Is there anywhere angels fear to tread? To be an angel investor, you need personal wealth, a sense of adventure, a pretty strong stomach, and most importantly, a good eye. So what do they look for? We picked the brains of three prominent insiders.
Bill Payne
Angel Investor and Entrepreneur-in-Residence, Ewing Marion Kauffman Foundation (Kansas City)
“I didn’t wake up one morning and decide to be an angel investor. I woke up one morning and saw some friends whom I thought would enjoy being entrepreneurs and encouraged them to go for it. I provided them with business savvy and finances to do that. I later discovered I was an angel investor.
Angel investors are people who invest time and their business experience, plus money, in early stage companies — specifically, at the seed and start-up stage. That’s how I differentiate angels from non-angels.
There is a big difference between an inventor and an entrepreneur. An entrepreneur is assumed to have an aptitude for learning how to manage and operate a business. Inventors are skilled at product innovation but are not necessarily potential businesspersons.
In my experience, the worst capital-raising pitches focus solely on the product. Bad pitches fail to acknowledge that we are not investing in a product; we are investing in a business. Many inventors and some entrepreneurs think that 90 percent of a business’ value is the product, when in fact the product may make up 10-20 percent of the early stage valuation. A clever product with no market opportunity has no value to the investor.
One of the magic words for we who invest in early stage companies is ‘focus’. Shaping the plan, doing the due diligence, working with the entrepreneur is all part of making the investment. Sometimes investors need to do substantial reshaping of the business plan prior to investing.
Historically, we angels have hidden from entrepreneurs because we are not full-time investors. We have a life; many of us are retired or semi-retired and we are doing a lot of different things. We’re not like venture capitalists, who spend all their time reading business plans. The growing popularity of angel organisations is having a big impact on access for entrepreneurs. In 1996 there were about 10 organised angel organisations in the US. Now there are about 220. Angel groups make access to angels by qualified entrepreneurs rather easy.”
Bill Payne is Entrepreneur-in-Residence at the E. M. Kauffman Foundation and he is based in Las Vegas. He co-founded Solid State Dielectrics, Inc. in 1971 and sold it to DuPont in 1982. Payne has been an angel investor since 1980, assisting the growth of companies such as Novacap Inc., Ceramic Devices, Inc., Vista Staffing Solutions, Inc. and Vistatech Corporation. He visited Australia last December as the lead instructor at the Power of Angel Investing seminars (a product he helped Kauffman develop in 2000).
Greg Horowitt
Executive Director, Global CONNECT (San Diego)
“During my early conversations with Australian entrepreneurs, I was surprised to learn that companies have listed on the Australian Stock Exchange solely for the purpose of raising ‘start-up’ capital. That led to other conversations on how early stage technology and life science companies get funded in Australia and a dialogue about organised ‘angel’ networks. When you are able to get a group of smart, experienced business people together, the level of due diligence that is possible is so much greater than a single individual, or even a typical venture firm with three or four partners. Venture capitalists don’t start companies… they grow them.
The typical sophisticated US angel investor is involved in roughly 10–20 deals with a $25,000–$50,000 investment in each. If one of those hits, it generally gives back a return in excess of what’s been lost on the others. Most angels look for an opportunity that can yield a 30 times or greater return.
How do you move science from the lab into the private sector, then into the marketplace, and eventually into the global marketplace? Global CONNECT is a network of networks. We’ve helped develop networks around the world that work with entrepreneurs to help qualify business opportunities. The best and most promising move up and we surround them with regional resources. The three key components are entrepreneurs, inventors and capital. You simply have to create visible opportunities for the angel investors.
A recent program we did in partnership BusinessACT and Larta ‘bridged’ several Canberra based companies into the US who were looking for access and validation of their US market strategy. The process began with market readiness training and the creation of a business presentation refined through individualized coaching. We helped the entrepreneurs understand the difference between having a company, and having a business. In doing so, they answer the all-important questions: “What is the problem being solved? What is the solution and why is it significant? What is your competitive strategic advantage? How are you going to make money… and more importantly, how are you going to make an investor rich?” When these questions are answered appropriately, the opportunity becomes clear, and the investor can make a clearly informed decision.”
Greg Horowitt is Executive Director of Global CONNECT, a San Diego-based international network linking regional networks and enterprises to global markets and customer channels. For nearly 20 years before that, he was with Flying Cross by Fechheimer Uniforms, a Berkshire Hathaway company, where he finished his tenure as vice president of regional sales. He visited Australia last December as MC of the Power of Angel Investing seminars.
Paul Kristensen
Capital Technologies Pty Ltd
“Invariably, the money ends up being the least important contribution that an angel investor makes. His knowledge, experience, range of contacts, strategic thinking, etc., are what really determines how a venture develops. I have learnt (sometimes the hard way) that you need to develop extremely selective hearing when you listen to people’s ‘prayers’. Many have their backs to the wall financially and are ready to make promises that are all too easily forgotten when the ‘angel’ has helped them to success.
My incentive to become an angel investor came while operating my own R&D consulting business in Europe. My clients included small, high tech companies that I sometimes became involved with in an entrepreneurial role. When I came to Australia in 1983, I was introduced to a little company that had operated for only six months and incurred total expenditures of about $60,000 when I met them. I contributed to their growth with a six-figure investment and we listed on the ASX as ERG Ltd in 1985. Every venture brings its own exciting successes mixed with lots of nail-biting challenges along the way, most often to do with raising successive rounds of funding to keep growing, or at least surviving!
Turn-off pitches include “if we just get two percent of the world market we will make squillions” and “this one is easy, everyone will want it.” I enjoy looking at things that are truly embryonic. When I see the rare exception that could have global, industry-transforming potential, I need to quickly come to grips with a whole field that is often new to me so I can work out for myself what it will take to make a success of that particular opportunity. That way I have never had to complain about any misrepresentation later on, and I get to develop a strategy that I feel really confident about. The early involvement also enables me to establish the right corporate structures from the outset and to put sound management in place.”
Paul Kristensen has been an ‘angel’ and seed capital investor in Australia for over two decades. He established Capital Technologies in 1986 and has founded the original companies behind the AIM-listed DDD Group Plc. (stereoscopic 3D software) and Structural Monitoring Systems Plc. (metal fatigue and crack propagation monitoring for aircraft, etc.). He is currently a non-exec director on the board of several other companies at various stages of development.
