In The Company Of Angels

June 5, 2002
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GRAND RAPIDS — For an entrepreneur seeking start-up capital, hooking up with the right angel investor can prove to be a match made in heaven.

According to the U.S. Small Business Administration’s Office of Advocacy, angel investors prefer to invest at the seed and start-up stages in the life of a venture. A round of angel financing is typically less than $1 million and, in most cases, less than $500,000.

Mark Clevey, a vice president in the SBA’s Lansing office, said angels are involved in the first round of embryonic funding and usually invest between $30,000 to $200,000 in a start-up.

Angels’ investment terms and conditions are usually briefer and more informal than those of venture capital firms. Furthermore, they’re patient investors. The Office of Advocacy says exit horizons tend to be five to 10 years or more.

Angel investors are accredited investors under federal and state securities laws. They’re generally identified as people whose net worth is more than $1 million or who have an annual income of more than $200,000.

The Michigan Economic Development Corporation (MEDC) is now organizing an angel network in Michigan that it expects to be operational in about three months.

“We’re trying to present a united front of angel investors,” said Jennifer Kopp, an MEDC spokesperson. “We’re going out right now and contacting angel investors and forming partnerships. So far we have gotten about 20 angels to respond.”

The MEDC has been locating in-state angels primarily by word of mouth and has enlisted the aid of venture capital (VC) firms toward that end because angels are typically wealthy individuals who prefer privacy and anonymity.

Gary Krause, director of special projects for the MEDC, said angels like to put their fortunes to work in very quiet ways through privately placed deals. Sometimes they will bankroll ventures singularly and sometimes collectively with co-investors in an organized venture capital company.

The whole idea behind the MEDC effort is to increase the amount of risk capital available to promote entrepreneurial activities, Krause said. Once the network is in place, the MEDC will use it to help link entrepreneurs with the right angel investors.

According to the MEDC, corporations are becoming increasingly aware of the value of new ventures and the investment returns that start-ups create.

“We want to spur business and entrepreneurship in Michigan in any way we can, and angel investors are a really critical piece of the puzzle,” Kopp noted.

She said angels choose to invest in start-ups based on a variety of criteria, key being the angel’s particular area of business expertise or interest. An angel with a strong background in life sciences, for example, is more likely to invest in a life science start-up than a publishing company.

Angels also give careful consideration to a start-up’s growth possibilities, its management team’s savvy and the potential of the entrepreneur’s business proposal.

Reportedly, many angels are adventurous little devils, often willing to take bigger risks or accept lower rewards when they’re attracted by the non-financial aspects of an entrepreneur’s proposal, according to the Office of Advocacy.

According to the MEDC, angels are more interested in helping to build a new company and tend to spend a lot of time guiding the day-to-day management of the start-ups they invest in. In some case, an “archangel” may serve as the entrepreneur’s mentor.

Clevey thinks there are probably hundreds of untapped angels in our midst. There are 1,000 women in Birmingham, Mich., alone who have a net worth of $1 million or more, he pointed out.

There’s a concentration of angels in Ann Arbor for a couple of reasons, Clevey said.

First, the University of Michigan is the largest repository of federal research dollars of any university in the country and 75 percent of patents are based on publicly funded research.

There’s more new technology coming out of U of M than out of any other university in the world, he stressed.

Second, technology relates to durable goods and the Midwest is the world center for the manufacture of durable goods.

“Technology means nothing if you cannot put it into a durable good. Until it does something, it has no value,” Clevey observed.

“What happens is that Michigan is the place final retail durable goods are made — cars, washing machines, medical devices, you name it. Of the 11 technologies that are driving the world economy, 10 of them are reflected in Michigan. All technology flows this way. This is where things get made.”

He noted some $600 million to $700 million in research funds are pumped into Michigan every year between Michigan, Michigan State and Wayne State universities. Three to five years later that research comes out in the form of new technologies for sale.

And venture capitalism is what makes it happen.

Michigan now outpaces other states in percentage of new venture capital growth. There are 17 private and two corporate VC firms in Michigan that are collectively investing some $2.5 billion this year, up 35 percent from last year.

The MEDC attributes the increase to two new firms, Ford Venture and Grandville-based XR Ventures LLC, both of which are corporate venture capital firms. The two added $315 million to Michigan’s total VC funds in 2000.

Venture capital firms, by definition, are only interested in companies that are going to go public. A company that is going to go public has to have proprietary technology or nobody will invest in it, Clevey pointed out.

It costs a minimum of $250,000 to take a company public and nobody will put that kind of money up to take a company out if doesn’t control some technology that gives it a market edge and a defendable leadership position, he added.

A seed capital firm is a VC firm that invests in early stage deals. From there, a new company will move on to a first stage VC that will complete the company’s management team and get the organization ready to go public.

A second stage VC firm’s only job is to take the company to Wall Street.

Second stage firms are only in a deal for two years maximum and look for a 30 to 40 percent return on investment, he explained, adding that most of that $2.5 billion being invested in Michigan companies this year is late-stage venture capital.

“Michigan, with Thomas Edison and Henry Ford and the Kelloggs and the Dows, has a culture of entrepreneurism like nowhere else in this country,” Clevey remarked.

“We have this history of tinkerers who take interesting things and turn them into usable products. We took that culture and added to it venture capital to finance the movement of technology from smart people’s brains into products and businesses.”

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