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Big money or bust Featured

7:00pm EDT February 27, 2001

Hal Nissley has served as an organizer, consultant or director at 44 start-ups.

In 1979, he secured the first commercial customer for Oracle, now a $4.9 billion company. In short, he knows a good business opportunity when he sees it.

Among his other business interests, Nissley is also founder of the International Angel Investors Institute in Silicon Valley and attended the first seminar of the Northeast Ohio branch of the Institute. There, he spoke to area investors and business owners about what he looks for in an investment.

He was joined by Krist Jake, president and CEO of Redwood Capital Partners in Silicon Valley, and Mike Pogue, president and CEO of Angel Capital Network, a Sausalito, Calif.-based venture investment bank.

"Simplistically, the perfect deal can be summed up in two words: markets and management," Nissley says. "It can't be 40 percent on one and 60 percent on the other; they almost have to be in perfect balance."

More specifically, here are some of the factors these seasoned investors look for in a deal, and they aren't always the same things.

Product

While Nissley says he likes to get involved in a start-up at the early stages, even help the founders write their business plan, Pogue says his firm usually waits until technology is in place and customers are placing orders.

"We had to have market validation before we were ready to stand up and get out our checkbooks," he says.

Jake, on the other hand, says it really depends on the product or service idea. If his firm's research shows that the opportunity is too good to pass up, it will invest even at the idea stage.

Market potential

When it comes to expected sales, there's little difference of opinion among investors: $100 million within 10 years, or they'll pass.

"I would say a $100 million market is an absolute minimum," Nissley says, while pointing out that it should only be a first benchmark on the way to much higher sales.

Jake says his firm isn't stuck on an absolute dollar figure, but there must be a large payoff down the road for it to invest.

"I think there's lots of good businesses out there that can succeed in a market that is much smaller than $200 million," Jake says. "It's just that the amount of capital consumed to get to that point can't be very much at all."

Barriers to entry

While patents and protectable intellectual property are good stonewalls to keep competitors from stealing your market share, they will find other ways to stay in the race. Likewise, the investors say a start-up owner claiming a first mover advantage or patents doesn't make or break a deal for them.

"I must have heard first mover advantage at least 1,000 times over the last year," Jake says. "All else equal, that's great, but it's rarely all equal."

Many companies fail in this area because while they are busy protecting ideas and technology, trade secrets such as customer lists, investor lists, vendor lists and channels of distribution lists are not as guarded, but just as valuable.

"Most people fall flat on their face when it comes to this type of intellectual property," Nissley says. How to reach: International Angel Investors Institute, Northeast Ohio, (216) 377-0619

Morgan Lewis Jr. (mlewis@sbnnet.com) is a reporter at SBN Magazine.