In 1822 Baron Nathan Rothschild advised investors to “Buy when there is blood running in the streets.” A characteristically cold and calculating counsel from the founder of the legendary Rothschild family banking dynasty — but does it hold true today?
As giant lending houses have come thudding to earth and folks at all levels are feeling the economic lifeblood drain out of their lives, certainly this recession could be interpreted as the time to employ Nathan’s maxim. Yet another tidbit of investing wisdom — “Only fools place their life’s savings behind a maxim” — urges a dash of caution.
To hold up the complex facets of today’s investing picture, the Venture Association of New Jersey has invited veteran angel investor #b#A. Wayne Tamarelli#/b#, founder of AWT Private Investments, to speak on “Venture Funders Should be Asking: Was Baron Rothschild Right?” on Tuesday, December 14, at 11:30 a.m. at the Marriott Hanover in Whippany. Cost: $75. Visit www.vanj.com.
Tamarelli seems to have always had the soul of a venturist. Raised in Pittsburgh, he realized early on that he did not want to follow the success-assured path of his surgeon father and inherit the family practice. He was less sure what he actually would do when he grew up — an answer he claims to still have not found.
During his undergraduate years at Carnegie-Mellon University, Tamarelli recalls changing his major five times before settling on chemical engineering. Upon earning his bachelor’s in 1963 he earned both his masters and Ph.D. simultaneously, in only two and a half years.
Following three years in the U.S. Army, Tamarelli took his engineering and managerial skills to Exxon. While there, he took an unprecedented shift into sales. “I realized that everybody in life is a salesman, so I asked to take a field sales post,” he says. When the company proved hesitant, he even offered to forgo salary and make his money on commission alone.
In 1970 Tamarelli moved to the Iselin-based Englehard Corporation. There, garnering eight promotions in 13 years to become senior vice president, Tamarelli headed up that firm’s strategic planning and handled several multi-billion dollar deals.
In 1983 Tamarelli went entrepreneurial, purchasing the Dock Resins Corporation. Today his investments have proliferated. As an angel he has helped launch dozens of ventures, and even own two wineries: Calluna Vineyards in Sonoma County, California, and Tamarelli Vineyard in Mendosa, Argentina.
In answering the question of his talk’s title, Tamarelli is guided by a lifetime of investing experience. And he answers a cautious yes.
#b#Blood time buying#/b#. “Certainly, this is a time of diminished capacity,” states Tamarelli. Many good firms may be purchased at a low ebb and be built back up into markedly profitable concerns. “However,” he adds, “this often means that such a company requires more funding to get it going. Additionally, today markets are weak and international competition is stronger than ever. India, which has come through this recession nearly unscathed, offers great competition in many fields.”
Another hurdle for the early stage investor is that latter phase funding has been reduced on all fronts. Government loans have been cut back. Banks and traditional lenders remain extremely cautious. In short, there are good sector-specific deals to be had, but due diligence on future funding projections, market potential, and competition are more vital than ever.
Tamarelli offers further qualifiers depending on what kind of investor you intend to be, and at what stage you enter. After scouring all possible funds from “families, fools, and friends,” entrepreneurs have traditionally turned to some combination of angel investors and venture capitalists for the next phase. Over the past decade, the parameters of these lenders have notably changed.
#b#Angel vs. VC#/b#. It has been said that angels give with their hearts, while venture capitalists give with their talons. Neither is quite true. In fact, their relative niches are reversing. “Originally, venture capital went to seed money,” says Tamarelli. “But over the years we’ve seen VC funds grow larger and larger, with most looking at deals in the over-$3 million range.”
While some smaller VC funds have come on the scene taking venture investing, as he puts it, “back to their roots,” seed funding is left increasingly to angels. Assuming the entrepreneur can raise $200,000 on his own, he will probably require additional seed funding of up to $3 million before being considered by VCs or traditional lenders. This has become the angels’ niche.
Generally, angels prove more patient than venture funders. The venture firm seeks to gets its cash and profit back to investors within three to five years, maximum. To ensure this explosive growth, venturists usually demand more control, for example one or two seats on the board. Also, many VCs have pushed immense sums at their favorite firms as an aid in meeting short-term projections. More than one startup has staggered under the weight of this over-capitalization.
Conversely, angels are considerably more tight-fisted. It is their personal cash, after all. “As to control, angels want to be represented on the board’s decision-making process,” says Tamarelli, “but we don’t seek major control.” Also, angels typically expect a three to seven-year investment cycle, and if some climb into 10 years, it’s all part of the game.
#b#Angels’ profile#/b#. As an initial member of the Band of Angels, (Silicon Valley’s first seed provider) and founding chair of Jumpstart NJ, Tamarelli brings a deep knowledge of this breed of investor. “Angels are motivated by more than just money,” he says. “They typically want some involvement in their investment.”
For Tamarelli and his wife, Carol, this has gotten as hands-on as harvesting, sorting, leaf pulling, bottling, and employing themselves in every stage of their wineries’ labors. While few plunge as deeply into the vat as the Tamarellis, most angels bring some sort of value to the process. Eschewing the passive angel role, they may provide marketing, general management, or technical skills into the entrepreneurial mix.
Tamarelli also points out that few angels have inherited their fortunes. “Most have made their own money, and want to keep their hands in business in some way,” he says.
Increasingly, angels are moving from the lone wolf investor toward small group ventures, involving two to five players. This allows a new angel to come to the table with as little as $25,000 for a given deal.
“I still find being an angel one of the most exciting aspects of business,” says Tamarelli. “The entrepreneurs themselves are always excited. Often they are greenhorns in some areas, where you can personally become involved and help out. Both of you learn from each other in the process.”
Thus for the angel, investing is a very personal experience. Does it matter if blood is running in the streets all around him, or if each morning’s sun shines on an unprecedented boom? Certainly these are considerations. But even more important are the people and the individual company in which he is placing his personal funds. They will make the real profits and provide the thrill — and that is the really exciting part of business.