Terry Cross

Terry summarizes the steps to accessing angel investment as follows:

• Initially, you should approach an angel group because that is one of the easier way to find individual angle investors.
• Provided you make it through the screening committee, you then do a 20 minute presentation followed by question and answer.
• Then the waiting game begins. If one or more investors takes interest, a series of meetings to explore the investment opportunity and perform due diligence will occur.
• Finally, if that process completes successfully, the investors and entrepreneurs will discuss terms. Currently, in the midst of the 2008 financial crisis in Michigan, entrepreneurs can expect to give up 30–40% ownership for investment on the order of $1M to $1.5M.

Angel groups we are aware of in Michigan include:

• Ann Arbor Angels in Ann Arbor
• Grand Angels in Grand Rapids
• Great Lakes Angels in Rochester
• First Angels in Kalamazoo
• Traverse Angels in Traverse City

We continue our discussion with Terry Cross on angel investing with an explanation of the kinds of risks he is most sensitive to. For the most part, there is not a set of pat answers. Terry wants to see that company management has thought of potential points of failure in their business plan. Common ones include:

• Missing initial sales forecasts by a substantial period of time.
• Unfavorable changes in the cost of sourcing.
• Distribution strategy failing to deliver.

An area of particular focus is intellectual property. Often, it is the only real asset the firm possesses. Because provisional patents are so easy to obtain, Terry has no real regard for them. He prizes full patents and, in some cases, trade secrets more highly.

Terry Cross made his first angel investment in 1962. His broker at the time suggested they try a private placement since "they weren't doing so well in the public equity markets". The investment was a roaring success, producing a return of almost 40 times the initial investment in 4 years. However, not all of Terry's investments were that successful. In this first segment with Terry, we gather the following lessons learned:

• Of Terry's 45 total investments, eight to ten have produced all the return, sometimes paying out 90 to 100 times the initial investment. Twenty-five burned through all their money and died. The rest are among the "living dead" with no return expected. That boils down to a success rate on the order of 20%. A recent study of angel investments suggests that this experience is not atypical.
• Over time, Terry has learned to bet on the jockey, meaning he considers the management team critical. He's also concerned with the company's value proposition and how the company differentiates itself in delivering it.
• A chief concern in evaluating a company's value proposition is the size of the market it thinks it can address.
  • If a company suffices itself with just estimating a small penetration of a very large market, that never seems to work out. The company has not determined who real customers might be.
  • A real estimate of addressable market consists of actual potential customers and a reason for why they would adopt the company's product.

In future segments with Terry, we will discuss intellectual property and risk mitigation, and the process of obtaining angel investment including the pitch, what happens after, and term sheets.

Additional Links

• The Angel Capital Education Foundation lists a number of white papers about angel investing funded by the Kauffman Foundation.