Category Archives: Alliance of Angels

Modumetal – the ACA Innovative Company of the Year

Greetings from San Francisco, where I am attending the Angel Capital Association (ACA) annual meeting. This afternoon, the ACA introduced a new award named after Luis Villalobos, one of the nations’ most prominent angels and founder of the Tech Coast Angels, who unexpectedly died last Fall. I was asked to introduce Christina Lomasney, the Modumetal CEO. Here are my remarks and the ACA press release:

Thanks, Richard [Sudek, the chair of the TCA and outgoing ACA board member].

It was just one short year ago in Atlanta that Luis and I decided to walk back from dinner and discuss our shared passions for Angel investing and innovative companies.

It is my distinct pleasure to introduce Christina Lomasney and Modumetal – both of whom embody my discussion with Luis and a great example of Peter’s [Diamandis, Chairman of the X Prize Foundation, who had just spoken] exponential company.

In more than 25 years of investing in and starting companies, it is rare to see an idea that can create and industry and change the world. Modumetal is such a company.

Christina has inspired the Alliance of Angels and other local angels with her vision to invest more than $4.9M. And inspired her employees to achieve great things with limited resources. And inspired large customers to bet on this early stage startup. Modumetal is a great example of why we angels do what we do – investing in innovative startups and helping them change the world.

Join me in recognizing the 2010 Luis Villalobos Award winner – Modumetal and Christina Lomasney.

Here is the ACA Press Release:

For Immediate Release

Contact:

Marianne Hudson
ACA/ACEF
913-894-4700 x1 (or 816-668-2248)

mhudson@angelcapitalassociation.org

Contact:
Erich Mische
Modumetal
877-632-4242
erich.mische@modumetal.com

Modumetal Named 2010 Luis Villalobos Award Recipient

National Award Recognizes Most Innovative Idea Financed by ACA Angel Group

San Francisco, CA, May 6, 2010 – The Angel Capital Association (ACA) named Modumetal of Seattle, WA, as inaugural winner of the Luis Villalobos Award.

The national award, which was established in 2010 to honor the late Mr. Villalobos, founder of Tech Coast Angels and a true “leading light” in the angel field, recognizes the most ingenious and innovative idea recently financed by one of the member angel groups of the Angel Capital Association.

Christina Lomasney, Modumetal co-founder, president, and CEO was presented the award at the 2010 ACA Summit in San Francisco, CA. The Summit was attended by 400 angel group leaders and investors from the United States, Canada, and 23 other countries.

“Luis was an innovator and a ferocious learner and tireless entrepreneur supporter,” said Richard Sudek, chairman of Tech Coast Angels and chair of the Luis Villalobos Award committee. “He started one of the early angel groups, and was intrigued and excited about innovative technology, science, and new ways of doing things. It made so much sense for ACA to honor Luis with this award which recognizes entrepreneurs who make very unique contributions that are disruptive or game changing.”

Modumetal is creating a new class of ultra-high performance nano-laminated materials.

“The leadership and support that Mr. Villalobos represented in helping entrepreneurs to realize their visions for the world echoes clearly today for Modumetal in his stories, his example, and in his own perseverance in realizing the Tech Coast Angels.” Lomasney said. “The Modumetal team is grateful for Luis’ inspiration and is honored to be the first to receive the Luis Villalobos Award for innovation.”

The Modumetal by Design™ process uses electricity instead of heat to grow metal from the ground up, in nano-scale layers. Modumetal, a revolutionary nano-laminated alloy system, is stronger and lighter than steel, can run longer and hotter than nickel-alloys, is more corrosion resistant, and costs less than stainless.

Alliance of Angels (AoA) of Seattle, WA co-led a multimillion-dollar Series A investment round in Modumetal. The syndicated round included significant investment from AoA members as well as from co-lead investor Second Avenue Partners and the Washington Research Foundation of Seattle.

“Between the people, the product, and their approach, I think Modumetal is one of the most creative and innovative companies in my twenty-five years of investing,” said Dan Rosen, Alliance of Angel chair.

Modumetal’s nano-laminate alloys have the potential to create an entire multi-billion industry that will transform transportation, aerospace, energy, and defense industries.

“This is exactly the sort of deal that Luis would have loved,” Rosen said. “Modumetal has inspired its employees to achieve great things, its investors to believe they can change the world, and its customers to work with this small startup to implement this striking innovation and change the way things are done.”


The Angel Capital Association
(ACA) is a trade association that supports angel investment groups in North America. ACA was founded by angel investment groups located in the United States and Canada to help maximize the success of group based angel investors.
(www.angelcapitalassociation.org)

Modumetal of Seattle, WA, is realizing the commercial potential of a unique class of nano-laminated materials. The Company is creating materials that will change design and manufacturing of metals by redefining structural, corrosion, and high temperature performance. Modumetal is made by a “green” electrochemical manufacturing approach, which reduces the carbon footprint of conventional metals manufacturing at the same time that it revolutionizes materials performance. (www.modumetal.com).

Dodd Bill to go to the full senate

As those who are following this topic know, the Senate Finance Committee moved Dodd’s Financial Reform bill out of committee without any amendments. This unusual move means that the three sections that might cripple angel financing remain in the bill. It becomes more critical than ever that we notify our senators of our adamant opposition to these sections that could have disastrous effects on early stage companies and financing.

At yesterday’s Alliance of Angels monthly meeting, I presented a few slides on the issue (http://drosenassoc.com/AoA Public Policy Issue.pdf) and we asked our members to sign these letters:

Cantwell Letter

Murray Letter

We then faxed the signed letters to Senators Cantwell and Murray. (If you are in another state and want the word versions to modify, they are at Word version of Murray letter, Word version of Cantwell letter).

I urge you do send them as well.

Startup Finance and Dodd Bill – follow up

On my last post, I referenced Scott Shane’s data. For those that haven’t read his book, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By (http://www.amazon.com/Illusions-Entrepreneurship-Costly-Entrepreneurs-Investors/dp/0300158564/ref=sr_1_1?ie=UTF8&s=books&qid=1269045575&sr=8-1) – it’s an important book for angel investors.

He has now published an article in Business Week that gives more detail on his insights and calculations of the impact of Dodd’s unintentional assault on angel investing (http://www.businessweek.com/smallbiz/content/mar2010/sb20100318_367600.htm).

Bills of the magnitude and length of Dodd’s financial reform bill achieve many important reforms, but it cannot be allowed to pass in its current form and cripple something that is both vital and working, like angel investing.

Opposition to Sections of Senator Dodd’s Financial Reform Bill that will Hurt Angel Groups and Financings

This open letter was sent to Senators Murray and Cantwell, Secretary Locke, and Representative Inslee. Please feel free to forward this to any other Senators or Representatives.

I chair the Alliance of Angels in Seattle. We are a not-for-profit group of over 60 individual and small institutions that invest in early stage startups in the Pacific Northwest and are one of the most active angel groups in country. In the last 3 years (2007-2009), we have invested $7.3M, $16M, and 17.5M in 44, 36, and 29 companies respectively. In almost all cases, we were the primary source of financing for these 109 new companies. The Alliance of Angels has been widely recognized for the benefits it provides to the community, to startups, and for potential economic development these startups bring with their new and innovative products and services.

I believe that Sections Sec 412 and 413 (pages 380-381) and Sec 926 (pages 816-819) of Senator Dodd’s Financial Reform Bill will have a significant negative impact on Angel investing, and might even cause groups like ours to no longer be able to function. While I applaud many of the goals of Senator Dodd’s bill that lead to better visibility and accountability, the three sections cited will have many unintended and disastrous consequences. This cannot be allowed to proceed.

Section 926, entitled “Authority of State Regulators Over Regulation D Offerings” (pages 816-819) is the most problematic. Today, startup companies can raise money from “accredited investors” like the Alliance of Angels simply and easily. As a result, we have funded over 100 new, innovative, and high-growth companies. Senator Dodd’s bill will force these startups to have to make a filing with the SEC and the SEC will have 120 days to review the filing. And then, if the review doesn’t happen, the individual states could then apply regulation. Section 926 will replace an accepted and working system with one riddled with uncertainty and delay. For a startup, a 120+ day delay in financing is often a death sentence. From an investor point of view, many Angel investors, recognizing the increased risk of failure from this added costly and burdensome regulation, might make the difference between continuing support of the entire early-stage investment asset class.

Furthermore, an added layer of state regulation over angel financing that currently works well will put a chill on angles syndicating deals across state lines. At this time such regulation is as unwise as it is unneeded. At the Alliance of Angels, we consider deals from across the Northwest (Washington, Oregon, Idaho, and Montana). If there is additional cost or restriction or time required, co-investment by angels in other state will be chilled. We need more angel investment, not less.

Lastly, Section 412 of the bill will change the definition of an “accredited investor,” adjusting this for inflation. Currently, and accredited investor must have net worth over $1 million or income over $200,000 ($300,000 for a couple) in the current year. People with this net worth or income are sophisticated financial investors. Do they need additional regulation to protect themselves from investing in startup companies?

According to Scott Shane, if you use a database on wealth from the IRS and calculate inflation based on information from the Bureau of Labor Statistics, the new thresholds for accredited investors would be $2.2 million in net worth, $450K in individual income ($775K in salaries for married couples). I believe that this will cripple groups like the Alliance of Angels and would cause a significant drop off in angel financing for startups.

In summary, “it’s not broke, so don’t fix it!” Angel investing in the United States has sufficient safeguards and does not need these provisions in Senator Dodd’s bill to make it safer. Instead, it will put a chill on the entire angel investing process, injecting uncertainty, excess costs and more risk. Please take whatever actions you can to make sure these provisions are eliminated from the bill.

Taking Money from Entrepreneurs’ Pockets

In a previous posting/rant, I talked about Angel Groups that gouge entrepreneurs (http://blog.drosenassoc.com/?p=13). Some charge over $10,000 for the right to present and that steams me. However, I have not directed my wrath at another group that gouges entrepreneurs even more – brokers and small investment bankers. Note to entrepreneurs: Do Not Use a Broker (or small investment bank)!

Such firms typically charge an entrepreneur between 5-10% of the amount raised, in addition to expenses, legal fees, and a retainer. No angel I know wants to see the money they invest in a startup flow out the back door in this way. You do not need to pay to find angels and get them to invest in your company. If you have a good idea and a good business, approach us directly. The staff at the Alliance of Angels gives you far better feedback, based on angels who actually invest, than you will get from a broker. And it’s free!

The Northwest Entrepreneur Network (NWEN) and Washington Technology Industry Alliance (WTIA) offer seminars, networking events, and classes on how to raise money. They are low cost and valuable.

But.. no angel I know likes deals where there are brokers involved. We like to meet with and get to know the entrepreneur, help them get their company going, and build to a success. None of want or need someone in the middle.

Different Sorts of Energy Companies

There are many types of “green” companies or companies that help save energy. I have two contrasting companies in my portfolio that illustrate this well.

The first is Virticus (www.virticus.com), whose products and services allow owners of lighting solutions to reduce energy and maintenance costs by 30-50%. They sell to parking lot owners (e.g. shopping centers) and cities (for street lights). The Virticus communication and control system enables the management of lights individually and collectively. It is a really cool solution that has begun to get traction in the marketplace. This kind of combined software, hardware, and service solution can make a rapid and substantial difference in energy consumption.

The second is Modumetal (www.modumetal.com). I have written about Modumetal’s technology and potential before. One of the founders of Modumetal, John Whitaker, gave a recent interview (http://www.pfonline.com/columns/0210end.html) about their novel, nanolaminated Thick Thermal Barrier Coating (T-TBC) technology and its application for higher operating temperatures to improve diesel engine performance, give better fuel efficiency and lower emissions and noise. The Modumetal T-TBC will insulate critical engine components such as piston crowns, valve faces, and cylinder heads. This is expected to enable higher operating temperatures and protect against abrasion and temperature-accelerated degradation in diesel engines. It is innovation like this that is likely to have huge impact on energy consumption.

While neither of these are the kind of companies that one typically thinks of when you hear about energy or green companies. But these two companies point out that we should change our thinking.

Modumetal and other category creating companies

I’m often asked about what I look for in startup companies. There really are two answers to this question.

On one hand, for most of my investments I seek a good solid company, with a great management team that can build a good revenue stream in an uncrowded market, which can be acquired at a good premium.

But the ones that get me really excited are those few, rare opportunities to define a completely new category with a world-changing technology. At any point in time, I like to have at least one such company in my portfolio and the current leading candidate is Modumetal (www.modumetal.com). Modumetal owns a category called nanolaminate composite alloys. In essence, they have found a way to make laminated metals that can take advantage of properties that occur at a nano scale. As you can read on their web site:

Modumetal is a new class of nanolaminated materials that will change design and manufacturing forever. Modumetal is going to change the way that engineers make parts, not just by affording the ultra-high performance of its nano-materials, but also by a process that we call Modumetal by Design™. This process allows engineers to bridge design and manufacturing to realize large-scale finished parts from nanoscale building blocks. Modumetal is a revolutionary nanolaminated alloy system that is stronger and lighter than steel AND can run longer and hotter than nickel-alloys AND is more corrosion resistant and costs less than stainless. Modumetal will replace today’s metals, ceramics and composites in applications, starting with military armor – proceeding to cars, planes, buildings and consumer goods. It is the next generation material that represents a sea change in the age-old tradeoffs between cost, weight and performance.

It is still early in the life of the company, so there is still a great deal of risk. The excitement of being part of company that can change the way things work may not be the most disciplined way to do angel investing, but it sure is what I enjoy. Stay tuned.

Techflash posting.. for pay angel groups

In response to John Cook’s thoughtful post: http://www.techflash.com/seattle/2009/10/angels_to_charge_or_not_to_charge.html, here is my reply. John – thanks for raising this topic.  It is a timely posting.  Historically, VCs haven’t ever charged entrepreneurs because they are paid management fees from their limited partners.  And individual angels don’t charge because they are investing their own money and don’t need to.  This has become an issue as angel groups have sprung up, and hired managers to manage deal flow and help entrepreneurs.

 

So who are the managers?  Some angel groups (like the Alliance of Angels) are investor-led, volunteer organizations.  The leadership of the group writes checks to startups.  (I’m personally in over 25 deals.)  We work closely with entrepreneurs and appreciate that, in many cases, they have given up lucrative jobs, mortgaged their homes, and invested virtually everything in making their company successful.  These are the entrepreneurs/companies we want to back and don’t want them to take any cash out of the company and put it in the pockets of middlemen who will “introduce them to investors.”  At the AoA, our executive committee is comprised of our most active angels – the ones that are actively investing in new companies.  I, personally, am less likely to invest in a company that is represented by an advisor who takes a fee that is dependent on raising money.  Our business model is simple – we put ourselves on the same side of the table as the entrepreneur: invest in the success of their company, help them thrive, and win only when the company does well.  It is a long-term commitment.

Other groups are led by “advisors” who only coordinate and don’t generally write their own checks.  These are the groups that want their money up front.  A friend of mine, who was a founder of Tech Coast Angels in San Diego, told me that one nationally syndicated organization not only charged entrepreneurs $8000 for the privilege of presenting there, but then would ask for $25,000 to $50,000 in consulting fees to help them hone their business plan and presentation. 

 

I’m glad that you have raised issue.  The AoA is in its 12th year.  We pride ourselves on helping entrepreneurs succeed and have a track record to prove it.  Startups that make it through our screening process get to present to more than 50 qualified angels at one time, and approximately 30-50% wind up getting financing.  I urge all entrepreneurs NOT to pay egregious fees to get in front of any investor.  It’s not necessary.  Just reach out to the ones who won’t ask you to pay – they are typically more aligned with your interests anyway!

Professional Angels: the new early stage VCs

As I’ve blogged before, the market conditions are driving early-stage investment capital back to basics.  VCs have always fostered great entrepreneurs with great ideas.  But the model has changed profoundly and permanently (see my earlier blog: “Why the VC Investment Model is Broken”). 

So how do great entrepreneurs build their business in 2009?  Professional Angels.

Most professional angels are members of angel groups.  (See http://www.angelcapitalassociation.org/ for the largest trade association.)  In these groups, members generally act as individuals for their own investment, but team on the key aspects of deal sourcing, deal screening, due diligence, investment pooling to ensure that there is sufficient capital overall for the company, and then monitoring the deal afterwards (including board representation).  In this regard they act like an early-stage VC fund, but the decision making is on an individual basis.  In the Seattle Alliance of Angels (www.allianceofangels.com) these groups have grown from an average size of about 2-3 investors to 6-12 investors in the last 4 years.  Such organization makes life easier for the entrepreneur, since they only need to negotiate with one person (the “lead investor”) and they get more money.  From the angel investor point of view, there is more leverage on the deal, more shared due diligence, and the knowledge and wisdom that comes from the entire group.

Professional angels in groups also behave differently than the individuals.  Most, if not all, now reserve for follow-on rounds (even though the entrepreneur’s business plan might call for this “being the only round of financing required”), just as a VC would do.  For example, the Alliance of Angels did 44 transactions in 2007, with 15 being new companies; 29 were therefore follow-on rounds.  In 2008, this pattern continued with the AoA doing 36 investments, where 19 were new, so 17 were follow-on.  This behavior allows an angel group to carry a company through from inception to cash flow positive in many cases.  No VC or institutional funding is required for this sort of deal.  This is a new phenomenon that will help shape the market going forward.

The implications of this are the following:

1)      Angel groups and funds can and do provide the capital needed for a capital-efficient company to make it to cash flow positive.

2)      Entrepreneurs and investors are positioned for more rapid exits, since the valuation needed for a successful exit is often much less.  If a startup takes in VC money, it will often require an exit over $150M for a successful exit (http://blog.drosenassoc.com/?p=7).  These exits are rare and the company often either fails or is sold for the liquidation preference, so the entrepreneur does not have a successful outcome.  On the other hand, if the total capital is low, even an exit of $20-40M can be hugely positive for both investors and entrepreneurs.

3)      Companies can now be built in a more capital efficient way.  With better tools, open source, Amazon Web Services, stimulus money, SBIR grants, etc. small amounts of capital can now go a long way.

Professional angels are filling the void created by VC funds getting larger and startups being more capital efficient.