By Michael F. Carmichael
As an increasing number of people, and Michiganders in particular, begin rethinking their career choices, the idea of starting their own business seems to be high on their list. Many will seek partners or invest in themselves using savings or buyout money. Some will seek conventional loans from banks or credit unions. And some will look for what are called “angel investors”- people willing to take a calculated risk on a start-up.
“The main difference between an angel investor and a partner is that a partner will dive in deep and come into the office each day,” says Rick Galdi, president of Great Lakes Angels, a southeast Michigan group of investors that provides initial funding for a variety of start-up companies. “I can guarantee you that won’t happen with an angel investor.
“People can find us via our Web site, www.GLAngels.org, or in a listing at angelsoft.net that covers many of the angel organizations in the U.S.,” Galdi continues. Another source for prospective entrepreneurs to check out is the Ewing Marion Kauffman Foundation at www.Kauffman.org.
But what happens once an entrepreneur has located a potential angel investment group? “Most angel organizations use an electronic application form,” says Galdi. “It, and other software tools designed to organize the angel process for us, come from a company named AngelSoft - that’s why most of our potential applicants find us through their Web site.”
According to AngelSoft, only one out of eight applicants makes it through the initial screening process; fewer than one in 10 remain after making an in-person presentation and a little more than 6 percent pass the “due diligence” tests, leaving only 3 percent that actually get funded.
Part of that small acceptance number may come from entrepreneurs not seeking the proper match when it comes to angel possibilities. “We look for companies in the IT (Information Technology) space, advanced manufacturing, medical devices-if they’re sufficiently commercialized and the runway to profitability isn’t too long and they’re not over-regulated by the FDA-and, increasingly, spin-offs from advanced manufacturing companies,” says Galdi. “Because of Michigan’s tax credits, we’re also looking at film and motion picture projects. We stay away from lifestyle businesses, such as restaurants, and someone who wants to open a retail shop-unless, of course, they’ve already opened three or four and showed that they have a replicable formula that is sustainable.”
Other angel groups may look just for local start-ups, or ones that will produce more jobs or an economic or social benefit to their region; examples of those are First Angels, in Kalamazoo, and Grand Angels in Holland, Mich.
The primary asset most entrepreneurs bring to the table is enthusiasm. “They may have failed once or even twice,” says Galdi, “but they keep at it and if we agree that they’re on the right track, they’re a good candidate for us.”
How does the angel process look from the other side? Russ Miller, president of Salamander Technologies in Traverse City, Mich., says one of the angel groups he turned to was Grand Angels. “We were one of their first projects as they were just getting started,” Miller says. “We were successful in our niche market of high-tech solutions for the law enforcement and homeland security, but we needed to grow to the next level. We needed to add staff, production equipment-and we had maxed out our credit cards and our second mortgages. We weren’t bankable, we hadn’t reached the funding levels threshold for venture capital, so the angel process was just right for us.” Miller says Michigan entrepreneurs are hungry for the angel investor, which he calls “low level” investment.
“In the grand scheme of things, funding in the low hundreds of thousands can mean a real difference. I remember one time three or four years ago when we won an award for some work we had done and believe me, that check for $10,000 looked really good! The state tends to look at the big chunks-the automotives, renewable energy, health care initiatives-but they tend to forget that there are a lot of smart, talented people in Michigan who are trying to bootstrap companies who could use a helping hand. So I highly endorse the angel concept to get money out there where it’s needed.”
It’s not only money that angels provide. Galdi of Great Lakes Angels says his group provides consulting services and avenues to additional resources such as financial, legal or marketing advisors.
Russ Miller of Salamander agrees. “These are successful business people; they’ve been around the block. They can make contacts for you-and they can help you make your pitch. How you pitch your business plan is half the battle. Your PowerPoint presentation has to be very clear and effective at laying out your case.”
Grand Angels are branching out beyond the traditional funding of start-ups, as are other angel groups. They’re considering investing in existing companies that are diversifying or entering new markets and are having difficulties in the existing tight credit market.
Who are some of the angels? Usually they’ve already made their mark in business and are seeking to put the results of their success to work by helping others get started, in addition of course to seeking a return on their investment. Some of Galdi’s angels include legendary serial entrepreneur Rick Inatome and Tom Anderson of Automation Alley. But there are also more institutional investors, such as banks and insurance companies, that “sponsor” angel groups.
Is now a good time to strike out on your own? In some cases there’s little choice. But, according to the Kauffman Foundation, there’s also hope. A new study, “The Economic Future Just Happened,” found that more than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market, and that these new firms steadily recreate the economy, generating jobs and innovations. So looking for angels to get you up and running can be well worth the effort.
When asked for advice to potential entrepreneurs, Salamander Technologies’ Miller says keep looking. “You have to look for non-traditional sources-and I guess I have to include angels in that mix-because quite often you look at this program or that program or some sort of grant-¦ but you could die before you get those. Sometimes time is of the essence. You can’t wait through the 18-month federal grant request. You kind of have to scramble in the early go.” At the same time, “you have to have a real value proposition, something that can sell. You have to have a ‘sanity check’ every once in a while from outside people that your idea really is feasible. Sometimes you have to be really tough on yourself to be sure that your idea is going to fly. That’s the acid test.”