It takes a sixth sense to find those unexpected treasures that will propel technology forward — the vacuum tubes so important to Silicon Valley’s development or the gunpowder that launched Dupont. “Often the gems for investors are finding the unexpected things that no one else has latched onto yet,” observes Wayne Tamarelli, president of AWT Private Investments.
Then he adds, intriguingly, “You don’t find those or the markets for them uniformly distributed.”
Rather, they are concentrated on the east and west coasts. Having invested in and managed businesses in both, Tamarelli has noticed important differences between the two coasts that entrepreneurs need to keep in mind when seeking funding.
Tamarelli will speak about “Investment on Two Coasts” at the Venture Association NJ’s on Tuesday, July 21, at noon at the Marriott Hanover in Whippany. Call 973-631-5680, or E-mail firstname.lastname@example.org. Cost: $75.
Competition is fierce between people trying to capture markets and get early-stage funding, and the road can be challenging. Entrepreneurs deciding where to locate and where to seek investment money should take the following into consideration:
Funders like to invest locally. Sometimes startups will relocate to a market where they have the best access to investment funds and customers. Angel-stage funders, in particular, tend to invest more in their local environment.
The West Coast has better networking for investors. In the Silicon Valley, which extends from the San Francisco Bay to San Jose, investors are more likely to know each other because there is more networking.
“New Jersey has suffered from a lack of investor networking over the years,” says Tamarelli. He says that some good forums exist, but until he helped form Jumpstart New Jersey — he was the founding chair and is still active — there was no angel investing group in New Jersey.
The West Coast has more investors. The West Coast has many successful entrepreneurs who have cashed out and become angels. “Angel investors are usually successful business people who have become independently wealthy to whatever degree and tend to be the best sources of funding for companies too early to be funded by institutional funds,” says Tamarelli.
“They’ve got the experience, money, and ideas to make it work.”
The West Coast has more cross-industry fertilization. On the West Coast, people in semiconductor, software, or electronics are much more likely to know people in, say, media or biotech. “On the East Coast, it is fragmented, and people don’t know as many people outside of their own industry,” says Tamarelli.
The West Coast has a different culture toward risk taking. In California, says Tamarelli, experience with a failed technology startup is assumed to be valuable. “People wear it almost as a badge of honor,” he says. They will talk about how much they learned from a failed effort and then pop forth with a new idea, with the same high confidence they invested in the first venture.
People on the East Coast, however, tend to be more conservative in terms of starting a technology business as well as lending to one. “The East Coast is somewhere in between Europe and California,” says Tamarelli. “In Europe, if you take risk and start a business once and fail, you’ll probably never get another chance.”
Geographically the East Coast is more fragmented. On the East Coast each city or region tends to have focal points of its own. New York, for example, is the hot spot for media, and New Jersey is relatively strong in pharmaceuticals.
But this division makes it harder to form mixed groups of angel investors. “Lots of times when you are looking for angel funding, you might have to reach outside your own industry,” says Tamarelli. “You might need to find networks of angels who are going to combine their skills and backgrounds.” He recalls, for instance, a deal in which he co-invested. One person understood the industry, market, and technical piece; another had a finance background; and still another came from marketing.
Tamarelli, whose business is based in Basking Ridge, grew up Pittsburgh, where his father was a surgeon and his mother a nurse. He earned a bachelor of science in chemical engineering in 1963 from Carnegie Mellon University, where he also earned a doctorate.
From 1966 to 1968 he served in the U.S. Army, followed by six years in the reserves. He achieved served as a contract project officer managing programs to develop weapons defense systems and advanced materials.
Between 1966 and 1970 he was a research manager in new ventures involving petrochemicals. He was also working on an MBA at night from New York University, with a double major in marketing and international business, which he completed in 1972.
He then got recruited by Engelhard, which much later was purchased by BASF. There he stayed until 1983. He started out in corporate planning, eventually moving up to senior vice president, where he gained experience in running global businesses.
That’s when Tamarelli got the entrepreneurial itch, he says. He bought Dock Resins in a leveraged buyout and built it up, selling it in 1997 for much more than he had originally invested.
At that point, he wanted neither to retire nor to work fulltime, so he became a private equity investor, working with companies and sitting on boards. “It’s a way to keep active without having to be fully committed to any particular thing,” he says.
Despite general characteristics of each coast that make it preferable as a source of startup funds, entrepreneurs might have more specific reasons for focusing on a particular area of the country. The New Jersey state government, for example, might offer a small startup funds for economic development. Or, if a company has three or four employees and is looking to expand, it might move to Connecticut in hopes of putting together a combination of government and private investment.
If the startup’s target market is concentrated in one area, the company might want to set up shop there. “If you are trying to crack a target market that isn’t where you are, that is a big handicap,” says Tamarelli. So, a media company might move to New York, or a company going after military markets might look either at Washington, D.C., or sites of federal military installations.
Tamarelli adds that using contracts from the military or from the National Institutes of Health to get started might have an important advantage. “If you can get the right kind of government support, you can keep the rights to your invention,” says Tamarelli. And this means non-dilutive funding, which is likely to be a draw for an angel a little further down the line.
Because Tamarelli has been active in industry associations and in investor networks, his name is familiar to many investors, but he emphasizes that this should not be viewed as an open invitation for startups to give him a call.
Angel investors generally get their referrals for deals from other investors or from accountants or attorneys familiar with the companies.
“What I don’t want is someone calling me up cold, because the chances of a fit are so low,” says Tamarelli. “It is like dating in a sense. You have a better chance if someone fixes you up than if you walk into a bar and start working the crowd. You’re not likely to get a good long-term fit that way.”