Start-up funding scarce. Who was to blame?
Hattie Bryant and Bruce Camber said they were thrilled when John Garcia told them he had made a fortune as an entrepreneur and could help their company make it big too.
Swayed by his sales pitch -- including his claim that he had scores of people lined up to invest in promising companies like theirs -- the Irvine couple said they paid Garcia $50,000 in fees and then waited for the money to roll in.
But in the end, the married couple claimed, Garcia didn’t find funding and tech support for their 14-year-old company, Small Business School, which produces videos for public television stations.
“When you hear his story, you go, ‘Wow, he would be a great partner,’ ” Camber said. “But we learned that if anything seems too good to be true, it is.”
Garcia, a well-known figure in Orange County entrepreneurship circles, disputes the couple’s claim as an attempt to blame him when their business suffered in the economic slump. He said he helped them find the partners, including board members, that they were seeking.
But in interviews with The Times, more than a dozen people said they had paid Garcia tens of thousands of dollars in fees with few results to show for it.
“Eventually, we couldn’t waste any more time with him,” said Richard Knapp, who runs a Manhattan Beach security software company called Avanton.
Knapp said he retained Garcia in 2005, paying him about $15,000 and giving him a 5% stake in the enterprise. Garcia spent most of his time bragging about his past successes, yet he never produced any funding, Knapp claimed.
Garcia, 55, of Santa Ana, disputed the accusations made by Knapp and other dissatisfied clients, and said that he had introduced them to contacts and had consulted with them on their businesses as agreed.
In some cases, he said, his customers simply didn’t have strong enough business plans to attract investors. Other times, Garcia said, they had good plans but were victims of a tough economy and needed to be patient.
“When things don’t go as they thought they would, they come back to me,” he said. “They forget what we did together.”
Several of Garcia’s clients have filed complaints with the Securities and Exchange Commission, which declined to comment.
Legal experts, however, point out that complaints that don’t involve multimillion-dollar amounts have a tough time drawing scrutiny from authorities.
“It represents an unfortunate effective loophole in enforcement for victims who may now have no resources to pursue civil claims,” said John Hueston, a partner at law firm Irell & Manella in Los Angeles, who was the lead prosecutor with the Justice Department’s Enron Task Force.
Venture capital experts, meanwhile, warn that paying someone to provide connections with investors is probably a mistake.
“Anyone I talk to, I discourage them from talking to guys who do that -- there’s no value-add,” said John Babcock, a partner at venture capital firm Rustic Canyon Partners in Santa Monica. “But it’s easy to see how you get fooled because they’re telling you exactly what you want to hear.”
In a tough funding climate, it’s hard not to strike a deal with a charismatic consultant offering a leg up, said Ohio entrepreneur Joel Keller.
Keller said that in 2006 he gave Garcia $15,000 to help his renewable energy start-up, Southwest Bio Energy, find funding. For that, Keller said he received two or three consultations by phone with Garcia. The company wasn’t able to find funding and is now defunct.
“We were pretty much desperate at the time, so we bit the bullet and paid him,” Keller said. “It took an awful amount of money out of our pockets.”
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Looking for ‘angels’
Garcia said he launched Tustin-based Angel Strategies in 1997 with partner Jim Casparie after helping start a few companies himself, including a medical supply firm and an investment fund focused on healthcare.
The firm’s name refers to a subset of venture capitalists known as “angel” investors -- because they provide much-needed money for small start-ups.
Garcia, who serves on the advisory board of Chapman University’s Leatherby Center for Entrepreneurship and Business Ethics, met some of his clients at conferences for fledgling business owners. It was at such an event at a Hyatt hotel in Orange County that Bryant and Camber met Garcia in early 2008.
The couple were trying to expand Small Business School. They said they agreed in July 2008 to pay Garcia $50,000 to turn the company into a viable Web enterprise and to establish a funding strategy.
Over time, though, Bryant and Camber did all the work, meeting with potential tech partners on their own while Garcia did nothing, the couple claim. Two months later, they asked him to refund $32,000, the amount they had paid to date.
The relationship soured from there: Bryant went to Garcia’s house in Santa Ana to demand a refund, according to both, and an Orange County Superior Court judge granted Garcia’s request for a temporary restraining order against her -- with Garcia saying he felt “physically and emotionally stalked and harassed.”
A judge later dissolved the order and directed Garcia to pay Bryant $1,500 in legal fees.
“We never would have given him a penny if we knew in June what we know now,” she said.
In April of this year, Bryant and Camber filed a civil suit against Garcia laying out their claims, alleging fraud and seeking $86,000 in damages, which would cover the money they paid him and the amount they spent on legal fees. Bryant said she also filed complaints with the state Department of Corporations and the Santa Ana Police Department.
Bryant said she filed the lawsuit without legal representation. Garcia said he had not yet seen the lawsuit or filed a response.
Bryant, who has contacted many of Garcia’s former clients, said she believes that others haven’t filed lawsuits against him because they figure it’s not worth the time or legal bills.
“He found an amount to take from people that they can’t afford to go get back,” she said.
The Times reviewed six business contracts that entrepreneurs signed with Garcia, and none of them guaranteed that he would deliver venture capital funding.
For example, the contract with Avanton says Garcia would guide the security software company “towards” certain objectives, such as establishing a viable business strategy, introducing the owners to sources of venture funding “as appropriate” and closing a funding round of $525,000. The contract also says that “the advisor cannot guarantee any particular outcome from this engagement.”
Many of Garcia’s disgruntled clients concede that they should have been more cautious in signing the contracts with Garcia, but say they were won over by his charm.
John “has that air about him that you can trust,” said Terry Benton of Mesa, Ariz., who paid Garcia $35,000 and a 5% stake in his concrete company, Stonecast Walls, to help him gain venture funding in March 2007.
“We thought, what is $35,000 now when this guy can help us get $1 million?” Benton said.
Benton said Garcia never lined up investors. In March 2008, Stonecast filed for bankruptcy.
Garcia said he blames himself for not foreseeing in 2007 that the construction market would implode.
“I personally feel guilty,” he said. “The signs were all there.”
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Garcia’s rebuttal
Frank Peters is chairman emeritus of Tech Coast Angels, a group of wealthy individuals looking to invest in small start-up companies. In 2006, Peters said he invested $20,000 in a Los Angeles brewer called Otra Beer on Garcia’s advice.
“It cratered the fastest out of any deal I ever invested in,” Peters said. “It still leaves a bitter taste in my mouth.”
British entrepreneur Robert Heaton said he wanted to intern for Garcia in 2007, but that to do so, Garcia required him to invest $25,000 in Angel Strategies.
Heaton said he gave Garcia the money, but said Garcia resisted giving him a list of companies where his money was invested. When he finally got the list, Heaton said, most of the firms either had gone out of business or denied any relationship with Garcia.
Heaton said he worked with Garcia on and off for a year doing paperwork and legal agreements for another Garcia investment that eventually went belly up.
Garcia attributed the dispute to miscommunication and Heaton’s lack of familiarity with Angel Strategies’ business model.
In an interview with The Times at an Italian restaurant near South Coast Plaza in Costa Mesa, Garcia put his head in his hands for a moment after hearing the accusations against him. When he lifted his head, he explained that though he didn’t have many success stories as a consultant, the complaints against him were “misunderstandings,” heightened by investor concerns about the economy.
“I’ve been doing this for the last 20 years, and this is the first time I’ve seen this type of emotion,” he said. “You can’t take it personally.”
Some clients stand by Garcia.
“I never had better success in my career in investing,” said Orange County consultant Roger Garriott, who also worked with Garcia as a business partner. He declined, however, to identify the companies that Angel Strategies had invested in to generate his returns.
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Videotaped speech
In December, Garcia was in Sweden to speak at an innovation center in Malmo.
Graduate student Kevin Ohashi said he attended the event and recorded a video of Garcia’s speech, which he later posted on YouTube.
In the video, Garcia said that 226 investors each put $1 million a year into an angel-investment fund his firm managed and that none of the companies it invested in had ever failed. Garcia also said that Angel Strategies was “probably the largest angel group in the world.”
Garcia later conceded that his comments were “glib,” adding that he “would have been more careful” if he had known he was being videotaped. (Ohashi said Garcia gave him permission to tape the event.) Garcia said the $1-million figure he had mentioned referred to funding commitments and not actual investments.
Angel Strategies co-founder Jim Casparie, who left the firm in 2004 to start his own venture capital consulting firm, said the group had 125 investors at its height and that they each invested around $40,000, rather than $1 million.
From 1997 to 2000, when Angel Strategies largely stopped investing because of the dot-com bust, Casparie said, the fund had put money into 10 to 12 start-ups. The most successful one, he said, was a same-day delivery service called WhyRunOut.com.
Casparie said WhyRunOut.com did return to investors some of the money they had put in. The Aliso Viejo company had a contract with Stater Bros. Markets to deliver groceries to its customers and even outlasted a few of its competitors. WhyRunOut eventually went out of business.
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Times researcher Scott J. Wilson contributed to this report.
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(BEGIN TEXTY OF INFOBOX)
Before you sign that contract . . .
For most business owners, contracts are an essential part of doing business. Hanna Hasl-Kelchner, author of “The Business Guide to Legal Literacy,” has some tips.
* Never sign a legally binding contract that you haven’t read in its entirety. If possible, have an attorney or someone who represents you read the contract -- and ask them to explain anything you don’t understand -- before it is signed.
* If any wording in the contract is vague or ambiguous, request written clarification. “Contracts are all about managing expectations” and avoiding surprises, she said.
* Keep an eye out for “red flag” language that says someone isn’t making any promises or guarantees, or that all investment decisions are yours. “All too often the first page ‘giveth’ and the rest of the agreement ‘taketh’ away,” she said.
* Make sure the deliverables in the contract can be measured. That can include how many meetings will be held, how many reports will be delivered, how much money will be raised and when these things will be delivered.
* Make sure the contract stipulates that its language cannot be changed or modified without the consent and involvement of all parties involved.
* Try to anticipate how the deal could go wrong and build in protection for yourself, including remedies if performance falls short. Also, make sure the contract clearly states the obligations of each party involved as well as the consequences for breach of contract.
-- Alana Semuels
