Angel Investing

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Terry Cross has 46 years experience as an angel investor. In this segment, he describes the general process for contacting angel investors, negotiating with them, and the type of terms you can expect amidst the credit crisis of 2008...

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

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When approaching angel investors, managers of early stage businesses need to think out the potential points of failure in their business plans. Common risks include failure to meet sales forecasts and spiraling supplier costs. Intellectual property is often the only real asset that an early stage company possesses, and angel investors want assurance that it is protected.

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

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.

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The Michigan Pre-Seed Capital Fund is targeted at early stage technology companies that need in the hundreds of thousands of dollars. Skip Simms, fund manager, explains the criteria for applying and the reason for the fund's existence.

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Filed under: Angel Investing | Ann Arbor Spark | Ann Arbor, MI | Financing Innovation | Friends and Family | Skip Simms | Venture Capital

The Michigan Pre-Seed Capital Fund is targeted at early stage technology companies that need in the hundreds of thousands of dollars. As Skip Simms, the fund's manager, explains:

• The maximum investment the fund will make is $250,000.
• The fund is a matching fund. Its contributions will always be less than or equal to those of outside investors. These investors might include angels, venture capitalists, or friends and family.
• The motivation for creating the fund came after the collapse of the first Internet bubble when angels and venture capitalists demonstrated hesitancy to invest in early stage ventures that were still trying to prove their business concept.
• People interested in the fund should apply through the nearest Michigan SmartZone where it is first reviewed. The application then goes to Skip Simms who presents it to the fund review board consisting of angels, venture capitalists, and service providers.

Additional links

• One reason that venture capitalists might be hesitant to invest in early stage companies is pressure from their own investors seeking high rates of return over a fixed time horizon.

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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.