Financing Innovation

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The Michigan Pre-Seed Fund can effectively double the impact of friends and family investments. Dennis Carmichael recounts how he first began to develop ERT systems and the role of different forms of early stage financing including the Pre-Seed Fund in bootstrapping his business.

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Filed under: Ann Arbor, MI | Dennis Carmichael | ERT Systems | Financing Innovation | Friends and Family

We've covered the importance of putting in your own money and getting friends and family funding in the early stages of financing your innovation. Getting funding is all about networking, and your closest associates (i.e., your family) are the most likely to give initially.

In this segment, Dennis Carmichael, President of ERT Systems, describes how he got the concept started. He was giving a talk at Automation Alley on RFID tracking for industrial operations and connected with former fire chief John Ellis. Highlights are:

• The first financing game from him and John. They needed to fund a prototype proof of concept.
• They started commercial sales early, both for cash flow and proof of concept.
• Their next investment came from friends and family. They were able to double this via a matching equity investment from the Michigan Pre-Seed fund.
• They are currently seeking an additional $1 MM investment to finance rapid sales expansion.

In future segments, we will have more to say about the Michigan Pre-Seed fund and the structure of venture capital and angel investing in Michigan.

Additional Links:

• Oregon startups points to good resources on bootstrapping your business or growing your business from internal cash flow and personal investment.
• This about.com article provides links to resources on how to structure friends and family financing.

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Early stage outside equity investors are angels and venture capitalists. Venture capitalists tend to come in later on deals, and angels seem to prefer more hands-on involvement with less initial investment. The SBTDC's Charlie Penner provides an overview of how these types of financing work in Michigan.

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Filed under: Angel Investing | Charlie Penner | Financing Innovation | Small Business & Technology Development Center | Venture Capital | Ypsilanti, MI

 As Charlie Penner, Regional Director of the SBTDC, mentioned in his first segment, the first choice an entrepreneur has to make is between debt and equity, and most entrepreneurs receive their first financing from friends and family. In this segment, Charlie discusses outside equity. There are two types:

• Venture capitalists have focused interests. Firms tend to focus on one field to the exclusion of others. In Michigan, venture capitalists tend like to target business to business opportunities with proven markets.
• Angel investors range from sophisticated groups to high net worth individuals. As echoed by Terry Cross, angels bet on the individual entrepreneur and typically make investments under $1 MM.

Both sets of investors look for outsize returns which typically come from risky investments. However, in Michigan, angels and venture capitalists have begun to hedge their bets a bit by focusing on companies that are already demonstrating some market traction.

Additional Links:

• This link gives good tips on getting funding from friends and family which often precedes outside equity investment.
• Angels tend to invest locally because they like to be involved in the businesses they invest in.

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Terry Cross made his first angel investment 46 years ago and has completed 45 investments. Of those, ten have "carried the freight", providing outsized returns. In the first of a series, Terry shares with us his insights on successful investments, stressing the importance of realistically estimating the addressable market for a company's goods and services.

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Filed under: Angel Investing | Detroit, MI | Financing Innovation | Terry Cross

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.

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Sharon McRill, President of the Betty Brigade, recounts how she discovered potential investors during a conversation with a new client. While she might have been hesitant to describe her business so vividly in its infancy, she now believes the risk of openness is more than repaid in refining her ideas and discovering opportunities.

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Filed under: Ann Arbor, MI | Betty Brigade | Financing Innovation | Sharon McRill

 A number of the entrepreneurs interviewed for our series on financing innovation have mentioned the value of networking to find equity investors in early stage start-ups. In this segment, Sharon McRill, President of The Betty Brigade, recounts in detail how a simple conversation with a new client led to several potential investors. Here are some key elements of that conversation:

• Sharon described her business as a franchise opportunity with high potential for growth. She had come to this view after reading Michael Gerber's E-Myth series of books.
• Sharon is essentially looking for a hands-off investor who will allow her to take her business to the next level. As her customer mentioned to her, that kind of investor is rare in Michigan.
• When queried about why she would be so open about her business plans, Sharon noted that there were many ideas but only a few who could implement. The risk was well paid in refining the idea.