A nice read from the Angel Capital Education Foundation.

The Invirtus (www.invirtus.com) success story begins with virtualization, one of the hottest topics in computing today; an entrepreneur who lived with and then created a solution for many of the problems of virtualization, and several angel investors who are committed to identifying and investing in Atlanta area high technology companies.

“We received a 4X return in under a year, and we are going to get paid more in earn-outs if the business hits certain sales milestones,” says Clark Gilder, a member of Atlanta Technology Angels and Invirtus investor. “This exit provides the overhead and funding to invest in sales and marketing plus gives us an instant distribution network of more than 1000 resellers. The ‘hot’ aspect of virtualization allowed us to exit without a VC round and the building effort that usually characterizes the typical three-to-five-year investment window for a start-up. Virtualization may be a niche today, but it’s going to become dominant down the road.”

Invirtus presents to ATA in April 2006

Gilder’s interest in startups and contributing to an economic environment that supports entrepreneurs dates back to 1988 when he tried and found it impossible to raise seed money in Atlanta for a software idea.

“No organized angel group existed here then,” he says. “In 2005 after learning about Atlanta Technology Angels (ATA) from another investor, I thought that it would be a perfect way to join with other angels to reduce risks; pool knowledge and experience, and share deal flow and due diligence while working and learning from each other.”

At Gilder’s invitation, Tom Edwards, CEO of Invirtus of Suwanee, GA, presented at ATA’s monthly meeting. The two had worked together previously at Microsoft. “By coincidence, I had also invited a guest, Bryan Adams, as a way to get him to join ATA,” Gilder says. “After the meeting he told me that he liked Tom’s pitch and wanted to work with me on due diligence.”

Gilder and Adams (a former CFO), plus Ken Gavranovic, a friend and former CEO, and one more angel investor who wishes to remain anonymous, pursued the investment. “I knew the virtualization space was taking off,” Gilder says. “I saw that Tom had a good first-version product; the question was could he sell it and build a team to operate and grow the business.”

Knox Massey, executive director of ATA(www.angelatlanta.com), says “Clark is one of the more active members of ATA, and when he suggested Invirtus as a presenting company, we immediately put the firm through the screening process. They did well and so it was a natural fit for ATA to have Invirtus at our monthly meeting of investors.”

Virtualization deploys unused capacity, reduces downtime, and improves back-up and recovery

Broadly speaking, virtualization is a technique for hiding the physical characteristics of computing resources from the way in which other systems, applications, or users interact with those resources. Virtualization can make a single physical resource (such as a server) appear to function as multiple logical resources; or it can cause multiple physical resources to appear to a user or application as a single logical resource.

The benefits of virtualization as a tool to drive efficient hardware utilization have been well understood since the seventies; however, in recent years, virtualization has shown the potential to not only improve the utilization of client-server networks, but to become much more than an IT tool.

“One of the common uses of virtual machines (VMs) is software sales demos,” Gilder says. “A company can package up the exact computing or networking environment that they want their representatives to use to sell their products, burn it on a CD, and distribute it to non-technical sales reps who simply copy the VM file into their PCs and run the demo.”

Microsoft, for example, supplies these types of complete working demos to thousands of sales representatives. Before founding Invirtus, Edwards worked in the group that was responsible for manufacturing, organizing, and building these demo CDs. “That’s where Tom first learned some of the challenges of virtualization,” Gilder says. “After he left Microsoft he continued this focus and came up with tools to make virtual machine files that are smaller, faster, and easier to distribute.”

Whether the application is testing, prototyping, disaster recovery, training, or sales demonstrations, Invirtus products optimize VM files to improve virtual machine performance, use physical hard-drive space more efficiently, and reduce the time that both humans and machines spend copying, moving, backing-up, or archiving virtual machine image files.

One month from the beginning of due diligence to term sheet

Gilder and the three other angels proposed a term sheet that included about $500,000 in Series A funding. Edwards, who held voting control via his original common shares, was asked to invest a relatively small amount in the Series A preferred deal as a motivational element.

“The company didn’t need more money at that stage, so we didn’t want to over-subscribe it,” Gilder says. “We were happy with our allocation; plus one of the down sides of angel investing is that it’s hard to coordinate 10 people to write checks for a $1 million round. The four of us knew each other and moved fast as group. We closed within two weeks of the term sheet.”

Edwards accepted the terms, and the angels spent the next few months coaching and helping him hire and build out his team. They also provided overall management guidance. “I understood the product technology,” Gilder says, “and the other angels provided CFO and CEO business development advice so we knew we could help guide Tom through the growth stages and any future fundraising experiences to keep this idea in Atlanta while getting a good return.”

Invirtus uses the Internet for marketing and sales

Invirtus didn’t spend any money on marketing and budgeted very little for advertising and sales. Instead, Edwards used Internet blogging to spread the word about his company’s products. “With the Internet, you can meet a niche audience fairly easily,” Gilder says. “Tom targeted the small community of technical people who were working with virtual machines. They were natural leverage points. If you just post a comment out there—I’ve got a beta version, come try it—they will.”

Edwards provided beta versions, gave early adopters a lot of support, and fixed things when his early users identified problems. Invirtus was a small, responsive company, and that paid off.

“Internet word of mouth literally moved his Google page rank from nothing to tops if you searched on the right key word,” Gilder says. “The blog was alive with quotes and suggestions, and that brought Invirtus to the attention of bigger players, including the company who bought it.”

Acquirer seeks out Invirtus

“By December 2006 it was obvious that the overall virtual machine market was hot,” Gilder says, “but it was also evident that sales of individual tools would take time to develop. About the time we began the process of starting up a VC round, we were approached by the larger company, so we negotiated an exit.”

The acquirer is a California-based, publicly traded (NASDAQ) software company. Edwards is staying on to run Invirtus as a wholly owned division of this larger company with the goal of integrating the Invirtus product line into the acquirer’s other management tool products.

The angels who invested in Invirtus would like to do more deals together. “Each of us brings unique skills and experience to the table to help entrepreneurs in early stage situations,” Gilder says. “Many founders with ideas don’t have a realistic understanding of the valuation of the company or of the value that experienced angels can bring to the table. They don’t understand the perils of raising venture capital too early and the potential outcomes that are likely when they miss VC performance targets. Experienced angels can help.”

Read the original, here.