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Posts Tagged ‘UNH Center for Venture Research’

Ask CJ: On the Benefits of Flying With Angels

Monday, October 17th, 2011

Q: “I am looking to get some funding for my business and would like to see if angel investing might be a good fit.  What types of businesses do they invest in?”

A: When I joined the Division of Economic Development about a year ago, I had the same question.  Strangely enough, it wasn’t all that easy to get an answer.  After doing some research to respond to your question, I learned that I’m not the only person who has experienced difficulties getting information about angel investment groups.  These are private groups conducting private transactions so data is not easily accessible.  Angel groups also differ from one to the next so that too needs to be taken in account.

New Hampshire Division of Economic Development Seacoast Business Services Specialist Christine J. Davis

With that being said, I have some general information as well as some insight about a local angel group.  I reached out to Jeff Sohl, director of the UNH Center for Venture Research to learn more.  The Center was established in 1984 to provide research and expertise through the study of early stage equity financing for high growth ventures (www.unh.edu/cvr).  Both angel groups and venture capitalists differ from debt financing in that they typically are not repaid until an exit event such as the sale of the company, a merger or an initial public offering (IPO).  Venture capital groups tend to come into the scene for later stage, and often larger, financing where as the angel groups have a history of providing start-up capital.

Angels can be divided into one of three types; individual, informal group or formal group.  According to Sohl, 75% of angel investments are made through an independent angel.  Informal groups, such as the eCoast Angels, meet regularly to review deals, vet them and if a deal is deemed a good investment, it is presented to the entire group to see if there are individuals willing to fund the deal.  Formal angel groups will have an executive director and members often are required to make minimal yearly investments.  Active investors not only invest with members of their group but often with members of other organizations. 

Angel investment deals range from $100,000 to $1 million with the average deal size being around $300,000. The process takes around three months to complete.  With the changes in the market, angel groups are spending more time conducting their due diligence and hence less deals are being done and it is often taking longer than in the past.  The group will have their own particular investment criteria to consider as they review deals but they also look at the management team, business plan and the opportunities for an exit.  More risk is borne by an angel investor so the relationship and trust between the entrepreneur and the investor(s) is much more important than in other types of investing.  As Jeff puts it, “The entrepreneur has very few assets so you are really betting on the jockey and not the horse.”  Angels typically invest in a company that is geographically close as they often take an active role in the company which usually includes a couple of board seats.  The entrepreneur will need to be willing to give up some control if they are going to accept this type of financing.  If the angel group doesn’t think you are going to be open to their expertise and vision, you may not get funded even if you fit all of the other criteria. 

I also had the good fortune of spending some time with Rod Van Sciver who is a member of eCoast Angels, www.ecoastangels.com, a local angel investment group in Portsmouth.  I asked Rod about their investment criteria and what types of businesses best fit their investment strategies.  In addition to the requirements I mentioned above, he said that they also look for the entrepreneur to have a prototype or a patent before they get involved.  Prospective companies need to show the potential for high growth and therefore lifestyle businesses with limited growth opportunities would not fit.  Rod discussed the process in which a proposal is first pre-screened by one individual and then if it has legs it goes to a screening committee for further review.  If the majority like the deal, it goes out to the entire group and a “champion” is sought to lead the deal.  Due to the continuing economic jitters, the process has lengthened and could take up to six months to go from the initial meeting to the signing of the term document.  The group may also reach out to other angel groups to bring them in on the deal.  I asked about the demand for funding and Rod said they receive about 6-12 proposals each month and 80% of those are rejected. 

I also inquired about the amount of funding that has been taking place recently.  Last year the group invested around $3.5M with $2M being attributed to their eCoast deals and the other $1.5M going to other outside deals.  I thought this was interesting as I have heard a number of times that no one is investing right now.  When I inquired further, I learned that the $2M invested last year was all follow-on investing from previous deals.  This is a phenomenon that I read about in some of Jeff Sohl’s research as well.  With the economy and the lack of next-stage financing in the market, angels are increasingly providing later rounds of equity capital (Angel Investing:  Changing Strategies During Volatile Time, Jeffrey E. Sohl, 2006).  Angels are in fact investing; however, the increase in follow-on funding may be the reason why entrepreneurs are telling us that angel funding has dried up.

There are many different ways to fund a business.  There are even more factors involved in deciding not only which type of financing would fit your business but also which type of financing would fit your management style.  Don’t like debt?  Perhaps you will be better off bootstrapping it.  Don’t like sharing the decision making and direction of your company?  Perhaps debt financing is the right fit for you.  It’s just as important to know what is available as it is to know yourself and your comfort level with the different finance options available to you.

Whether you have been in business for 20 years or just getting started, we have the resources and the expertise to answer your questions. You can e-mail me at Christine.Davis@dred.state.nh.us. I look forward to hearing from you.

Christine J. Davis works for the N.H. Division of Economic Development as a resource specialist serving businesses in Rockingham and Strafford counties. Her role is to provide the support needed for businesses so that they may remain viable and growing entities in the community. Ms. Davis lives in Exeter with her two daughters.  When not performing her work or parenting duties she can be found on her bike, in her garden or headed down Water Street in Exeter with her girls to get an ice cream.