Inflective Havoc
Reflections on Our Big Entrepreneurial Times from Jan Horsfall

The Power of Angel Investment

  I’ve been relatively outspoken about the role of angel investment in new companies. It’s a timely topic in my own life, as I’m involved with no fewer than eight different companies seeking angel investment for their fledgling newcos. The amounts differ – from $30,000 to $500,000 – but the end game is the same: advance the company to the next level so more value can be unlocked.

So I’m constantly a bit surprised at how aloof and inconsistent most of our more notable private investors are when it comes to this angel activity, because these new companies literally don’t have other options. Shouldn’t that mean as private investors we should be more intense about the needed support?  I honestly see more private investors who treat private investment as a hobby or a day at the race track than what it is: private investment in our own local businesses.   

Where else are our best local newcos going to get funding? 

Banks? There is no bank money to be had for any of these aforementioned companies – ranging in type from technology to gaming to consumer food brands – and it’s a huge waste of time in the form of a crap shoot if one does decide they’re going to take the ‘bank tour’ in search of some bank debt. I personally don’t know one newco on my radar screen with any hopes of getting any assistance from the banks. Even outside of entrepreneurs seeking bank debt, the more ‘down the middle of the fairway’ bank debt is also incredibly delayed at best. In speaking last week with John Barr, Papa Murphy’s Take ‘n’ Bake CEO, he indicated basic franchisee SBA loans are currently taking nearly seven months to complete – double the time it used to take. Further, Dodd-Frank is a horrific piece of legislation and the banks are also hamstrung due to the uncertainty of this anti-business legislation.

Private equity? Not unless you have at least $500,000 dropping to the bottom – often closer to $1MM minimum of EBITDA. None of the companies I sited above would qualify. Additionally, not only have the PEG’s lost their leverage from the banks (the PEG’s aren’t getting any help from the banks either), but they continue to drive down the pricing of exiting companies as there isn’t currently enough strategic money in the markets to keep them honest on that front (indeed, it won’t be a Seller’s Market for exiting companies until mid-2013 at the earliest).

Venture capital? Potentially, but in speaking with my venture capital friends, on average the investments have been fewer in 2011 and the early-stage start up is usually still too early. Again, when I think about the companies above, there is only one company who could potentially go there and they’re currently so cash constrained that readying them for the VC process has proven difficult. You really need an angel to get a VC to support you.

Which is why in so many cases the only avenue for expansion has now turned into the only avenue for survival to many of these companies:  angels.  There simply aren’t other options.

Herein lies the choice of  opportunity or cost for cities across the country, depending on the health of the overall angel investment community in their respective locales.  Even here in Colorado, the difference in the angel investment intent in the top four business communities of Boulder, Denver, Colorado Springs and Fort Collins is dramatically different. As I’ve noted, Boulder continues to set the example for what private angels should do for their community in terms of volume of investment, follow up investment, and what I’ll term generosity – the sense of support and giving which new companies need so desperately. The other three metro areas have some work to do.

While I’m proud of the advent of High Altitude Investors here in Colorado Springs, the overall angel investment network remains tepid at best. Like other metro areas in which the angel investment support is cumulatively lacking, there seem to be common symptoms:

  • There is an irrational risk aversion, out of step with the risk inherent in these start ups.
  • There is a lack of understanding as to how much of one’s personal portfolio should be aimed at start ups. I’ve watched high net worth individuals with over $100MM of assets pull back after investing less than $1MM in new companies – less than 1% of their asset base. Frankly, if you’re not investing at least 10% of your investment capital into private investment, then you don’t really understand the role of private investment.
  • These investors – the majority – tend to invest too sparingly and haphazardly, going against the need to invest in enough companies to create a strong ROI scenario for themselves as the winners and losers get sorted out.
  • I’ve then watched private investor after purported private investor decide angel investment “wasn’t for them” because of the lack of return on one or two private investments. Whatever happened to learning?
  • Thus, with too few deals in the hopper per individual, the cumulative angel community support isn’t what it needs to be for the area businesses who have no place to turn. Think ‘gas shortage’.
  • I’ve also seen private investors who don’t understand what it means to ‘invest along the way.’ Thus, companies who do have angels and are looking back to them for repetitive investment in subsequent rounds also suffer when these investors fail to summon the courage and understanding to put additional funding into these concerns.
In the end, not only does the cumulative effect of this lack of angel funding mean the end of the line for many of these starving entities, it also has the predictable effect on the communities who don’t foster a broader, more generous angel investment structure, such as the one in Boulder: the people who start these unsupported companies will leave. Conversely, that’s what is so incredibly cool about angel investment – not only do you help young companies as you seek that larger ROI, but you play a critical role in helping build your city’s new business foundation.  This dynamic is rarely considered as part of the overall investment thinking. And that’s a real shame.
I appreciate the belief that an investment has to stand on its own merits, but you can’t escape the fact that when you’re talking angel investment, there’s an added benefit which is more in line with making a large donation to a local symphony or local zoo or any other local philanthropic activity: you make your community better. So what’s wrong with considering this when you make your investment? It doesn’t make you weaker, it frankly shows you’re smarter than the average angel. And it shows you care.              
I’m going to continue to strongly push for angel investment education as part of an effort to increase the overall private investment activity  in our growing city. I’m also going to call “bullshit” on people when they ignore the effects of walking away from this vital activity all while pontificating about how much they care about the place the live. If we can afford to make the giraffe exhibit at the Colorado Springs Zoo ‘world class’, then we can certainly be smart enough to make our city’s new business foundation ‘world class’ as well.
Sometimes all it takes is one angel investor to break the habit of tepid angel investment. You can lead by example and pull people with similar net worth into the game – and you can personally save a company and turn it into a growth entity at the same time you make your city’s future more promising. Think about that next time you’re writing that check to the symphony. Not only can you be charitable, but you can also make a helluva lot of money in the process.
– Jan

One Response to “The Power of Angel Investment”

  1. […] this area’s inability to financially feed and nurture its young start ups (see my earlier blog, The Power of Angel Investment). Amazingly, the spirit and intensity of a growing group of Colorado entrepreneurs will keep that […]

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