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This is the Executive Connect Podcast - a show for the new generation of leaders. Join us as we discover unconventional leadership strategies not traditionally associated with executive roles. Our guests include upper-level C-Suite executives charting new ways to grow their organizations, successful entrepreneurs changing the way the world does business, and experts and thought leaders from fields outside of Corporate America that can bring new insights into leadership, prosperity, and personal growth - all while connecting on a human level. No one has all the answers - but by building a community of open-minded and engaged leaders we hope to give you the tools you need to help you find your own path to success.
Melissa Aarskaug (00:01.836):
Welcome to the Executive Connect podcast. Today I'm excited to talk with Jerry Forney about pitfalls and strategies for angel investing. Gary is a seasoned entrepreneur with a focus on disruptive technologies and the current chairman of the Central Texas Angel Network. Welcome, Gary.
Gary Forni (00:25.837):
Thanks, Melissa. Happy to be here.
Melissa Aarskaug (00:28.428):
Thanks so much for being here. I know how what a busy man you are. And I always like to kick it off and just ask you to share a little bit about how you got into the angel investing business. Was it a specific interest? Did somebody turn you on to it? Share, give us some insight into you and how you got to where you are today.
Gary Forni (00:50.221):
Sure. I graduated from school with a degree in electrical engineering, with an emphasis on semiconductors. So went to Silicon Valley and started working at a chip company, a small chip company at the time, right from the get-go. Spent a lot of years there through that early time of the dot-com boom, kind of the run-up to that. So all through the 90s, worked with a number of startups. I can remember when Yahoo started when eBay started when Amazon started when all these companies started and we're going how are they going to make money doing that? That doesn't even make sense to me. Watching them grow up and certainly got involved in that to a greater and greater degree and started making solo investments, solo angel investments at the time. So that was back in kind of the mid-90s, 95 kind of timeframe.
I thought I was only going to work at one company my whole life. But after about 22 years, my division was sold to a different company and I started experiencing life at other companies. And after I finished my golden handcuffs and indentured servitude at the second company, I spun out into startups and have been in startups ever since. And I got into angel investing because specifically with an angel group because the angel investments I had made as a solo entrepreneur, they all went to zero. They all went to zero or they all became zombies, meaning they still exist, but you're never going to see your money again. You can write it off. And so as I left the semiconductor space and started working in software and startup space, the first startup I ran, the members of the Central Texas Angel Network and the Houston Angel Network, invested in that company. And not just invest in the company, they invested in specifically their time and energy in me and to make me a better CEO. And that process of working so closely with them is like, my thought after a while was once I'm done with this startup, I'm going to join them over there because these are really good guys and they're making a difference in so many other companies and so many startups and so many people's lives. I want to be able to give back like they're giving back. And that's what actually introduced me to CTAN and would introduce me to the specific group that I'm in right now.
Melissa Aarskaug (03:24.396):
That's fantastic, I love to hear it. Now let's talk a little bit about your journey to being the board chair. How did you end up as the chairman of the CTAN Network?
Gary Forni (03:37.389):
That's a good question. I've been a member for about 16 years, maybe 15 years now. So it hasn't been a short process. And in fact, I thought I'd been doing a good job of keeping a low profile and that I wasn't going to be tapped to do this role. But you know, the pandemic happened and the pandemic affected, you know, visibly you could see restaurants and activities where you would go were all affected. All manner of clubs and organizations where people gather, maybe not as publicly, but where people gather, also went on hiatus. And so there was a downturn in almost any volunteer organization or face-to-face organization. And CTAN was no exception to that, right? So CTAN scaled back. There were fewer members. There were fewer companies pitching. There were fewer angels investing. And it was a time that people had to, you know, if you want to keep the organization alive, and we weren't getting that small, but if you want the organization to grow again once the pandemic's over, you got to invest now and you got to step up and participate. And so that's really how I was asked to get on the board of directors originally. I spent a year on the board of directors. And after that first year, they asked me to be the chairman of the board. And I've been that for a year now and I'll likely be that for one more year. And so that's really how I came into this role. It wasn't like I had my sights set on it, pretty much the opposite of that. But, you know, any good organization really runs on the back of the people, you know, that 80-20% rule, those 20% of the people who put in 80% of that effort. And so I thought it was a worthy organization to make that kind of time investment.
Melissa Aarskaug (05:30.988):
That's great.
Melissa Aarskaug (08:06.636):
Now, it seems like everybody's in the startup business in Austin, Gary. I know a lot of businesses come through Austin startup looking for funding. I want to talk a little bit about how CTAN identifies and selects startups to invest in.
Gary Forni (08:39.277):
Yeah, it's a great topic. And our process has been worked through and refined now for almost 20 years. So this is not where we started. Kind of go back to your original comment there about it's a startup-centric town. And the answer is yes, it is a startup-centric town. In fact, if you look at the country as a whole, Austin is right up there in the top 10, right around the top five, five, six, seven kind of area in terms of the number of startups. And that comes from a whole series of different things happening in this town that allow that to happen that aren't necessarily part of other towns. And so if you look around, we have a lot of universities. Obviously, things are dominated by the University of Texas in Austin.
But it isn't the only university. I mean, just outside of town is A&M just south of, that's just east of town, just south of town is Texas State. We've got Concordia here. We've got all these other universities here. We've got universities up in Georgetown. So we have all these universities in or around Austin that provides a pool of young, creative talent to invest in and work in these startups. But we've also got capital, people who have exited other startups.
And that capital is here in town, Central Texas Angel Network has spent a lot of time recruiting all of those kind of investors. So many of them are a member of Central Texas Angel Network, but many of them are not a member of Central Texas Angel Network. And we work with them almost as syndication partners. So we know who those people are and what they like to invest in. Sometimes we refer deals out to them. Sometimes they refer deals to us. We all work together to fund startups in the area.
You also have the government and now the military with the Army Strategic Command in the building. I have an office in Capital Factory, Army Strategic Commands here as well as in their own building downtown. So we have the government, the universities, investors, and these young people with creative, new and creative ideas all in the same town. That mix is a very good mix. And then you have one other thing and that is in Austin, Texas in general, but in Austin specific, there's a whole sense of working together that you don't get in Silicon Valley or you don't get, you know, up in the Northeast. So you can get a meeting with almost anybody, not necessarily hours of time, but you can chat with almost anybody, get some feedback on an idea, be able to connect some dots such that you can get some kind of critical mass going fairly easily in the town.
which really separates it from other towns. And so all of that together is, you know, breeds all of these startup ideas to move from idea phase into implementation phase. And that's what we really, really try to help with at the Central Texas Angel Network. So we have a process that goes out and engages broadly in the ecosystem at the university level, at the accelerators, at the incubators, at the coworking locations.
Certainly, we even work with other governments, not necessarily here, just here in Austin, but also in surrounding suburbs like Buda and Round Rock and Georgetown, even as far away as our counterparts in Dallas and Houston. So, working together, we try to bring in as many startups as we can. And so, that allows us to look at roughly 500 startups a year. And so, that's 500 new startups a year. I'm not counting the ones who come back for additional funding. So that's a lot of startups. And so you need a process, 500 years, that's a lot of startups to be taken a look at. So you need a process and we have a very rigorous process. We have a full-time dedicated head here at the Central Texas Angel Network who focus on bringing companies in, getting all of the information. And we use the Angel Networking and VC networking software or managing software to aggregate all of these startups and help those startups upload their information, pitch decks, one-pagers, financials, three-year plans, all of that information so that as that information is uploaded, angels have the ability to quickly look at a number of different companies. And so to give you a sense of it, we have six screening sessions a year, essentially pipelines. We gather startups for a month or a month and a half.
Get all of that information. So it's a process of getting all of that together. And then we have a screening night where all of the angels will go online. It takes about three days. All the angels go online, look at, let's say, 75 companies and quickly pick, I want to know more about these companies. And yes, there'll be a pitch deck up there and yes, there'll be a one pager up there. But they'll say, you know, here's the companies I want to know more about. And I've got 120 angels in my organization. So there's a vast difference in opinion of what people want to know more about. Some people are very med-centric. Some people are pharma-centric. Some people are SaaS or software guys. Some people are just disruption. I'm more of a disruption person. So there's, you know, we're generalists at Central Texas Angel Network. So we all vote. I mean, it's as simple as it can be. We all vote. I want to know more about these 20 companies. And then the team aggregates that information and pick the 20 top vote getters. And those 20 top vote getters are invited to pitch. It's initially, it's a virtual online Zoom pitch. All of the angels log into that for pitch night. And it's usually three to five days after we do the online screening. And then again, all of the angels will vote. And the top five, roughly five, of that Zoom pitch night go to a formal pitch night. We expect the presenter to come in person and they get 10 minutes to pitch and there'll be another 10 minutes of Q &A.
Sometimes the time changes a little bit, but roughly they get that. Where all the angels are there for dinner. And so you might have 60 or 70, we rarely get all 120 in one room. But we have Zoom because some of our members are out in Florida and some of our members in Colorado and some run other angel groups in New York. So we have our members, both locally as well as online, all dial into this formal pitch dinner, people pitch, and we vote over the next two days.
And so the following Tuesday, I mean, all of this is happening in the space of two weeks. The following Tuesday, we start due to the companies that meet the bar and get enough votes. We start due diligence the following Tuesday. We have a pitch center on Thursday due diligence the following Tuesday, and we're off and running. We try to close our investments from that first online screening to that first check in. We try to make that about two months. So it's a very fast process.
Melissa Aarskaug (15:54.156):
Are there any industries that the angel investors are most interested in now? I know Austin's becoming AI space with, you know, Elon Musk here, there's a lot with healthcare. Is there any specific sectors or is it spread across all the sectors?
Gary Forni (16:16.205):
So we're generalists as an organization, we're generalists because we serve, you know, 120 different members' needs, right? But there are some things we don't invest in. I think it's a shorter list to say what we don't invest in. We don't invest in real estate deals. If it's a real estate deal, you want to fund apartment building, that kind of stuff, we don't do that. We're looking for, you know, venture fundable deals. So that venture fundable means it has to have high growth. We're looking for a 10X return on our investment, not 10%. We're looking for a 10X return on our investment. So there's got to be a lot of growth in that kind of deal. We'll do almost everything. We'll do things that other angel networks won't touch, consumer product goods. One of my best returns ever was on a consumer product good. So we're not opposed to doing that. We do hardware as well. Again, something angel groups frequently don't touch. And well, of course, we do the classic software that everybody does, medical devices, pharma, all that kind of stuff. To your point about AI, AI is certainly the buzzword of the year. Everything is about, you know, chat GPT and AI. But, you know, if you do this long enough, you know, there's a new buzzword every other year. You know, two years ago, everything was about Bitcoin. Two years before that, everything was about blockchain and two years before that, everything was about ML. So this, you know, will change over time. AI is a very disruptive technology. It has the promise of significantly reducing headcount in a number of areas and improving the output of product. So it'd be a mistake, almost a mistake for any company not to use it, but we invest in a lot of other things, not just AI. In fact, this year, only one third of our deals were AI. So, you know, it's not even the majority.
Melissa Aarskaug (18:15.436):
Yeah, so I know we talked a little bit about like the investment strategy. I want to pivot a little bit to talking about C-TAN and how they support and mentor other C-TAN members. Can you share a little bit about the type of mentorship that C-TAN provides to its membership?
Gary Forni (18:33.645):
You bet. You bet I can. In fact, when you look at an angel organization, people join an angel organization for a very finite number of reasons. One is obviously they want to make money. That's clear to everybody. And if you look at our mission statement, that's number one on the list. Identify, invest in, and support early stage startups while delivering a return to our members. So that's a big line, while returning a return to our members. We're looking to make money. But the second point of being a member of the angel network is usually, it varies on person to person, but it's about how do I give back to the community, right? And so giving back to the community to a large extent is how do I mentor that next generation of startup or entrepreneurs? And that's what a lot of our members like to do. Some of them want to continue to be educated in their area, in their field of study, their chosen field of study, their area of expertise. Some of them want to, you know, they, you know, they want to treat startups like a black box because to a large extent they are right. Every startup needs to have good financials. Every startup needs to have, you know, a well-thought-out strategy. You have to have a hiring plan, has to have a growth plan. Those kinds of things are generic across startups. And so many of these members are like, I can bring that kind of thinking to these startups. If they're going to put money in to that startup, they certainly want to do anything they can to help that startup be successful. And so tapping into this expertise is critical for a startup. I like to say that if you only take money from an angel, you're leaving the most valuable things behind. That expertise and that set of contacts, that Rolodex are as valuable, if not more valuable than the actual cash that they put into the deal.
So that's what we do for a start, right? And then there's always a social aspect, right? And so, you know, people like to engage, they like to find better ways to do things. And so at CTAN, we have a process where we have an onboarding process for angels, where as soon as you sign up to be a member of CTAN, you get assigned an angel buddy. First of all, the executive director calls you and talks to you, the program manager talks to you, you get assigned an angel buddy, which is an angel has been here for a number of years who can answer questions that you may have about angel network. For people that I bring in the organization, I like to make sure I go to the first pitch dinner with them. So they have a friendly face in the crowd. Somebody introduces them around and gets a sense of the flow and the dynamics of it. And so that's kind of the onboarding process. We also track everything. We track everything about every company we invest in. We track everything about every company we don't invest in, the ones we turn down, which is 98 out of 100 companies that we look at, we turn down. We also track our performance at all of our different functions, our social functions, our investing functions, our people attending. Is this the right forum? Do people want to go do this? Would they rather go do something else? Is this a good time of day? Is it a good day of the week? We want to have the metrics to know, are we servicing our members well? And if not, what adjustments should we make? So, you know, that's a big piece of what we do in terms of at least having the data to make an intelligent decision. But then many of our members, like I mentioned earlier, are there to give back and to also learn and to take advantage of things that they're learning in their space, things they want to learn in their space. And so we have lunch and learns. We have a monthly lunch and learn that goes over nuances of investing, for instance. Sometimes it'll be focused, a day will be a lunch will be focused on due diligence. Sometimes it'll be focused on the benefits of LLC investments versus C Corp investments. Sometimes it'll be, some of the favorite ones are the metric review. I said, we track companies we invest in versus one we don't invest in. And we want to understand, did we miss a winner? And if we did miss a winner, what did we miss that said that was a winner we should have invested in it? Likewise, did we invest in ones that went out of business? And if so, were there some signs that we should have seen based on the KPIs and the data we have? So whenever we do that one, that's a big winner. It's a very data-rich one. But we also do, I call it war stories where we get three angels who made 30 to 50 investments each. And they go up and they tell their favorite stories and how they've learned lessons the very, very hard way and invested poorly in decisions that were poor decisions made and what they've learned from that. So at least the rest of us don't have to duplicate those kinds of mistakes.
Melissa Aarskaug (23:31.148):
That's fantastic. You actually, that was my next question for you. I know success stories and lessons learned are really important for investors on what they missed, what they got right. Can you share a little bit about some key lessons you have learned in investing both successfully and unsuccessfully that you could share with our listeners?
Gary Forni (23:56.589):
Yeah, for sure. And it's a three-hour presentation to get through our annual metrics review. It is a lengthy exercise, 80 slides. We don't subject many people to that. But the one-hour synopsis of that is, like I said, a fantastic lunch and learn. But from that data, what we've learned is failures usually fail pretty fast. So we've invested in 219 companies. 53 have had successful exits. I'm sorry, 83 have had successful exits. 53 have failed out now, failed. And so what we've learned is, failures usually die within the first three to five years. But those successes, they usually don't even start until five to seven years. So that's one of the key learnings is you're investing for a long period of time. You're not going to be an overnight win. in the angel investment space. It takes startups a long time to mature and exit. And when I say exit, the vast majority of the companies we invest in exit by acquisition. We've had a few IPOs that come out of this and we've had some unicorns, a number of unicorns that have come out of this as well. But the actual, the vast majority of them are acquired. If you break it up, we've had exits as high as 70X. You know, 50X a bunch of 30s a whole bunch of 20s and 10. But you know our average and so if you look at our exit average our average return is a 4.6X return on a vessel. So for every We use round numbers for every 10,000 you put in you get about 46,000 back So that's our average return that means that counts as zeros too, right? And so our average company actually returns about 5.8 to 6.6X what we put into it. So that's a great number. Anytime an investment group can say, we got a 4.6 return on investment and to put it into time bound that, we're providing a 30% IRR. We've been providing that now for many, many years, kind of varies between 29, 31, but roughly a 30% IRR to our investors. Put it on perspective. You know, the NASDAQ, which is usually the highest returning of the public exchanges, provides a 13 to 15% IRR. We're well over double that. And we're well over double most angel groups. So I'm sorry, well over double most VC. So people all think, VC, that's where the big money is. Not really, not true. A well-run angel group can be very competitive with the VC. I'm not trying to throw shade on Anderson Horowitz and A16Z and all those big dogs, not at all. Those guys do really, really well. But the average VC, we're as good at or better than the average VC. And we get to invest in companies we see on a regular basis and help grow these companies, unlike what we would do as a limited partner in a VC.
Melissa Aarskaug (27:11.852):
Any trends in the startup ecosystem and angel investing that you're seeing right now?
Gary Forni (27:19.181):
Well, certainly the trend is every startup I've seen this year puts the letters AI after themselves, even if the company has nothing to do with AI. It's an amazing belief that some startups have that A, they have to be AI, and B, that we're too stupid to figure out that you have no AI in your solution, even if you have AI in your name. Look, when we do due diligence on a company, we will have six or 10 angels. And these are high net worth individuals, right? They're smart people who are investing their money. And so we dig into a company, we'll put 40 hours of due diligence into a company before we invest. We'll do that over the course of a month. And we'll write a 40-page due diligence report. I've seen scenarios where we've known more about the industry a startup is trying to penetrate than the startup does because we have members from that industry. Not only do we have members from that industry, we have a Rolodex of people we can call in that industry. And so when I said in Austin, you know, with a couple of phone calls, you can talk to just about anybody. That is very, very true. And so if we're putting money in, we're going to make phone calls and we call your competitors. We obviously don't divulge any NDA information, but we talk to them about their industry and who they're worried about. We call your customers and we talk to them and see if they're really customers or serious. We do background checks on the key management team. We do analysis on all of the financials. We know quite a bit about your company before we put money in it. And so if you have some bogus name like AI for reading, I was like, yeah, there's no AI in here. And that is like a yellow flag right off the top or even a red flag right off the top that you're not being transparent with us. And it doesn't take a whole lot of yellow flags or red flags when you look at 100 deals in the course of 45 days to say, yeah, I'm going to pass on this one. There's bigger fish. There's better fish in the sea. So a couple of yellow or red flags in doing some analysis of the company and is like, no, I'm going to pass.
Melissa Aarskaug (29:48.268):
So what does, you know, looking at five to 10 years, what does the future of angel investing look like?
Gary Forni (29:56.109):
That is, that's a crapshoot. It's tough to answer that. A couple of years ago, I was reading some articles that were saying angel networks were going to disappear because what we've seen lately is venture capital is much harder to come by, much, much harder since the pandemic. The number of venture funds has dropped markedly. And so what we've seen is a number of other VCs have migrated to more angel space. Historically, VCs wanted to invest a minimum of $5 million and up in a company because they had these $100 million or $50 million or $100 million funds, and they couldn't afford to manage more than about 20 companies out of these funds. So they didn't want to go anything less than a raise of $5 million. And so all that space under $5 million is the realm of angels. And so now that VCs are having trouble raising these monster funds, they're raising smaller funds so they can invest in smaller amounts of money. And that means they're being pushed down by their LPs into earlier stage startups. And so there was this belief that, well, there's not going to be a need for angels. And the answer is, no, that's not true. There are 350 angel groups in the US. 350 angel groups who are members of the Angel Capital Association. There are lots of independent angel groups, which are six people and a dog who sit around at dinner every once in a while and bring in their favorite nephew's company, and they all talk about it and invest in it. And over the course of the lifespan of that angel network, they make like four investments and then they disappear. I'm talking about real angel networks that are going to have the legs to last a long time. So there are a large number of angel networks.
And we've become more sophisticated. So the Angel Capital Association has a syndication process. If a company is raising $2 million, maybe my organization wants to put $800,000 to that. That means there's $1.2 million left in the raise. I'll submit it to the Angel Capital Association. And the other members of that group can each take a piece of the action. They'll get my due diligence report, our 40-page document talks about the company and our assessment of it. They'll know that we're putting money in and they're like, great, we wanted more deal flow and this one's been vetted. So they'll take, they'll at least take a piece of that. And that's how, you know, startups now raise $2 million. They don't usually get it from one angel group, usually a banding together of a series of angel groups. And the ACA is one of the ways that that happens as well as, you know, another way that that happens is we have relationships with all of the angel groups in Texas. And so it's not unusual for us to say, and there's 200,000 left in this round, anybody want it? And that group will just ride along on what we're doing and just makes it easy for the startup, makes it easy for the other angel groups, and they don't have to duplicate work. So what are we seeing going forward? We're going to continue to see angel networks in the organization, in the ecosystem. One of the things I think that I'm trying to make happen is make it easy for these solo angel investors to not lose their money. So if you're on your own, you don't have 120 other people behind you kind of dividing up the work. You don't see the same amount of deal flow. You don't have people dividing up the work on their due diligence. So I'm out there like saying, join a network. You can join my network, Central Texas Network. You can join some other network, but don't run by yourself because that's almost a surefire way to lose your money. I'll give the example on that.
My first investment was in 1995, so that's 29 years ago. That company still exists. 29 years later, I've never seen a penny back from that company. It's a zombie that will not die. I can't write it off and I can't cash it in and take it to the bank. And that's because I didn't know enough. And that problem has been solved by having 119 other members in the organization to say, Gary, what are you thinking? Why is that attractive to you? And have you noticed these red flags? And so there's value in having a group of people around you. And that I think is going to be kind of the future is have those people around you.
Melissa Aarskaug (34:33.068):
Yeah, I would absolutely agree. I think collaboration amongst the members, it builds not only community, but you're learning from the way other people analyze and think through a deal and things you may have missed. So I absolutely agree with that. I wanted to kind of in closing, just talk a little bit about advice for, you know, aspiring angel investors or those who maybe have never done it and they are trying to figure out some key skills or things they should look for that you can share with our listeners. Or is there any kind of tips that you can share with our listeners that have not done any angel investing?
Gary Forni (35:15.821):
Yeah, I can sort of say, don't invest by yourself. The first thing you want to do is join an angel network. And the second thing you want to do, and this is usually comes to the surprise when I tell people, don't invest, even when you join an angel network, don't invest for the first three months. Just look at the deals, join the due diligence team, learn the process, learn what questions to ask, learn on somebody else's dime before you start investing and recognize. You know, I said it takes five to seven years to have, you know, those successful exits. So that means if you have a finite amount of capital to invest in startups, and it should only be a finite percentage of your portfolio that you're investing in startups, it's going to take five to seven years to replenish that. And yes, you're going to have 5X, whatever you put in, or 10X, whatever you put in, but it's going to take a long time. So don't join in the space of six months. Spend all your money because it's going to be a long five to seven years. So, you know, partition it out so that you're participating in the process and you're learning and getting better over time. And so that by the time that, you know, five years and seven years has gone by and you have more capital invest, you know, you're still participating. You're still, you know, you're not a one and done kind of person. That's just a very frustrating way to be. So, you know, take your time. It's a learning process. It's a long haul. So don't rush. Don't rush the process is the advice I usually give starting investors.
Melissa Aarskaug (36:45.644):
That's great. I love that. I think that's great advice for anything in life, right? Take time and learn and sit behind people that have been in the shoes you're trying to be in and teach you. And so thank you so much, Gary. I know you're a busy man. I appreciate your time. I'm excited to be part of the Central Texas Angel Network and get to learn from experts like yourself. And I just want to thank you for being here today and sharing your insights with our listeners.
Gary Forni (37:15.949):
Happy to be here, Melissa. Appreciate you inviting me and love having you at the Central Texas Angel Network.
Melissa Aarskaug (37:23.596):
That's the Executive Connect podcast.