Techsouth writer Justin Rubner got together with me to ask a dozen questions on early stage investing and the current economy. Here's the result...
Twelve Questions for an Angel
A Q&A with Atlanta early-stage investor
Charlie Paparelli
Charlie Paparelli may not be the most prolific investor in Atlanta. But he does serve an integral part of the city’s startup ecosystem. As president of Paparelli Ventures, a pre-formation investment firm focused on Atlanta-area technology companies, he has supplied many entrepreneurs with both the cash and the council necessary for getting their startups off the ground. He also runs Angel Lounge, a new group he created that aims to bring together individuals looking to become early-stage investors. Another role Paparelli plays, you may say, serves a higher purpose. That role is CEO of High Tech Ministries, a "biblical-based" leadership development association focused on technology professionals.
TechView Atlanta recently sat down with Paparelli to gather his thoughts on the economy, angel investing, the Atlanta startup scene and even religion and ACC football.
Charlie Paparelli sees green in "green" investing as he shifts away from the "old way" of IT.
1. It's no secret that having diversified investments is the key to survive during bad economic times. But even with his diversified portfolio, Paparelli says he has been hit.
Question: How have you been impacted by the downturn in the economy?
Answer: "I'm not someone who is in debt, thank God. So, how have I been impacted? It's been on paper. It’s the downdraft in the stock market. But I do have a balanced portfolio so I did have some protection against the stock market. One of the balancing factors was commodities. However, commodities went in the tank too. So not only did stocks go down but commodities went down precipitously, too-which is usually an offset to the stock market. Depending on where the Dow is, it's been a downdraft of anywhere between 14 to 18 percent for me."
2. Despite the credit crunch, a horrible real estate market, and a slowing economy, Paparelli says angel investors are still looking for deals. He says angels in Atlanta are pretty reflective of early-stage investors elsewhere.
Q: Are angels approaching deals with just more scrutiny, or do you actually see them sitting on the sidelines waiting for better days?
A: "I think it's a combination. Not all angels are behaving the same way. Some angels have left the market. I say a third have just gone away. Then another third are people who are looking for the perfect investment... And the last third-the real angels who have been at this thing for a while-have just tightened up their criteria and at the same time are looking for better deals with better evaluations."
Life Out of the Valley: Paparelli sees advantages in not having to chase the next billion dollar idea.
3. Paparelli is a startup advocate. He recently formed Angel Lounge, a monthly gathering of angels designed to help the next generation of early-stage investors learn from more experienced ones. There are now 70 members-most of them names you probably haven’t heard of-in the group learning from the likes of Paparelli, Sig Mosley ofImlay Investments and Knox Massey of the Atlanta Technology Angels. Paparelli got the idea to form Angel Lounge after attending Capital Connections, a popular venue for investors and entrepreneurs.
Q: Why did you start Angel Lounge?
A: "There's all kinds of places you can go in Atlanta to become a better entrepreneur. ATDC has all kinds of courses. But where do you go to learn how to become an angel investor? How do you learn about private equity? Who do you talk to? How you evaluate a startup? How do you evaluate management? How do you structure a deal? How do you determine what a good deal is? So that's the purpose of Angel Lounge. Rich people don't want to raise their hands and say "I don't know." They're assumed to know…. I don't need to get Sig Mosley and Knox Massey together. What we need to do is to get people together who have a low or no profile."
4. Paparelli has funded 18 startups during his tenure as an investor. He has historically focused on IT companies, but has made a recent tangent into the green market with an investment in a startup that’s working on an internal combustion engine that he says burns cleaner and more efficiently.
Q: What are you looking for as an angel investor?
A: "I have always been interested in investing in services companies that are IT centric for their differentiation. But I’m in sort of a flux right now. Now I'm investigating the green area. The IT area is the old way. The green is the new way."
Follow-up: But that takes a lot of money, doesn’t it?
A: "Well, that's if you get the whole green company. Services are going to support all kinds of companies around green companies. It's going to be an ecosystem in and of itself. I never participated in starting Cisco. But I sure participated in an organization that was a dealer for Cisco. I think there will be a lot of opportunities in that area as the next big wave…Green is not something that's going away."
5. According to Paparelli, Atlanta is a fine place to raise money in-and stay in-as long as you have the right kind of opportunity for investors.
Q: What's the best thing about starting a technology company in Atlanta?
A: "There's a better chance of getting funded here in Atlanta compared to other cities if you have the right vision for the company that you are trying to build. If you look at Silicon Valley, they're looking for billion-dollar opportunities. If you go to Silicon Valley and say 'Listen, I think I can build this startup into a $30 million company and have a great cash flow business' and they'll say 'We're not interested.' But if you come to Atlanta, there's a lot of high interest around these mid-sized opportunities. The best thing about Atlanta, and I don't know if everyone will agree with me on this, is we have more modest targets. But that's my conclusion. That's why I'm here."
Charlie says it is a good time to start a new business for true entrepreneurs, not ones just in it purely for the money.
6. Atlanta often gets knocked for not having many huge success stories in the realm of Google or eBay. But that may not necessarily be a bad thing, Paparelli says.
Q: What's the worst thing about starting a technology company in Atlanta?
A: "It's sort of the antithesis of what I just told you. It's the lack of the really big thinkers. When you go to Silicon Valley and you meet these guys, they're 100 percent focused. They also have the highest divorce rates over there. It’s all about the business. We're a lifestyle city, and no one wants to say that, but I also think that's a great positive for Atlanta. You can build a business here and cash out but it's not going to be a multi billion-dollar business. It's not going to be an anchor tenant kind of business. It's just that whole California scene; it's all about the idea. It's just great. There's a lot of buzz. It's just exciting to be out there. And the networks are there to make it successful right down to the commercial leasing guys-they're taking positions in companies. The whole ecosystem is there to work. We have a very disparate set of ecosystems."
7. Paparelli breaks down successful entrepreneurs into two categories: mercenaries and missionaries. Right now, it’s all about the missionaries.
Q: Is it a good time to start a company?
A: "We have eliminated the mercenaries as far as entrepreneurs go. What we're left with are the missionaries. Before, it was just about money. Those guys, with this environment, have cleared out. But the missionaries are doing this because they're called on to do this. There's nothing else that would give them fulfillment. So, yes it is a good time to start-if you can get into a good industry with a good entrepreneur who will sacrifice everything."
8. A down economy, Paparelli says, is not a time to come out with just cool technology. That technology has to solve a pressing problem. It also helps when there’s a regulatory mandate.
Q: What are good kinds of companies to start right now?
A: "Companies in the compliance business. Things you have no choice on. Companies out there that are saying 'We are providing a product that satisfies those compliance requirements.' That's the best kind of business to start in this economy. The worst is those offering the nice-to-have solutions."
9. Listen first. Then act. That is Paparelli's message to entrepreneurs.
Q: What's your best piece of advice-advice that may not be common knowledge-that you want to tell young companies?
A: "You need to talk to your customers and prospects. Listen to what they see and listen to what they're doing and position your company to follow their strategy. Don't sell them on what they need to be doing but rather on what you can do to help them. Ask, 'How can we fit into your strategy?' Talk to them. Become a partner, as opposed to trying to lead them. They're the people with the money after all."
10. Sequoia Ventures, one of the nation's biggest VC firms, rang alarm bells in October with a presentation to investment companies warning them of dire times ahead. The presentation in no uncertain terms said they should be focusing far more on survival and much less on growth.
Q: Did Sequoia send the right message?
A: "That's a zero sum look at things. You cut costs now because things are going to get ugly. That's a very radical view. But they may be right. What if this thing takes five or six years to come out of it? It took five or six years to get into it."
11. There may be separation of church and state. But Paparelli believes that religion can play a vital-and healthy-role in business.
Q: How does your Christian faith have a role in your investments?
A: "I look for the CEO to be a Christian, so that we have a common set of values. Second, we know we will build a business that will be a good witness for the gospel of Jesus Christ… I see business as a platform for the ministry. Business is basically the equivalent of Jesus' gift of healing in that business solves problems for a particular market."
12. Paparelli graduated from the University of Miami, where he got a degree in Accounting. His Hurricanes play the Georgia Tech Yellow Jackets on Nov. 20.
Q: Will Miami beat Georgia Tech?
A: "Next year for sure. But the Hurricanes will not beat Georgia Tech this year. Right now, we have a hugely talented freshmen team. Next time they'll be ready."
