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ANGEL MONEY IS AVAILABLE
AND STEADILY TAKING FLIGHT IN ST. LOUIS
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By Shera Dalin
It’s not uncommon for a physician to be a lifesaver, but in the
case of S2Tech of Chesterfield, a couple of area doctors were life
givers.
When Day Veerlapati was starting the information technology company
nearly a decade ago, he went to his bank and asked for a loan. Veerlapati,
a former software engineer for McDonnell Douglas and Union Pacific
Railroad, fully expected to receive the loan since he had been a
reliable and loyal bank customer. Then came the rude awakening.
“They told me, ‘You started only two or three months ago. Don’t
even think about trying to get a loan,” Veerlapati says. “That was
pretty disheartening. You deposit money in the banks, and you think
they will help you when you need it. But banks give you money when
you don’t need it.”
So Veerlapati began searching for investors. He approached two friends
about funding the company. Fortunately, the two friends were physicians
who had the resources to become angels—investors who pour up to
$2 million into a company for a return on the investment.
Day
Veerlapati, Founder and CEO, S2Tech |
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Veerlapati was exceptionally lucky. One friend gave him an interest-free
$30,000 loan and the other co-signed for a $30,000 line of credit
with an area bank. With the addition of about $40,000 of his own
funds, Veerlapati was able to clear several barriers to S2Tech’s
launch.
“The angel investment was absolutely important,” says Veerlapati,
CEO. “I had to buy computers, stationery, have a logo made and pay
for travel. Because of the investment I started with three employees,
and I was able to fund payroll right away.”
That initial investment provided the foundation for what has become
a company with $4.5 million in revenue last year, 50 employees across
the U.S. and more than 30 staffers in a development center in India,
Veerlapati’s native country. Entrepreneurs across the region laud
angel investors for not only helping them launch their companies
but for enabling them to flourish. Beyond the intense publicity
around angel and venture capital investment in biotechnology firms,
information technology companies, are also finding some fertile
ground in the St. Louis area.
They’re getting help, in part, from formal angel groups such as
the St. Louis Arch Angels, one of many seed and early-stage investment
clubs cropping up around the nation. About 170 formal and informal
angel groups operate in the U.S., up from about 50 five years ago,
according to research by Jeffrey E. Sohl at the University of New
Hampshire’s Center for Venture Research.
Formed in March 2005 by the Nidus Center and the RCGA, St. Louis
Arch Angels has invested nearly $1 million in two St. Louis companies—software
product developer Appistry Inc. and biofuel developer Akermin Inc.
That figure will grow to $2.5 million this year with the addition
of its third investment, drug maker Sequoia Sciences Inc. of St.
Louis.
Membership in Arch Angels has reached its goal of 50 investors,
but the group is accepting new members because of natural attrition,
says Chairman Gilbert Bickel, senior vice president of Morgan Stanley.
Of the 120 applicants for funding, about 15 percent have been technology
companies, Bickel says. One such company, which he declined to name,
is going through the due diligence process.
“Technology companies are traditionally a harder angel investment.
The company, process and product are much more difficult for the
average angel to understand,” Bickel says. “But you are going to
see more emerging angel group interests and venture capital community
interests.”
Appistry, which received $400,000 from Arch Angels, was critical
to the company’s success.
“The funding we’ve gotten from Arch Angels and our other angels
is everything to us,” says Appistry Chief Executive Kevin Haar,
himself an investor member of Arch Angels. “Arch Angels became an
accelerator for (fundraising).”
But because the availability of venture capital funding in the St.
Louis metro area is limited compared to large tech-friendly cities
such as San Francisco or Seattle, IT companies here must seek funding
elsewhere or rely for longer periods on their angels, Haar says.
The issue isn’t a shortage of IT investment prospects, he notes.
“I don’t think we lack talent,” he says. “St. Louis has all the
talent it needs. It is getting focused on how to commercialize those
ideas.”
The key is spreading the word about successful investments so that
more angels and venture capitalists are willing to jump into the
pool and take the risk, Haar says.
“The people who say the angel environment in St. Louis isn’t good
are wrong,” says Paul Galeski, chief executive and founder of Maverick
Technologies in Columbia, Ill.
The manufacturing automation software company raised $4 million
in its first round of financing and recently completed a second
round of $7 million. The investment enabled Maverick to boost annual
revenue from $20 million to $80 million in 2005 and grow to 500
employees in 22 locations.
Galeski raised significant funding in St. Louis, but expanded the
search to Kansas City for mezzanine debt.
“I really look for people to invest in the company who bring more
than money—people that bring business acumen, business contacts,
management expertise and industry expertise,” Galeski says.
More than money, Veerlapati says he seeks investors who can connect
their portfolio companies for cross selling, as well as promoting
each other to those who have the expertise and personnel they lack.
The key, these entrepreneurs say, is having criteria that the angels
must match or meet. That improves the likelihood of success, Galeski
says. Make a profile of the ideal investor for your company, be
certain the angels’ investment goals are the same as yours on return,
level and length of investment and how much involvement they want
in the business, he advised.
He also recommends that angel-seekers mine the right network of
people and be aware that St. Louis investors are looking for a good
presentation (not necessarily flashy).
“Are there hotter markets than St. Louis?” Galeski asks. “Absolutely.
But in St. Louis you deal with good, honest people. St. Louis invests
more in the person and the story rather than the deals.”
Presented with good IT deals, Arch Angels will take the risk, Bickel
says.
“The angel community is learning more and more about how to do those
investments,” he says. “We’ve done a heck of a lot more than anyone
expected.” |
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