Audrey McLean is sitting with a couple of young engineers at Il Fornaio, Silicon Valley's newest deal spot. They're trying to raise $1.5 million for a new e-commerce company. Suddenly, McLean asks, “What's Mario Andretti's strategy?”
Meaning: What is it about your trade that puts you so far ahead of your competitors that they can never close the gap? Like a famous racing driver's technique. McLean promises to listen and get back to you right away.
A week later, she decided to pass. Why? Because she couldn't beat Mario Andretti.
“They were licensing other people's technology. What happens if the licensing deals fall apart? The problem with the web is that it makes it easy to build something, so it gives you a false sense of security.” Something else was missing: “You have two partners, but no visible CEO,” complains MacLean.
Mr. McLean, 46, is one of Silicon Valley's angels, so-called because they dig into their own pockets to give entrepreneurs their first round of funding. In this respect, they differ from traditional venture capitalists, who are typically agents of other people's money and who rarely provide funding to startups these days.
Angels have been around since at least five centuries ago, when Ferdinand and Isabella stole the Genoese sailor Christopher Columbus. But today's angels don't just sit around waiting for someone with an idea to come along. Good ideas are much scarcer than money these days, so angels are on the hunt for them. Jeffrey Sohl of the University of New Hampshire's Center for Venture Studies, one of the nation's leading authorities on angels, says there are about 300,000 angels in the United States.
Today, he's out there, checkbook in hand, pen at the ready, searching for business contacts. He tells me that $10 billion was pumped into startups last year alone. What about this year?
There will probably be more put into it.
In 1997, Congress gave these people a jolt of adrenaline by making profits from loans to new businesses taxable.
It will be deferred as long as it is rolled out to new startups within 60 days.
Angel investors usually get involved in start-ups at an earlier stage than venture capitalists, who want to see something that works. Angel investors, as the name suggests, put money into the business.
They put hundreds of thousands, or even millions, of money into their ideas and dreams, and when their dreams start to come true, venture capitalists take notice.
McLean is considered one of the smartest and most well-connected angel investors. Of the six companies he's started, two have gone public, three have been acquired (one by Microsoft), and one has failed. Forbes Global estimates he's made at least $20 million on $1.2 million in investments. He has six more deals in various stages of development.
That track record of success has venture capitalists watching MacLean's companies closely. “There's nothing angel-y about!” exclaims Tim Draper, a partner at Silicon Valley's Red Inc. and a third-generation venture capitalist.
Hot Draper, Fisher, Jurvetson. “Audrey McLean Walks on Water.”
Reed Hastings, a promising engineer whom MacLean helped, put it in more understandable terms: “Audrey is a tough coach who brings out the best in people. She's brutally honest, but in a productive way.”
Hastings has reason to be happy: His company, Pure Software, was MacLean's “angel.” The company went public in 1995, making Hastings $75 million richer. As Hastings points out, MacLean brings more than cash to the deal: She sits on the board of directors, challenges business plans, helps turn ideas into prototypes, hires experienced executives, and finds customers.
So what does MacLean look for in an investment? A promising idea, of course. But personality is also crucial. “If I ask a tough question and they get defensive, that's a red flag,” he says. “I back people who I think are looking for help and advice. Those are the best entrepreneurs.”
They also have to be very formidable competitors: “Starting a company is like going to war. You can't do anything but be totally immersed in it. You have to approach it with insane passion and determination that nothing can stop me.”
She found that entrepreneurial enthusiasm in Hastings, a young engineer working at Adaptive, a networking company she founded in 1988. When Hastings, then 30, approached MacLean in 1990, his idea had already been rejected by several venture capitalists. He wanted to build a tool that would enable software designers to debug programs faster and get products to market sooner. MacLean was intrigued: in the software world, first to market often wins.
MacLean put in a symbolic $20,000 to keep an eye on Hastings. As her confidence in him grew, she and her venture capitalist friends raised another $6.4 million. It wasn't all smooth sailing.
The product was ready to launch in six months, but he was having trouble selling it. The company had gone through four VPs of sales in four years. Hastings says MacLean was always asking, “When are we going to get this right?” Eventually, she helped hire the right VP of sales, and Pure Software got off the ground. MacLean's investment totaled $245,000, and the company was worth $5 million at its IPO in 1995.
Although Mr. McLean is best known for his tech deals, he started Pete's Brewing Co. in 1987 (see box, page 73). The microbrewery's founder, Pete Slosberg, then 37, had been working with Mr. McLean's husband at Rolm, a maker of corporate telephone systems. Mr. Slosberg's hobby was brewing beer, and he had just won a silver medal at the Great American Beer Festival in Colorado. Mr. McLean thought he could help build Mr. Slosberg's beer, Pete's Wicked Ale, into a national brand, and he eventually invested $215,000.
Other adherents were hard to find. “I'm living proof that Audrey is a great salesperson,” says Jeff Yang, a partner at Institutional Venture Partners in Menlo Park, Calif. “She was a real saleswoman, and she was a real saleswoman,” Mr. Yang says.
“She called me and I went from, ‘I don’t know anything about beer, I don’t want to do it,’ to, ‘Okay, I’ll send you a check.’ I don’t really know what happened.”
Peet's Brewing Co. went public in November 1995, returning more than 100 times their investment to its original investors. Peet's wasn't a complete success, but it was successful enough to be acquired by Gambrinus Co., a San Antonio, Texas-based beer importer that handles brands such as Corona, for $69 million.
If MacLean can sometimes be tough on entrepreneurs, it's tough love.
She learned that while growing up without much money in the rural town of Warwick, New York, and raising her nine younger siblings. When she was just 8, her father said, “Hey, Audrey, do you want to go to college? Get a scholarship.” In 1970, she received a partial scholarship to Columbia University, but didn't go. “My dad wouldn't cosign my loans,” she says. “He said no one would want to marry me because you'd be in debt.” So McLean took classes at Long Island University instead, where she got a full scholarship. But she dropped out and went to Paris, where she modeled for fashion magazines like Vogue.
Upon returning home, she decided to make a fresh start and headed to California, where she earned a bachelor's degree in mathematics from the University of Redlands. “Math is the great equalizer,” she says. “If you can do numbers, the boys are going to look up to you.”
And it was. MacLean began her career as an engineer at early networking company Tymshare, where she rose to the position of sales director, but left with several colleagues when Tymshare refused to support their idea to create a line of switches for wide-area networking products. In the summer of 1982, at age 30, she co-founded Network Equipment Technologies. MacLean sold a rental property she owned for $70,000, put the money into investments, and didn't take a paycheck for more than a year. She would take calls from potential clients by waiting for their secretaries to go home and have them take the calls themselves.
Getting venture capitalists to listen to her presentation was even harder.
At the time, Silicon Valley wasn't flush with institutional money, and there weren't any female founders. It took her more than a year to raise her first round of funding, $4.3 million, and that was after she hired an experienced manager from Comsat as CEO. Pregnant with her second child, MacLean recalls one of the lead investors asking if she was pregnant. “When I told him I was, he said, 'You'd better get another $500,000 in key man insurance.'”
Over the next four years, MacLean built the baby, raised another $20 million, and offered her services to big companies like IBM. NET's IPO in February 1987 gave investors a 16-fold return on their investment. But MacLean ended up owning less than 1% of the company and making just over $1 million in profits. The experience taught her a lesson she never forgot: Don't give away too much stock.
With that in mind, she bought 21 percent of the common stock of another startup, Adaptive Inc., a maker of high-speed switches that received funding from NET in 1988. Shortly after the two companies merged in 1993, MacLean's stake was worth $6 million.
Around that time, she was tired of working 80-hour weeks and wanted to spend more time with her two daughters. She decided to live off her own money. She withdrew her money from NET and Adaptive and used it to back other startups. She also invested in one IPO, the only stock of which was named Cisco Systems.
Ms. MacLean's husband of 20 years, Michael Clare, is co-founder of LAN-switch maker Synoptics Inc. and an angel investor in his own right. “They're both known by everyone in Silicon Valley,” says Andrew Rachleff, general partner at Benchmark Capital in Menlo Park, Calif.
MacLean spends a lot of time chatting with people like Michael Price, the former head of Lazard Fraser's telecommunications business, who put together the WorldCom-MCI deal. “Audrey is a smart, kind, tough businesswoman,” Price says. “But she's also a great mother, a great wife, a great friend. What's really interesting about her is that she's all of those things.” Together, the two have invested in several companies, including Avidia, a maker of low-end switches that they founded in 1997 with $2.5 million. The company was soon acquired by a fast-food giant.
It bought communications equipment maker Pairgain for $94 million. “We made 10 times our profits in six months,” Price boasts.
The firm also co-invested in Firefly, an Internet startup out of the MIT Media Lab that was recently acquired by Microsoft, which tracks the interests and purchasing habits of web surfers for companies like Barnes & Noble.
In addition to tech, McLean has recently begun turning his attention to healthcare. “They're both huge market opportunities,” he says. He and Stan Meresman, former chief financial officer of Silicon Graphics, invested $1 million in Healthcare Transaction Systems, a company that works to streamline hospital purchasing systems (see below).
Barbara Pardos, 27, a Stanford University PhD in electrical engineering, attended Mr. MacLean's entrepreneurship class at Stanford, and when Ms. Pardos started an advanced laser-technology startup called Informed Diagnostics, Mr. MacLean wrote her a check for $100,000 before seeing a prototype.
Will any of MacLean's startups make it onto FORBES GLOBAL's list of 300 Best Small Businesses? Absolutely.
