Angel investors offer a potential option for an entrepreneur behind an innovation or startup business who needs capital to take off. Michigan now has 10 angel investment groups, including Muskegon Angels and Holland-based Grand Angels, which this summer formed an affiliate in Kalamazoo, Ka-Zoo Angels, and looks to add others around the state. The 10 groups combined had more than 340 members at the end of 2016. MiBiz spoke with Grand Angels President Tim Parker about what angel investors seek in an investment prospect and the advice for startup companies that may be considering an angel investment.
What does a startup company seeking capital need to show you first to get your interest?
We look at two things initially. The first thing is, of course, if the business case isn’t compelling then we’re not going to go forward. The second thing we look at before we even dive deeply into the business case is the team. We’ll look at the business team, especially the CEO, because they’re pretty small and sometimes it’s the CEO driving most of it. We say, ‘Does this person have integrity, does he have skin in the game, is he dedicated and believe in this business, and is he coachable? Is he willing to listen to our input and to have us help him be successful?’ That could make a good business case go nowhere if there’s a weakness in one of those areas, so we take that very seriously.
What comes next after you look at those issues?
They need to have a unique business proposition. It has to have a unique business model or product or process that is protected strongly with I.P., or at least the patents are filed and we’ve verified and have some indication they’re going to be issued. Or it’s a process that can’t be imitated or it’s difficult to copy. We’re looking for something unique. If there’s a lot of competition and somebody can come in and do it, we’re probably not going to be very interested in it.
What can a startup do to get your attention and start a conversation?
Sometimes the most brilliant people are able to take something that’s pretty complicated and make it sound simple. When an entrepreneur is coming to us — and we’re looking at 500 (prospects) a year — they need to be able to capture our attention and keep our attention in a very short period of time. If it’s in a pitch competition, or if it’s in a meeting or conference call, or even in their written business plan, we need to be captured pretty quickly and to be interested quickly, and we need to be automatically asking a whole lot more questions because that’s an indication of our interest.
That can be a challenge for some entrepreneurs to take something that could be complex because typically something that’s innovative or that’s a unique approach is difficult to explain. So the ability to summarize what their business is in a way that we can comprehend pretty quickly is important.
What are the conversation killers?
Not being completely open about the risks. It’s important to be upfront about what those are so that we can help work on those and mitigate those with the company. I think we’re used to seeing aggressive business plans that may be full of hopeless optimism. We tend to take those plans and regenerate them on our own to develop ones that we think are reasonable and realistic. So it’s a little bit of a double-edged sword when you see the big hockey stick graph come in. You can look at it and say, ‘Yeah, that can never happen,’ but then you can look at it and say, ‘Look, this person really believes in this business. That’s a positive thing. He’s going to rule the world with this new idea.’
What can a startup expect from Grand Angels once you make the decision to put money into a company?
They can expect us to be involved, and to be involved in a positive way, not an overbearing way. One of the benefits of our membership group and our fund investors is that we have a very large, broad field of knowledge available to help these companies. These people that are in our group are interested in helping them succeed. If a company has, maybe, a weakness in the sales area, we have a couple members who are experts in that and they’re glad to give their time to help.
Is an investment by an angel group right for every startup?
Probably not. There are always alternatives for investments. You can go to friends and family. You can go to a family office, or you can try to go straight to venture capital. From an entrepreneur’s perspective, they need to look at all of those options.
Typically with an angel deal, we’re either taking an equity stake in the company or we’re expecting a fairly healthy return. It’s a very high risk because these companies have a failure rate that’s higher than most investments. The entrepreneur needs to consider that carefully, but they also need to realize that giving up a little bit of equity is opening the door to a lot of potential support that will help them succeed.