Brock Blake: [music] I’m Brock Blake, CEO of FundingUniverse.com. At FundingUniverse.com, aspiring entrepreneurs have access to hundreds of accredited angel investors in their state. In addition to all the tools they need to complete a business plan, they find their pitch and raise capital. Investors, come check out the high-quality deal-flow in your area. FundingUniverse.com – we connect entrepreneurs and angel investors
Bill is, bar-none, the nation’s leading expert on angel investing. No one else in the country had spoken at more events, consulted more start-ups and advised more angel groups. He is the current Entrepreneur-in-Residence at the Ewing Marion Kauffman Foundation and a regular speaker at investment conferences across the country.
This interview is the second of a two-part series and this second interview previews entrepreneurs’ invaluable insight into approaching investors and perfecting their pitch.
Bill Payne: [music] Probably, there’s a rather even distribution of entrepreneurs across the country and a rather even distribution of friends and family money because they live near the entrepreneur. If you go to the other end of the spectrum, we know that venture capital is Coastal -- lot in California, a lot in the Boston area, more than half of venture capitalists in those two -- and then distributed unevenly at locations such as San Diego and Austin and other places around the country. In angel investors, I don’t think we have really good data, but I would suspect they are probably as distributed in a manner similar to the entrepreneurs. But, angel groups are not quite that broadly distributed but much more uniformly distributed than are venture capitalists. You’ll find angel groups in, virtually, every state in the union and a lot of angel groups in places where you see there are few venture capitalists. So, the distribution of angel money is much broader than the distribution of venture capital.
Angel investors are primarily seed and start-up investors. In other words, they are investing at very early stage in the company’s evolution. The first source of resources for any entrepreneur is their own savings and any debt that they can assemble including mortgages on their home or credit card debt. It’s in the best interest of all entrepreneurs to use their own resources first because that means that they get to keep more equity for themselves. The next source of capital is friends and family and that money comes from Aunt Martha or the next door neighbor or a teacher, someone who knows the personality of the individual or the integrity of the individual. They are not necessarily investing in the company; they are investing in this friend. The only caution I make to entrepreneurs there is if you take friends and family money, make sure that both you and the person who is giving you the money understand that this is a gift or is debt or is equity, because, unfortunately, most of us who are entrepreneurs and accepted friends and family money didn’t necessarily document that and later, it becomes very important.
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Friends and family money usually begins to run out at about a total of accumulated capital of about a hundred thousand dollars. An angel starts beginning to play, or some, as low as a hundred thousand or in rounds of investment as small as hundred thousand. But most of them, most angel rounds of investment start at two-hundred or two-hundred fifty thousand dollars being, sort of, a small size and then the absolute upper hand is around two-million. But, I would say ninety-five percent of rounds of angel investment are between two-hundred-fifty thousand and a million. Individual’s investment in that round may be between twenty-five thousand and a hundred thousand dollars - in that round. So angels, generally, are making one or two or perhaps three rounds of investment in a company as the company matures. So, the first might be a sort of a seed round, then a start-up round and then an early stage round where the total amount of capital invested in a company ranges from a couple of a hundred thousand dollars to maybe two-million dollars, the top side.
At a later stage then, as the company needs more money to grow to perhaps a huge size, that’s when venture capital tends to be involved. They may make investments. Venture capitalists may make investments at two-million dollars would be tiny and very few venture capital investments are making it that range. Most of them start at four or five million dollars with two or three VC companies combining to make that five-million on up to fifty, seventy-five, a hundred million dollars that they have invested at the venture capital stage, but, not at a start-up or even in early stage. As companies mature, they need more money if they really are on a very, very rapid growth stage. Seed and start-up companies very seldom need more than a million dollars. So, the size and the amount of money that a company needs are proportional to its maturity.
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There are about eight million millionaires in the US at this time. So, probably, there are only about five percent of them are angel investors. If you do the math, though, just having a million dollars an asset is probably not enough to be a millionaire. You probably need to be, sort of, a minimum of three to five millionaire to be an angel investor and still have enough of your assets in more conservative investments and have appropriate asset allocation. I hate to advise anybody who is an angel investor to have a real high fraction of their investments in angel investing because it’s just too risky. So, there are probably -- let’s say, a couple of million three to five millionaires in this country -- so, if there are really a quarter of million to four hundred thousand, then maybe twenty percent of people in that, ten to twenty percent of wealthy people choose to be angel investors. I think that number is growing because ten years ago, nobody ever heard of angel investor; now, we see a lot of information in the popular press about angel investors. So, I think that’s good for the economy, I think that’s good for entrepreneurs that there are more active angel investors and it means we’re going to see more deals also.
The interesting thing about we who have been angel investing for twenty or twenty-five years is that we never thought much about writing that first check. It seemed to be an exciting time, we had an opportunity to invest at the ground for in this new company; but, we didn’t think much about how that fit in to the rest of our portfolio investments, how much we are allocating to angel investing versus more conservative types of investments. If there’s a limited number of entrepreneurs and angel investors in Boy Z, for example, and because of the distribution of venture capital, there is much less venture capital there. For capital there maybe, say in Silicon Valley, two things that happen: you get a lot more company start that won’t need venture capital that for which half a million or a million dollars would get them where they need to go, you’ll find few companies that have such a powerful idea that venture capital actually come there and invest; and you’ll have a greater number of companies that have a powerful idea that need venture capital but for whom venture capitalist will say, “We’ll invest in your company but you’ve got to move to where we are.”
Angels are very patient and the reason is very obvious. Venture capitalists are investing other people’s money and they have made some projections and commitments to their limited partners that those limited partners will see their return on investment in seven to ten years. So, the idea that a venture capitalist might be invested in a company for eleven years is not practical. Angel investors would love to have all their exits happen in eighteen months. They would love to have that. But, the fact is that we, angels, realize that to grow a substantial company can take many years and we would like to see them exit in five or seven years but that’s off along the longer.
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