Aug. 25–ENTREPRENEURS WANT ANGELS TO LEND THEIR WINGS: The relationship between entrepreneurs and those whose money they need is a delicate dance, say those close to the process, and the need forcash may dictate how much control a business owner can bear to surrender.

Some investors wait until the business is desperate for money, gaining more control over the company in exchange for the funds.

“It’s sort of a curve that has a timeline,” said David Wonkovich, president and founder of Aplicon Solutions Inc. and a hopeful contender for venture capital. “As the cash runs out and you want to keep the venture going, you have to give up a bigger share of the company. I think venture capitalists wait until time is of the essence and then make their deal.”

“There are a lot of people out there who will try to [low-ball an entrepreneur]. But if you look at what’s going on right now, valuations of the companies people are investing in are much lower than they’ve been in a number of years,” because fewer funds are investing, said Joel Grushkin, chairman of equity ventures for DHR International Inc., an executive search firm based in Chicago.

Grushkin is the San Diego-Inland Empire representative of Tustin-based Angel Strategies LLC, an international angel investment firm. Grushkin is also an angel investor.

The dance between an entrepreneur and potential investor can last months before a deal is signed, and often stirs tension as investors seek to buy a company at valuations that are sometimes lower than an entrepreneur’s calculations, said Bart Greenberg, a partner in the Orange County office of Preston Gates & Ellis LLP. The Seattle firm employs 400 attorneys nationwide.

“Most deals die because they can’t reach agreement on valuation,” he said. “Obviously there’s a lot of wounded egos along the way.”

Chemistry between the investor and entrepreneur is important, so is the entrepreneur’s ability to handle criticism, Greenberg said. If a business owner bristles at scrutiny, an investor may lose confidence in the management team.

The quality of a company’s management team is critical, Grushkin said. Venture capitalists are more concerned about the management team than with the quality of the product or service, he said.

“There’s more due diligence being done now … it’s been proven that without good management a company’s never going to make it,” he said.

Entrepreneurs can kill an investment deal in progress by failing to reach promised milestones, and by resisting leadership changes initiated by the potential investor.

“A lot of times, founders think they can run a company, but they’ve never done it before,” Grushkin said. Investors may insist on bringing in a chief executive officer with a track record,” he said.

Wonkovich is working to fill his dance card.

On Aug. 18, he was about to return phone calls to two potential investors following his presentation at the Summer 2003 Diamond Venture Forum Aug. 13 in San Bernardino. Wonkovich, gave a 20-minute presentation to 15 investors and spent 10 minutes answering questions. Aplicon Solutions was one of four presenting companies.

Wonkovich’s two contacts and their requests for additional business plan information were the first serious nibbles of interest from funding sources since he began pitching his business to investors in March and April.

The 18-month-old Aplicon, a company of five employees and three contractors, develops supply chain management software that links a business, its vendors and customers with one Web- based system for handling purchase orders and other contracts.

The forum was organized by IETechSource, a division of the Inland Empire Economic Partnership, a regional economic development organization.

Greenberg, Wonkovich’s attorney and an IETechSource board member, alerted him to the event, Wonkovich said.

Wonkovich’s background includes supply chain management with Nestle USA in Glendale, consulting with Pricewaterhouse Coopers LLP, and involvement in a dot-com in Walnut between 2000 and 2002 before it close its doors.

He founded Aplicon Solutions in Diamond Bar with a $300,000 investment of his own money to market the supply chain software he and his teammates developed. Since January 2002 the startup has garnered $760,000 in revenue, but needs more capital to stay afloat.

The handful of competing entrepreneurs at the Diamond Venture Forum allowed for more presentation time, Wonkovich said. “I’ve been to forums where they said you have seven minutes to give your pitch and seven minutes to answer questions.”

Wonkovich has pursued venture capital funding through the Internet, and other forums of angel investors. But he believes his asking price of $1.5 million was too rich for the interests of well- heeled angels whose investments tend to hover below the $100,000 range.

Venture capitalists, by contrast, tend to fund companies that are already operating and have reached a stage requiring bigger chunks of cash.

The competition for investment funds is fierce.

Greenberg, whose job involves connecting entrepreneurs with potential funding sources, has come across 30 to 50 technology startups over the past year. Of those, he has linked 10 or 20 with potential funding sources, and of that group, perhaps one or two have actually received a check.

While venture capital dollars are available, investors are far pickier about where they place their money than before the dot-com crash in 1999 and 2000, and most are interested in firms that offer applications or products in life sciences and consumer products, Greenberg said.

According to a July 29 report by the National Venture Capital Association in Arlington, Va., two years of decline in venture capital investments is on a slight rebound. For the second quarter of 2003, venture capital investments rose slightly to $4.3 billion from $4 billion in the first quarter, according to the report.

“The increase … is the first uptick in the post-bubble era that began in 2001,” the article said.

Wonkovich continues to ask for the $1.5 million, although he may be willing to settle for smaller incremental infusions, he said. He declined to reveal for publication the amount of time his company can last without investor participation.

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(c) 2003, The Business Press, San Bernardino, Calif. Distributed by Knight Ridder/Tribune Business News.