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What Are Angel Investors Investing In?

About 50 entrepreneurs in the Camden/Philadelphia region attended a recent event that featured angel investors who answered the question that is on so many minds: what are angel investors investing in? The event was co-hosted by the Angel Venture Fair and the New Jersey Business Incubation Network and was held at the Rutgers Business Incubator in Camden.

The panel of four investors included Loren Danzis, a founder of Delaware Crossing Investor Group; Katherine O’Neill, executive director of the JumpStart New Jersey Angel Network; Gloria Rabinowitz, managing director of Golden Seeds; and Ellen Weber, executive director of Robin Hood Ventures. Marc Kramer, executive director of the Angel Venture Fair, moderated the panel. Suzanne Zammit, president of the New Jersey Business Incubation Network and manager of the Rutgers Business Incubator, provided welcoming remarks.

Attendees gained valuable insights into the basics of finding an angel investor, particularly in the current economic climate. The panel answered questions on various topics. Excerpts follow.

What is the rate of return that you’re looking for?

Danzis: We’re looking to invest in strong companies and strong deal terms – meaning a 5-10 potential exit multiple. We consider the valuation of the company when we invest, the amount of capital necessary for the company to execute on the opportunity, the potential dilution that may occur as a result of future rounds of investment, and whether any buyers exist for the company.

O’Neill: The only time an angel investor or a VC makes money is when a company gets sold. So if you’re looking for angel or VC money, it’s not a lifestyle business. It’s got to be something that will be sold; 99 percent of the exits are from mergers or acquisitions.

What is the structure of the company once you get involved. Is it common stock? And how deeply do you get involved?

O’Neill: It varies. Angels can invest early on or later as opportunistic investments. What you really want from your investor is someone who can open new doors and move you forward. Normally we take 20 to 30 percent of the company in an early-stage investment. What that board member will bring is moving the company forward. And what angels are looking at nationally these days is making sure that from the day people are invested, they’re looking at the exit, that they have milestones that drive them in that direction, even though it may be five years away.

What about the chemistry?

Danzis: The best chemistry is created when you have investors who speak the company’s language – who are fluent in the industry and can see the inherent opportunities the company has to offer. Lately we’ve seen a number of very impressive companies, but because we don’t have anyone in our network well versed in the particular industry, it’s a challenge to develop that chemistry. Companies would be better positioned if they approached an angel investor group with whom they have already identified a connection – someone with good insight into the industry. 

Weber: We actually publish the bios of our members on our website, so you can go in and see if there are people you can connect with who will add value to your business.

Rabinowitz: We also have a larger network, so if we don’t have direct expertise, groups in different areas do. We reach out; we do our own due diligence.

O’Neill: We don’t publish our members’ bios. We have some members that are public, our chairman is public, but our members don’t want to get pounded. If we don’t have someone who knows that space, we’re not going to invest. And that’s what we look for when we do our screening. We all talk to each other. Sometimes we refer to other investment groups. There is too little early-stage capital for all the companies who need it, so we all try to help each other.

How is the information that companies bring to you protected?

Danzis: All of our members sign a confidentiality agreement. While we generally try to dissuade companies from providing us with confidential information, we also understand that a company’s greatest assets are generally its intellectual property, and keeping that secure is a simple matter of trust and character in the angel investor community.

Weber: Your biggest protection is our reputation. If the word got out that we did something that was not honorable, no one would ever come to us for capital again.

How much dilution do you expect and where do you say, ‘sorry, you need too much capital after me’?

O’Neill: Jumpstart invests in health care in the IT, diagnostics and medical device space. We stay away entirely from drug development, because the amount of money required for that is way too dilutive. You do not want to see yourself washed out of an investment. Of course if the valuation is going up, you’re fine.

How much do companies have to raise in the family and friends round for investors to feel comfortable enough to invest?

Rabinowitz: There’s no fixed number, it’s skin in the game. We are behind you, we want you to be successful, you’re putting your ideas and personal capital in. If you have not put any capital in, and you are not at a point with friends and family, if your mother or father, or your husband or wife haven’t put anything in, or you haven’t put anything in, we say, “well wait a minute, it’s just not a proposal that we would be interested in.”

Weber: Friends and family money is the entrepreneur’s least expensive money, so the more they can raise that way the better.  We don’t expect any specific amount.  We do expect the entrepreneur to have “skin in the game” by investing. The level depends on the age and experience of the entrepreneurs. We have invested in some very young entrepreneurs who don’t have a lot of money, so we don’t expect them to put in much, but we also expect them to take a very modest salary – enough to pay the basics.  For more experienced entrepreneurs, we expect them to put in substantial money. One of the worst presentations was from someone who cashed out very nicely, and we said great, how much are you putting in, and the guy had the nerve to say, “I’m not putting anything in, I have a family to protect.” We’re investing our own money, and you’ve invested your sweat equity and some of your own money. We want you to be invested too.

What kind of investment do you expect from friends and family?

O’Neill: Here’s a way to protect your friends and family: use convertible debt.

What about Angelsoft (now Gust)?

Weber: We find it incredibly helpful. It is a wonderful mechanism to get the information that we need and then to share deals. For example, we’re doing a deal right now with a group from Pittsburgh. And how we would have shared that information without this type of platform, I don’t know. We’re all putting our information in in one place where we can all look at it and share commentary.

How many deals have you done where no one knew anyone at your organization, they just went in over your website?

Rabinowitz: Just because youhave not met anyone at Golden Seeds and because you submitted over the website, does not mean that we wouldn’t consider it. But it’s always good for you to make as many contacts as you can.

Attendees had the ample opportunity to make the recommended contacts, both by asking direct questions during the panel discussion and afterwards in one-on-one conversations. 

The National Business Incubation Association (NBIA) is the world’s leading organization advancing business incubation and entrepreneurship. Each year, it provides thousands of professionals with information, education, advocacy and networking resources to bring excellence to the process of assisting early-stage companies. An elected, voting board of directors representing the world's leading incubators governs the association.

The New Jersey Business Incubation Network (NJBIN) is a collaborative statewide community of business experts, resources and facilities dedicated to enhancing the commercial success of early-stage entrepreneurial companies, growing higher paying jobs in New Jersey and supporting the Economic Growth Strategy for the State.

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