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Before the Angel Comes the Mechanic

It takes business expertise to get a start-up high enough off the ground to attract investment capital.

May 10, 2000|JUAN HOVEY

Think you have a great idea for a start-up? Is capital--maybe a little angel capital--the only thing that stands between you and success?

Think again, because you're probably way ahead of yourself. Despite the recent turmoil in the public stock markets, Southern California's angel investors are alive and well, scouring the area for promising entrepreneurs with good ideas and no money.

But if you're one of those entrepreneurs, you probably need something much harder to come by than angel money. You probably need help with the basics of business organization. Long before you go looking for angel money, you need to flesh out your idea with a solid business structure covering everything from back-office accounting to production and marketing and sales and distribution.

In short, you need help from somebody who understands the nuts and bolts of commerce--a business mechanic, as it were. If you're like Mark Surfas, chief executive of GameSpy Industries Inc. of Irvine, once you get that kind of help, you may well find that rounding up angel money is no problem.

"I didn't go looking for angel capital," Surfas said. "I needed help with the basics--everything from writing my business plan to arranging my corporate structure and hiring employees and managing cash flow. I was in over my head."

In plain English, Surfas had a great idea for a "dot-com" business and no clue how to make it real. He needed far more than capital to get GameSpy up and running. He needed management expertise, and once he got it, his company became an Internet success story. GameSpy is one of the Internet's premier gaming networks; if you play such online games as "Quake," "Soldier of Fortune," "Duke Nukem" and "Grand Theft Auto," you probably do so on the GameSpy network. The company employs 75 people and expects to generate revenues of about $5 million this year, up from $2 million last year.

A former national director of online operations for the real estate brokerage Coldwell Banker, Surfas came to the idea behind GameSpy in the mid-1990s while running an Internet consulting company. Surfas saw opportunity as the Internet developed, and in 1997 he closed down his consulting operations to go into Internet gaming.

"I went to my employees, told them I wanted to make this change, and asked who wanted to stay," Surfas said with a laugh. "Pretty much everybody left; only three people stayed."

It was a start, and Surfas' timing was good; GameSpy hit cyberspace just as Internet gaming became popular.

"GameSpy was profitable in the early going because it had to be," Surfas said. "But I wanted to grow much faster than my revenues would permit, and I asked myself: What do I really need, and whom do I need on my team to get it?"

Networking among friends and business associates, Surfas made contact with David Berkus, an angel investor who manages an Arcadia-based angel investment fund, Kodiak Ventures, specializing in early-stage Internet and software start-ups.

Surfas sketched out his idea--and his need for help.

"There was no outlay of cash," Surfas said. "I traded equity for Dave's involvement, and he knew that I needed help with the myriad of practical things you have to do to put something like this together. It was really basic."

Working long hours over many months, Surfas and Berkus wrote a business plan detailing GameSpy's corporate governance and business structure. Berkus coached Surfas on setting and meeting realistic goals, and in the early going he took on chief financial officer responsibilities.

It was almost easier to go after outside financing, Surfas said. Working Berkus' Rolodex, Surfas and Berkus brought in $500,000 in angel capital in late 1998 and early 1999, followed by $3 million raised among such corporate strategic partners as Ziff-Davis Inc. last winter. Surfas expects to close a third round of $5 million this month, once again among strategic partners.

What lessons does Surfas draw from his experience?

"You don't need cash to get your start-up off the ground," he said. "You need management, contracts, facilities and everything else before you go looking for capital.

"I can't say how key it was for me to get somebody on board who had real depth of experience in solving day-to-day business problems. If you don't get help like that on your side, you're going to have to reinvent the wheel every time.

"It's a lot easier to raise outside money once you work with someone who understands that that's not what you really need."


Next week: What makes for a good angel investor?


Juan Hovey can be reached at (805) 492-7909 or at

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