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Saturday, Jun 10, 2023

Idea People Meet Money People in Venture Session

Hi, I’m Jim Smith, and I’m looking for $1.2 million. So begins a typical Keiretsu Forum presentation, held monthly in Westlake Village. Venture funding, from venture capital and equity investment firms, dropped off dramatically in Southern California in the first quarter of the year, falling 40 percent to $371 million compared to the year ago period. But the slowdown is not apparent on a recent morning when about 20 Keiretsu members, each with an average net worth of $8 million to $10 million, assembled to hear presentations from four companies hoping to persuade them to reach deep into their pockets. Keiretsu, with chapters across the country, is a closely knit group of some 350 investment professionals and high-worth individuals who provide angel funding to emerging companies. Although the organization provides the network and manpower to evaluate potential investments, each member makes the decision to fund independently. Together, Keiretsu members have made investments in 69 companies totaling over $40 million in the past five years, about $5 million of that out of the Westlake Village office established two years ago. Four companies are on the morning’s agenda a real estate investment company that’s previously been funded by Keiretsu members, a digital music producer and marketer back for a second time (members didn’t feel the company was ready at the first presentation), a firm that’s secured a patent for a device that will decaffeinate coffee after it is brewed, and a tech company that has found a way to reduce the time required for computer chip design. They’ve all been prescreened by a committee of members experienced in the sector where the company plays, and by another group of members at a chapter deal screening, and they have come to today’s meeting to try to secure a list of potential investors, to whom they will provide still more information and likely make even more presentations. The competition is steep. Of the 40 or 50 initial applications, only four or five will make it to today’s level. Fewer still will find an angel, receiving as little as $250,000 and as much as $1.5 million. Those presenting must, in 20 minutes time, not only provide a rationale for their business, service or product, they must also convincingly explain why an investor can’t lose, how much can be made and what kind of timetable can be expected for the inevitable payback. Before the presentation is over, they will all have to field tough questions on the fly and do it all while appearing completely unflappable. First up is IMH Secured Loan Fund LLC, a Scottsdale-based company that invests in real estate bridge loans. Shane Albers, the company’s manager and CEO is slow and methodical as he boasts that the fund has historically produced yields of 10 percent to investors and a default rate of about 3 percent on some 300 loans. Albers has come with pictures of some of the company’s investments and, perhaps more important, the knowledge that Keiretsu members have already funded the company to the tune of $5.5 million. Still, someone wants to know how the company can perform proper due diligence when loans average three weeks in duration. The next presenter, Digital Musicworks International (DMI), a Sacramento-based company that licenses and acquires recordings, converts them to a digital format and then distributes them to digital music stores like Apple’s iTunes, “bubbled” at its last presentation, a term the members use for those businesses deemed not yet ready for an angel investment. This time around, the presenters, Mitchell Koulouris, DMI’s CEO, and Anders Brown, the vice president for business strategy, have made significant inroads, securing some 85,000 tracks of music and projecting revenues of $3 million this year. Unlike the questions posed to IMH, which focused on the risk levels of the investments the company makes the group now seems clearly to be trying to evaluate whether DMI is a company with legs. “Most music today is controlled by major music groups. Will you be able to mine enough gold?” one Keiretsu member asks. “Why would a major publisher give up these recordings to you?” “What’s your plan if iTunes doesn’t like you anymore?” “We’ve done this quite a bit,” says Koulouris to this reporter when the presentation is over. “It was everything I expected. The questions were typical.” The crowd is perhaps most animated during the presentation by The Decaf Company LLC, a Danville, Calif.-based startup hoping to market a technology that removes caffeine from coffee after it is brewed. There are several decaf coffee drinkers in the room, at least one who’d welcome a wider choice of coffee flavors at his local Starbucks instead of the single decaf selection typically offered, and another investor who can see potential in using the technology to remove sulfites from wine for those like his wife, who gets headaches from the naturally occurring preservatives. Mel Stuckey, the company’s CEO, and a seasoned capital raiser, focuses on the numbers 80 million cups of decaf coffee consumed each day, 150 million cups of tea and a high-margin business that will yield EBITDA of 40 percent and a return to investors of 30 percent annually. He’s looking for $750,000 for independent certification testing and developing pre-production samples. Some 15 investors signed up when Stuckey gave the pitch in Northern California, meaning they wished to be contacted to explore the investment further, but Stuckey concedes, “There was no thunderous applause.” The final presenter, Ellis Smith, CEO of Blue Pearl Software Inc. in Santa Clara, got a much better reception in Northern California, leaving with 39 names on the sign-up sheet, but when he finished, there was nary a question from the Westlake Village audience. Blue Pearl has developed a technology that can shave several months and several million dollars off chip design costs, which can run to $30 million, but the technical nature of the presentation, and perhaps the lateness of the hour, seemed to make it difficult for the audience to grasp until finally, one member, tried to help cut through the confusion. “How many companies are making these chips? Why are chips redesigned? Give us a one-minute spiel about this space,” he said. The question speaks to the essential challenge that confronts each presenter, how to provide enough information to a group with diverse backgrounds without getting too technical or reaching outside the audience’s realm of experience. How well each has done will be answered when they receive a feedback sheet. For now though, presenters are asked to leave the room for the final 15-minute comment period. The group is asked for the pros first and the cons second. But it is here where the implications of some of the questions asked earlier take shape. Someone in the group describes the IMH presentation as “smooth.” “I’m always wary when promoters take their money out of the less risky part of the deal,” says another member of the way in which the IMH fund is structured. DMI, the group agrees, is a business of the future, and it would be good to get in on the ground floor. “The numbers he quoted, the rate of return based on the tracks he has, the payback seems aggressive,” comments another member of the DMI projections. The Decaf Co. appears to present a high upside and low downside, one member remarks. Still, “It’s just a concept that it will taste better,” says another. “I think they need some more due diligence.” Finally, the Blue Pearl management team is impressive, the audience, notes, but it quickly hones in on another indicator. “They’re a group of very, very successful people, but they only put in $300,000,” says an investor. “He sold all these companies. Where’s the cash?” The comments will be summarized into a feedback sheet that’s distributed back to the applicants. “Sometimes entrepreneurs value that as much as the capital,” said John P. Dilts, managing director of Keiretsu’s Westlake Village chapter. “It’s pretty unusual. Most (funding) groups don’t do that.”

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