For these angels, nurturing start-ups is "a thrilling hobby," but one that plays second fiddle to the full-time job of running their own companies. Angel work squeezes into the spare moments -- an early-morning breakfast, a midafternoon rendezvous in a parking lot, or a late-night session after work. While individual members may receive a business plan every week, as a group they review only about seven companies a year and probably add no more than two to their portfolio. Each member analyzes a different angle. Schwenk, for example, dissects the financials, while Morley burrows into the technological questions. Sometimes all of them invest in a deal, and other times just a few chip in. On average, a member's initial investment in a company is $35,000.
Characteristic of most angels, the breakfast club prefers a deal within driving distance, so they can drop in easily. Moreover, deals tend to mirror the club's area of expertise in engineering and software. This is not ironclad, though. They have strayed into a Thai restaurant and children's furniture. "The only rule in this game is that there are no rules," Morley explains.
If Tom Sears convinces the breakfast club to invest -- and several members are still pondering that possibility -- what might he expect? Continued informality, of course. But a glimpse inside the workings of another breakfast-club deal reveals that this informality is served up with the kind of critical business judgment so important to a fledgling entrepreneur.
* * *
Marc Holtzman didn't think he could stand one more rejection. In nine months he'd made his pitch to 30 venture firms. The refrain became familiar: good idea but, well, maybe later. After three years working out of his basement and drawing no salary, a local venture capitalist hooked him up with the breakfast club.
George Schwenk remembers when he first read Holtzman's plan. "I couldn't even understand the product the guy was selling, but something, I can't explain what exactly, captured my imagination." The next day Schwenk arranged a time to meet Holtzman. Holtzman had no prototype, only an idea. For two hours he sketched wildly on a pad of paper giving form to a device that would automate the sample-preparation stage in biochemical research laboratories, a device that may be applicable in AIDS research. As the meeting drew to a close, Schwenk offered little commitment except a promise that he would call Holtzman in a week.
So began a six-week courtship, as Schwenk pondered the merits of both the investment and the person. They chatted over coffee, sometimes with a spreadsheet in front of them, and Schwenk would talk of his own company-building experience. Finally, Schwenk told Holtzman it was time to meet his fellow breakfast-club members.
At eight o'clock on a crisp November morning, Holtzman stood up in front of the breakfast club and defended his dream. That afternoon Holtzman phoned Schwenk asking how he'd done. Schwenk's response: "It went as well as it ever does, but the guys were concerned that your briefcase was too fancy."
In mid-December, Schwenk handed Holtzman two five-by-seven-inch index cards; scribbled on them was a blueprint for the future. One card laid out the incorporation of Holtzman's company, Cardinal Instruments Inc., and the issue of common stock, 75% owned by Holtzman and 25% owned by the breakfast club. Holtzman's percentage factored in his sweat equity and the $10,000 he'd spent so far on the project.
The second card sketched rough plans for the financial structure. Round I: the initial investment called for $60,000 from the breakfast club in exchange for the 25% equity interest, with the money devoted to developing a prototype. Round II: $300,000 garnered from a small venture firm that the breakfast club would bring in; the proceeds would go toward manufacturing the product. During this stage, the company would also look for about $250,000 in debt financing. Round III: an equity investment of about $1 million would be made by venture firms to roll out the product nationally.
While many angels structure deals combining guaranteed loans or debt financing, the breakfast club prefers the simplicity of common stock. "We're stacking the decks to optimize the company's chance at success," one member says, "not our recovery in the event of failure." That's not to say that angel work doesn't have its limits. With the investing clout of approximately $300,000 a year, the breakfast club eases out when the company is at the third or fourth financing. "We only pour a gallon of gas in the carburetor and get it off and going," a club member explains.
Once the company is chugging along, it's time to find more formal sources of capital with deeper pockets. The breakfast club works with six area venture firms -- all of which are run by either business associates or friends. "We know these firms are not intent on ripping the company from its founder," Schwenk says. And from the venture company's point of view, deals that come from the angels are prescreened.
So far, Holtzman's "blueprint" is on schedule. The only hitch in Round II was that two local venture capitalists both wanted in. So a compromise was reached by which each firm put up $100,000 and the breakfast club put up another $130,000, $55,000 of it from friends of club members who wanted in. When it comes time for Round III -- sometime in early 1990 -- the breakfast club plans to help the company find about $1 million in venture money and may put in some more money of its own. Meanwhile, Schwenk prepares Holtzman for the big leagues by bringing the young founder to venture capital soirées in Boston. At one of these receptions, a big-league venture capitalist asked why he hadn't contacted the venture firm earlier. Holtzman had to smile: "I did, but your firm had no interest back then."
