that network all have their own priorities. Angel investing is risky; many companies don’t make it for one reason or another and their money is lost. Or even if the company does succeed, the early investors are often greatly diluted in later rounds of funding. So, naturally, when they evaluate an investment opportunity, they are looking for certain kinds of companies that can really be a “home run”…and compensate for all those times they’re going to strike out.
But, if you don’t really need the capital to succeed in your business, why would you bother with them? It’s not some gold star, and it’s not free…you’re giving ownership in your company.
Deaver, why were you so contemptuous about people getting money from their father, or friends and family, if that’s the path you trod? i assumed that your contempt for this approach meant that you wouldn’t engage in it, but i guess you combine hypocrisy with your other unattractive traits.
you seem to assume that many, or most, or perhaps all, angel investors are scions of wealth. you are very misinformed, if that’s your view. in the country as a whole, 80% of millionaires are first generation rich. I can tell you for sure that HAN is a valid sample of American millionaires.
i find your abrupt swerve to some kind of racist element particularly puzzling and bizarre. you feel you were discriminated against on the basis of being Irish? did you perhaps apply to HAN during the late 1800s
I think the root thought here is that most people’s basic assumption for Angel Investors is that they have a higher tolerance for risk and make investments at the earliest stage, the Idea stage. My discussions with HAN members and those who are familiar with HAN are that they typically are not as interested in investing until you already have a working product and a handful of customers or beta testers that can show revenue or serve as solid references, because they want to see that you have already learned some lessons about what works and doesn’t work for your business at your own expense, and not at theirs. I agree however, that to have a viable technology startup community, Houston needs a group of investors and/or a program with a higher risk tolerance with small investments of $25k – $50k to help startups get off the ground. This is something that StartupHouston has been actively promoting, since its inception. To have an equivalent to TechStars/YCombinator/PlugNPlay here in Houston to help launch more startups. I have been seeing more traction for this idea in the last several months and hope that there is some good news in the months ahead.
PS. Let’s leave discussions of assumed discrimination or otherwise out of this (and other) conversations on this blog, or I will close comments on this post (and delete the offending ones).
A YCombinator type thing here in Houston would be great.