02 Nov Angel Investing in Wisconsin
Editors Note: The Wisconsin Technology Network has received an exclusive advance copy of NorthStar Economics 60-page report titled, the NorthStar Guide to Growth and Venture Capital in Wisconsin. This report contains a primer for Wisconsin companies seeking information about risk capital available in the state. David Ward and his team have agreed to excerpt their report in four-installments on WTN over the next three weeks the second installment is:
Angel Investing in Wisconsin
Wealthy individuals who make high-risk, potentially high-yield investments to early stage companies typically do Angel financings. Emphasis is placed on enterprises with rapid growth potential. Many angel investors also offer their business expertise by participating in the management, operation, and marketing of the business.
Angel investors regularly supply the risk capital American businesses require for early stage formation and growth. Early entrepreneurial finance, supplied by angel investors, can assist businesses with their initial business concept or prototype phases – often moving the business toward full startup capabilities.
Early-stage capital supplied by angel investors supporting the creation and growth of high-tech businesses is essential to any New Economy economic development strategy.
How is angel capital made available to early growth businesses?
Financial investments in America’s early stage businesses are often provided by family, friends and angel investors.
Combining with the founders’ personal resources, these “outside” investors regularly finance the growth of infant businesses throughout their early expansion stages – completing these early capitalization steps prepares companies for later stage financing by venture capitalists and institutional equity investors – offering a critical bridge for emerging enterprises between startup development and later expansion phases.
Early-stage (e.g., seed, startup, etc.) Wisconsin businesses requiring growth capital should consider identifying individual angel investors or approaching the expanding in-state angel networks for necessary capital.
In Wisconsin, there are two fundamental types of “angels” who should be approached – usually for quite different reasons – individual investors and angel networks.
For a beginning, let’s remember that a majority of angel investing occurs outside the technology business sectors. Angel investing most often occurs amongst traditional business deals: retail stores, real estate partnerships, restaurants, and so on. The anticipated financial returns on traditional deals are small compared to typical venture capital investment expectations, as are the risks.
Angel networks represent a minority of angels in any given economic community. Although the earliest American angel networks were primarily profit-motivated and usually located within communities where venture-backed deals flourished, more recently formed networks are increasingly organized with some motivation toward supporting the local economy (especially so in Wisconsin, perhaps more than other places). These angel networks tend to focus on “high tech” businesses, because of potentials for high-wage job creation and other community benefits. For the most part, Wisconsin’s angel networks are not designed to go after moderate-growth, traditional industry businesses, or even tech-based “lifestyle” companies.¹
Moderate-growth, traditional industry companies need “affiliated angels” – friends, family, friends of friends, family of friends, business associates, and friends and family of business associates. These independent, individual angels usually have industry experience, and are identified through family, friends, and service providers. Most successful businesspeople who are active investors are “more likely to fund opportunities when they can identify and measure the risks involved. Entrepreneurs should always try to find knowledgeable, affiliated angels.”²
Who are angel investors in the United States? How important are they for early stage business growth?
High-net worth individuals, known as “angel” investors, have become increasingly significant resources in supplying capital and know-how to fast growth, early stage American enterprises.
Individual investors and loosely organized groups of angel investors dwarf conventional seed and venture capital funds as the primary sources of seed stage and startup capital in the United States. Angel investors often fill financing gaps when the resources of the entrepreneur are exhausted.
Wisconsin has been generating significant, civic-spirited commitments from high-net worth individuals willing to form local angel networks. These networks typically serve individual communities and regions around the state. These angel networks serve as the “farm system” for nurturing untested deals within Wisconsin’s emerging entrepreneurial economy.
Angel investors are often wealthy entrepreneurs who have started companies themselves and now have the money and know-how to start other businesses. Many of these repeat angels say they are investing in new ventures that interest them. More sophisticated angels say they are readying new ventures for institutional money, while satisfying their desire to be involved in growing companies without full-time responsibilities.
When did the modern American “entrepreneurial economy” begin? How does “tech” job growth today compare with the more established, larger economy?
In 1979, Fortune 500 payrolls peaked at 16 million employees and Bill Gates dropped out of Harvard University to become a computer systems software pioneer. By 1996, Fortune 500 payrolls had fallen more than 25%, but an “invisible” entrepreneurial economy had created more than 25 million new jobs.
In 1985, only 40%of the Forbes Four Hundred Richest People in America were entirely self-made³, i.e., first generation money. Most major U. S. family fortunes had then been made during the earlier industrialization of America. By 1994, however, 80% of the Forbes Four Hundred were self-made. These modern entrepreneurial successes were mostly realized within the high technology sectors of the New Economy.
“The structure of the U. S. economy passed a milestone of transcendental importance in 1979 – the transition from a decaying industrial economy to an emerging entrepreneurial economy,” declares Prof. William Wetzel, Jr., Director Emeritus, Center for Venture Research at the University of New Hampshire.(4)
According to the Center for Venture Research, some 400, 000 high net worth angels invest $30 billion – $45 billion annually into more than 50, 000 ventures.(5)
When were angel investor networks first formed in Wisconsin? Where are angel networks located now?
Individual angel investing has a long history in Wisconsin – making investments into both traditional businesses and high-tech. Within the UW-Madison Research Park, PanVera LLC, for instance, was funded with $4 million in investments from individual angels.
Wisconsin’s first angel networks were initiated in 2000. Wisconsin has established six angel “networks.” These organizations are Early Stage Research (Madison), Origin Investment Group, LLC (La Crosse), Silicon Pastures (Milwaukee), Valley Angels Investment Group, LLC (Green Bay) , The Golden Angels Network (Milwaukee) , and Wisconsin Investment Partners, LLC (Madison) .
End Note: This excerpt has been published with the permission of NorthStar Economics. Dr. David J. Ward, PhD is President of NorthStar Economics and co-author of the report. He completed a thirty-one year career in the University of Wisconsin System in July 2000. Ward held teaching positions at the University of Wisconsin – Green Bay and the University of Wisconsin – Oshkosh. James Patterson is a senior associate with NorthStar Economics. He served as the principal investigator and co-author of the. The 2003 NorthStar Guide to Growth and Venture Capital for Wisconsin companies that is now available for online purchase online at www.northstareconomics.com for $25 plus shipping and handling.
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