Region’s Realities Limit ‘Angel’ Networks’ Impact
There’s been excited talk and press lately about new “angel” networks in Southern California.
Specifically mentioned are the CEO Emeritus Club and Tech Coast Angels in Orange County. ACE-Net, the electronic angel network sponsored by the federal Small Business Administration, and other online networks are part of the buzz.
These networks match companies needing cash with “angels,” high-net-worth individuals who help start-ups grow enough to hit the radar of venture capital firms. Angels generally put up enough money to own 60% to 80% of an innovative small firm and wait up to five years for their profits when the company is sold or becomes publicly traded.
It’s a good system, the financial equivalent of a dating service.
But angel networks are not a silver bullet.
They alone are not the cure-all that will jump-start fledgling companies into venture capital readiness and push investment dollars into Southern California on a par with Silicon Valley and Boston’s Route 128. For that to happen, this region needs to cope with three realities that stand in the way of the gush of entrepreneurial dollars.
Reality 1: We are not Northern California.
Business people here point out that Northern California hogs the venture capital. Last fiscal year, Silicon Valley and environs grabbed nearly $2.4 billion while the southern half of the state had to make do with $850 million. That amounts to nearly 24% of the nation’s $10.1 billion venture capital flowing to Northern California, versus only 8.4% trickling to Southern California.
The result is that technology clusters in West Los Angeles, Santa Monica, Irvine, Burbank-Glendale and Ventura County are starving for money.
Deals are going unfunded here, the entrepreneurial capital of the nation, that could pump more dollars into the economy, so the argument goes.
But that view ignores the reality that despite our economic muscle and the number of start-ups in Southern California, we are investment capital neophytes.
We may have plenty of start-ups, but lots of them are service-industry, home-based and one-person consulting firms that wouldn’t qualify for investment capital to begin with. And too many of those seeking venture capital are ill-prepared and unrealistic, say those in the venture business.
Laid-off engineers from our downsized aerospace industry may be creating their own firms aplenty, but they carry with them two and three decades’ worth of slow-moving corporate and government thinking. Such habits don’t translate well in the high-speed, profit-and-loss world of entrepreneurship.
I’m no venture capitalist, but after sitting in at workshops where would-be high-tech entrepreneurs struggled to put one word in front of another and failed to clearly explain their product, I began to get the idea that we have far to go in this region.
Further, Northern California’s venture-capital-rich environment did not surface overnight but has been developing since the 1950s. Angel networks can speed up the process, but they won’t work miracles.
So before we bemoan the lack of venture capital, we need to pay our dues and develop core businesses and experienced entrepreneurs, a process that will take years.
Reality 2: We need to improve our school system.
Where do innovative, idea-rich entrepreneurs come from?
Colleges and universities provide the high-level engineers and product development people. Good high schools provide the entry-level production workers. Entrepreneurs can come from both groups once they get a job, learn an industry thoroughly and think of a better way to do something.
But with California schools last year spending $1,000 less per pupil than the national average, operating with the largest class size in the country and, in Los Angeles County, having a dropout rate of 28%, twice the national average, our basic entrepreneurial labor pool will itself be running on empty soon.
No matter how many angel networks are created, if our workers are untrained and uneducated, the region can’t advance economically. We have to ensure that the educational network is in place to support the angel networks.
Reality 3: We are a diverse area.
The racial and ethnic composition of California--especially Southern California--is the most diverse in the United States. Yet angel networks are predominantly Anglo and male and function like a club. It’s a who-do-you-know arrangement, said Richard Gearhardt, executive director of Texas Capital Network. Angel networks created by bureaucrats and academics not hooked into those wheeler-dealer communities often struggle for their lack of connections, Gearhardt said.
Further, when plunking money down on the table, angels need to feel comfortable not only with the business plan, but with the people implementing that plan. Angel networks screen and introduce investors to entrepreneurs, serving as economic matchmakers.
If we, in diverse Southern California, neglect diversity at either end of the matchmaking process, we will have limited our future economic growth and prosperity.
Fortunately, the newest networks created here seem to have a good share of minority and immigrant entrepreneurs as founders.
Perhaps over time, with these champions, public officials pushing for improved schools and entrepreneurs willing to buckle down and learn the basics, we can create an entrepreneurial region capable of attracting billions of dollars in venture capital.
*
Vicki Torres can be reached at (213) 237-6553 or vicki.torres@latimes.com
