01 Jun Angel investor boot camp advises and educates cherubs
MADISON, Wis. – Educating and advising potential angel investors, or cherubs, on how to act and think like fully grown seraphs was the goal of a seminar at the Entrepreneurs’ Conference Tuesday in Milwaukee. The primer, titled “Private Equity and Angel Investing Boot Camp,” exposed audience members to the basics of angel investing, available resources and initiatives customized to help burgeoning investors make smart choices and build networks.
According to State Secretary of Financial Institutions and speaker Lorrie Keating-Heinemann, the amount of investment activity within a state is indicative of economic health. She said the DFI is working to increase the number of angel networks in Wisconsin, and identified NorthStar Economic’s online directory of networks as instrumental for both investors and entrepreneurs. Angel investing, she added, accounts for twice as much investment as venture capital within a state.
“If you measure the amount of venture capital invested in a state, it’s a directly related to economic impact on that state. And the more venture capital, the more positive that economy is within the state,” Keating-Heinemann said.
State Secretary of Commerce Cory Nettles spoke on how recent government initiatives will attract individuals and networks looking to invest in Wisconsin’s entrepreneurs. He said Act 255, a specific program from Gov. Doyle’s “Grow Wisconsin” plan, is a critical step toward regaining lost investment ground in Wisconsin. The bill, which has recently entered the rulemaking process, allows a 25-percent tax credit to angels who invest in certified, high-tech startups.
“We think that Wisconsin Act 255, or senate bill 261, is going to be an important tool to help stimulate some venture capital in Wisconsin,” Nettles said. “We need to change the focus on the types of businesses we seed in Wisconsin. We’ve got to stop chasing all kinds of jobs and chase particular types of jobs … high-end jobs.”
The provisions of the bill call for tax credits, technology transfer grants and the creation of four or five entrepreneurship centers across the state. The $90-million-dollar package is hoped to leverage an additional $250 million in investment. Nettles stated the 25 percent tax credit for angel investors was a compromise forged in the legislature and may increase by means of future negotiations.
“Depending on the success of Act 255, we might be back,” Nettles said.
Marianne Hudson, director of Angel Capital Association’s Angel Initiative, gave a detailed overview on forming angel networks, the risks and benefits of organized investments. The ACA is a peer organization of angel investors in North America and is an extension of the Kauffman Foundation. She emphasized how important angels are to high-tech, start-up companies as 90 percent of outside equity capital in seed and early stage companies is believed to be invested by angels.
“It is our belief at the Kauffman Foundation that angels are an important source of capital. After friends and family, this is they key money that’s out there. … There is a tremendous amount of wealth out there in nascent investors,” Hudson said.
She offered advice on how rookie angel investor networks can establish themselves and go on to make smart and sophisticated decisions. Through a series of series of principles, Hudson said groups can sculpt the type of network that best fits their business goals and community.
Hudson emphasized inviting only accredited investors into new angel networks and identifying a champion investor, someone to commit a significant amount of time to the group, are fundamental steps to success.
Other major steps, according to Hudson, in creating an angel group are:
Conducting a community assessment – examining the entrepreneurial culture of an area
Selecting the best structure – deciding whether the group will be member-managed or manger-managed
Establish a fund or not – an important consideration when choosing a legal structure
Selecting a legal structure – choosing among LLC, non-profit corporation, corporation or no formal structure
Membership issues – establishing the number of members allowed, exclusivity and recruiting policies
Financing – deciding whether dues, sponsorships or events can provide financing
Investment evaluation – solidifying guidelines on deal sourcing and screening, due diligence and follow-on considerations
The schism between angel investors and venture capitalists is closing, much to entrepreneurs’ advantage, she added.
“Even venture capitalists are starting to see angels as very strong sources and sophisticated investors. The media is also starting to understand how angels are important. This is leading to increased deal flow,” she said.
Hudson also conveyed a cautionary message about the undeniable risks associated with risk capital.
“When you are deciding you want to be an angel you need to recognize you can lose your investment,” Hudson cautioned. “[But] it’s a great opportunity for giving back and having fun.”
Panelist Alec Fraser, partner at Michael Best & Friedrich, echoed her opinion during the discussion.
“More often than not, you’re likely to lose investment. You can’t just make one, you need to diversify with a portfolio and have a significant upside to support loses and other investments. From a lawyer standpoint, it’s as simple as not wanting to put all eggs in one basket,” he said.