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Published in Finance

Pandemic disruption creates new opportunities for angel investors

BY Sunday, September 27, 2020 06:15pm

After taking a step back in the early months of the COVID-19 pandemic, angel investors say they are actively seeking deals, particularly in startups that are able to take advantage of the resulting economic disruptions.

Startups working on technologies for remote work and school as well as telehealth are among the areas that angel investors are chasing in an economy altered by the pandemic.

“Disruption has really accelerated a lot of changes,” Craig Hall, an angel investor from Holland and president of Lee Shore Equities LLC, said during a panel discussion at the recent Michigan Angel Summit.

Hall was among a trio of angel investors who spoke at the event organized by Ann Arbor SPARK.

“Yes, people are investing during the time of a pandemic,” said Skip Simms, senior vice  president at Ann Arbor SPARK who leads Michigan Angel Community, a statewide initiative that promotes angel investing. “Some see this as a period to sit on the sidelines, while others see it as a time of opportunity.”

As the coronavirus spread to the U.S. in February, Detroit-based ID Ventures — like many investment firms — focused on supporting existing portfolio companies by taking a pool of money set aside for new deals and using it for follow-on investments, said ID Ventures Managing Director Patti Glaza.

ID Ventures then went to partners for a stabilization fund for technology startups in Michigan. The firm ended up deploying about $4 million to make sure companies had adequate capital “to figure out how they work from home, how the sales cycle changes, how we adjust to the new climate,” Glaza said.

ID Ventures “kind of got back to normal operations” by June as the state began lifting some restrictions, she said.

“We’re back. We’re back funding new companies, looking at new deals, and trying to keep on doing business as normal,” Glaza said.

Quick pivot

Speakers at the Michigan Angel Summit virtual session, moderated by Michigan Venture Capital Association Executive Director Ara Topouzian, said they and their portfolio companies had to quickly pivot when the pandemic hit Michigan and led to stay-at-home orders from Gov. Gretchen Whitmer.

ID Ventures during the pandemic has made “a little higher” initial investment in startups, Glaza said. The firm typically put $100,000 to $125,000 into a first funding round pre-COVID, she said. Now, initial investments in startups are $150,000 to $175,000 “from the perspective of understanding that the next 12 to 18 months is still not entirely clear,” and companies need extra capital to get through the present economic environment, Glaza said.

“I don’t think things have to go back to the way they were, but there is still uncertainty and (startups are) still trying to figure out what that next stage of capital looks like and what milestones are required to get there,” she said. “We are adding a little to each investment to get a little bit more runway to address the length of time we want them to have to build out their companies.”

Startups by nature are “always fragile,” said Casey Cowell of Boomerang-Catapult LLC, which invests in new companies in the Traverse City area. Boomerang-Catapult has an “A plan” for startups and “can come up with a B plan where maybe revenue is off 15 or 20 percent,” Cowell said.

“But we really don’t have a plan where revenue goes to zero and just stays there for a while,” he said. “So, for some of these companies, they’re so fragile you immediately have to concoct a strategy to put money in and then figure out how to pivot, if you can, or find a partner or accentuate relationships with existing partners.”

In two instances, Boomerang-Catapult opted to work out cashless mergers for portfolio companies with “larger partners that we had been working with, because the prospect of holding out on our own was too difficult,” Cowell said.

Other companies have had to transform and adjust business models and customer bases in just a few months, he said.

New technologies, new opportunities

Investors have since come back to scouting the market for deals, particularly in technologies that have accelerated and grown rapidly during the pandemic. Telehealth and remote working “probably got five to 10 years of evolution compressed into six months,” Cowell said.

“There are a lot of new opportunities. Our view is full speed ahead. If ever there was a time to dig in and get aggressive, this is it,” he said. “The volume of opportunities is overwhelming. It’s just made us sharpen the pencil and get even clearer and more aggressive in evaluating opportunities. We have a window here where things are going to get reset to a certain degree and we want to take advantage of that.”

The new opportunities result from the pandemic’s economic disruptions that “accelerated on so many different levels,” said Hall, a founder of Grand Rapids-based Grand Angels in 2004.

“To be able to align ourselves with like-minded organizations and be able to have them help recognize the kind of changes that can be turned into catalytic positives, I think is really key,” Hall said. “This is really when the next great companies are formed, right now.”

Meanwhile, angel investing and the number of angel investors in Michigan has been growing for years. Michigan had 13 angel groups that in 2019 invested $73.6 million in 106 startup companies. That compares to $52.1 million invested in 84 startups in 2018.

Crain’s Detroit Business recently reported on the formation of two new angel groups: Detroit-based Commune Angels and the Ark Angel Fund.

As the pandemic continued through the summer and into the fall and likely winter, Boomerang-Catapult has been urging portfolio companies to consider how they can adjust to the resulting disruptions and permanent changes in the economy, Cowell said, adding that startups in particular “need to be opportunistic to act fast.”

“What we’re trying to do is get the companies to think more about not just business as usual, but are there break-through events like now that they can really use to accelerate and pivot into other areas,” he said. “If we can nurture them and have them recognize that this is the time to maybe put the pedal to the metal because all of a sudden we have this opportunity.”

As startups need to “be ready to be opportunistic and willing to act fast,” investors have to prepare themselves to provide the quick capital companies require to pivot and take advantage of an emerging opportunity, Cowell said.

“That’s part of the environment,” he said, “being really prepared to check it out fast and make a decision.”

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