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Investor warns of angel-venture funding gap

Bill Payne
Madison, Wis. - There is a missing link in the capital food chain, and Bill Payne is traveling to Wisconsin to warn entrepreneurs not to be devoured by it.

Payne, an entrepreneur-in-residence for the Kauffman Foundation and a prominent angel investor, will be in Madison to address the June 25 Wisconsin Alumni Research Foundation's Gilson Discovery Series.

His topic will be the capital food chain for entrepreneurs, and he's familiar with all of the links. Since the early 1980s, he has made angel investments in 30 early-stage companies and serves on the boards of about a dozen firms, and he has been tracking a well-defined trend.

Payne will tell the audience there is a gap between the so-called “sweet spot” for angel investors and the level at which venture investors are willing to commit funds to companies in high-growth mode.

“I think there are a lot of misconceptions in the world of enterprise as to when entrepreneurs should approach certain sets of investors,” Payne said. “You don't take a new business plan to venture capitalists and expect them to give you $4 million right out of the chute.”
That's because the capital food chain, which begins with financing from founders, family, and friends and proceeds to early-stage angel investors and to growth-stage venture investors, has been damaged by a series of events, starting with the dotcom bust. That damage is evident between the high range of the sweet spot for angels and the low range for venture capitalists - about $1.5 million to $4 million.

In Payne's view, it's a waste of time to seek capital between those two amounts, which he calls the functional gap between angels and venture capitalists.

Entrepreneurs need to make sure they have ample cash to find their way through that gap, where very few investors reside.

“That doesn't mean they can't go back to angels,” he added, “but it does mean they need to meet their milestones.”

Western ventures

The avuncular Payne, who currently is involved with four early-stage companies, serves on the board of Vegas Valley Angels. As a member of the San Diego Tech Coast Angels and the San Diego Social Venture Partners, he is active in the angel capital market on the west coast. With the Kauffman Foundation, he has addressed capital topics ranging from bootstrapping for start ups to debt financing for high-growth companies.

He advises entrepreneurs to present a balanced business plan, including milestones that must be consistently met, to investors.

The typical business plan focuses on the technology or the product, but investors want to know about the opportunity, including any “unfair” (sustainable) market advantage, the size of the “addressable” market, meaning the market that is specific to the given product or service, and the sales and marketing channels entrepreneurs plan to use.

According to Payne, these aspects of the strategy should be part of the business plan, the executive summary, and the elevator speech.

Payne called angel investing “a real crap shoot” in which investors realistically expect a full return on investment on only one in 10 portfolio companies. One of the ways in which they try to minimize outright business failures is by providing entrepreneurial counsel to their portfolio companies.

“Most angels have been entrepreneurs or have run larger businesses, and they can bring more to the enterprise as mentors,” he said. “We do that to help entrepreneurs avoid the pitfalls that strangle new companies.”

His counsel is similar to the advice provided at the recent Wisconsin Entrepreneur's Conference. Geoff Bastow, a private equity investor and CEO of Thin Air Software, told entrepreneurs to start building relationships, even discuss their business plans, with banks and investors before the point at which they would consider funding your business.

“Talk to them early to be well positioned when you have the means to go to those groups,” Bastow said. “It makes you much more attractive to funding sources.”

Entrepreneurial darlings

These days, entrepreneurs often are juxtaposed against scandalous corporations, and they have become the darling of the political set. But are public officials doing enough to create tax and regulatory conditions in which more of them can survive?

Payne said entrepreneurs have created jobs and tax base without a lot of support from the federal government in particular, and he hopes all levels of government adopt the physician's credo: “First, do no harm.”

If there were one policy he would like government to follow, it would be to keep capital gains taxes low, which he believes encourages investment and actually results in more revenue to the government than higher rates.

He views that as win-win for government and business, but he's most appreciative of an ever-changing mindset. More and more people inside and outside of government, Payne said, now understand something fundamental about the impact of start-up businesses.

“The primary source of new jobs is entrepreneurs with less than 100 employees,” he said. “That was not accepted in government circles right away.”

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Jason R. Smith responded 8 years ago: #1

As an early stage Midwest venture capital fund targeting life science and IT opportunities in the $1M to $3M range, I agree with Mr. Payne that a "capital gap" has evolved at this range of funding. However, I must respectfully disagree that although there may be a shortage, we do not believe it is a "waste of time" to seek funding at this level. That's entirely why our firm chose to allocate resources to establish an early stage fund in the Midwest. In closing, what some may consider a hinderance to entrepreneurs at this stage of development, our firm views as an opportunity to add value through opening sales pipelines beyond the Midwest, adding experienced management/board members, and securing follow-on capital for those companies to help manage their rapid growth.

M responded 8 years ago: #2

Mr. Payne speaks from a national perspective. I don't believe his characterization of a funding gap between $1.5-4M is accurate in the Midwest. Perhaps there's a funding gap between $500k-1.5M. But most of the regional VCs actively invest in the $1.5-4M range. Some may say that that's the only range they invest in without a syndication.

Dave Wolkowitz responded 8 years ago: #3

Perhaps there should be efforts to bring more eligible folks to the ranks of angel investors. Perhaps the low-profile of angel investors not only make it hard for entrepreneurs to raise money from them, but also make it hard for people to become angel investors.

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