Orange County’s small-business climate has become a hotbed for investors.
But businesses have to be extra careful in approaching investors, some entrepreneurs and consultants say.
Letting your bank, accountant and lawyer know that you’re seeking investors also is a good way to get on people’s radar, they said.
“Listen to your business advisers,” said Carole-Lynn Glass, director of emerging growth services for finance consultant Rose Ryan Inc. in Irvine. “They’re working with venture capitalists all the time and they can introduce you to (an investor).”
Entrepreneurs can bring investors in during various stages of their business.
Angel investors target young companies. Venture capital firms tend to invest in later-stage startups than angels, but also join early funding rounds when they feel a company’s prospects for growth are good. Private equity firms stick to more established companies with the intention of selling it later for a
profit.
Some angel investors can help startups raise up to $3 million, according to Frank Peters, chairman of Tech Coast Angels and host of “The Frank Peters Show,” a Podcast for
entrepreneurs.
Getting the attention of an angel investor isn’t easy, Peters said.
“A serial entrepreneur has a much better chance of convincing us to invest in their businesses,” Peters said. “If you come to us and you haven’t raised any money, we’ll think you’re too early. Credibility is a big thing with us.”
John Payne, cofounder and chief executive of CircleUp Inc., which creates social messaging software that organizes e-mail and instant messages, found that his past experiences helped him nab meetings with investors.
Since starting his Newport Beach company in 2006, he’s raised
$3 million from angel investors.
Payne started software companies and ran businesses for venture capital groups. He served as chief executive of Los Angeles-based Stamps.com Inc. before it went public in 1999.
Not all experienced entrepreneurs can nab outside money, Payne said.
“Having experience gets you meetings with investors but it doesn’t always get you money,” he said. “You have to have a big idea, a big market and the right team in place.”
Reputation is key for startups looking for investor attention.
Chris Simms, founder and president of the Huntington Beach-based Lazy Dog Cafe restaurants, found that his ties to the restaurant industry helped him attract investors when he started his company in 2003.
Simms’ father, Thomas Simms, was the founder of Tustin-based Mimi’s Cafe, which was sold to Ohio-based Bob Evans Farms Inc. for $180 million in 2004.
Starting a restaurant requires a lot of money. Simms brought in investors, who helped fund the opening of the company’s three restaurants in Orange, Westminster and Torrance.
Dean Quinn’s and Dale Rhodes’ backgrounds worked in their favor when they started their surf- and skate-inspired clothing company.
Their business, O’Quinn Clothing of Huntington Beach, sells board shorts, shirts and pants at upscale department stores such as Bloomingdale’s and boutiques including Fred Segal and Lisa Kline of Los Angeles.
The partners built a name for themselves in the action sports apparel industry by working as sales executives for Nike Inc.’s Hurley International LLC for
eight years.
“To be a real player in this market you need to have strong financing behind you,” Quinn said. “We went after financing right out of the gate. We had a lot of people who were interested in our company because of our backgrounds and that certainly helped.”
For entrepreneurs without a long track record, Peters suggests organizing an advisory board made up of industry executives and academic professionals.
“It doesn’t cost you money,” Peters said. “A lot of people like to get involved with early stage companies.”
Startups also need to be diligent about securing and protecting their intellectual property and trademarks, Peters said.
They need to be realistic about the value of their company when seeking outside money, Peters said.
Some startups make the mistake of valuing their business too high and walk away from the best offers, he said.
“Take the money upfront because the offers aren’t always easy to come by,” he said.
Companies that are self-financed or backed by angel investors can start attracting
other investors.
Some venture capitalists invest in early stage companies. But most prefer to work with companies that have a solid client base and at least $10 million to $20 million in revenue, according to Murray Rudin of Irvine-based private equity firm Riordan Lewis
& Haden.
Investors want to make sure that companies they’re investing in have growth potential that would make them an attractive candidate for an initial public offering or a strategic sale to a large company, Rudin said.
“They need to have a well defined strategy for how they’re going to create value in the future,” he said.
Institutional investors, such as private equity firms, typically hold a company for five years before selling it for a profit, Rudin said.
Small-business owners need to be prepared for a possible sale before making a commitment to private equity groups, he said.
They also need to understand that bringing in investors means being open to outsiders’ opinions, according to Shivbir Grewal, a partner at Newport Beach law firm Stradling Yocca Carlson & Rauth.
“Some small business owners have what I call ‘founderitis,’ a condition where an entrepreneur will do whatever it takes to be involved in all aspects of the business and
is not open to learning from outsiders,” Grewal said. “That can hurt a business in the
long run.”
