Angel investment momentum

We've been fortunate lately. Despite the various indicators of a slowing economy, one thing that has not seen a downturn is the number of investments made by angels and angel groups here in the Midwest. In fact, there's been more syndication of deals and sharing of information and diligence materials between angel groups than ever before. Not only is this occurring within our state borders through the efforts of people like Joe Kramer at Wisconsin Angel Network and Tom Still at the Wisconsin Technology Council working with groups such as Wisconsin Investment Partners, a re-surging Silicon Pastures, and others, but also through, dare I say, “cross-border” discussions as well. For example, Dennis Serio and others at the Illinois Business & Investor Forum have been coordinating with other angel groups to syndicate deals, share diligence information and conduct investor webcasts to locations in several Midwest states.

The reasons for this are many. Understanding the importance to new job formation and technology company wage levels, state governments are stepping in with tax incentives for angel investments. Also, it has become “fashionable” in certain circles to have investments in leading edge companies with incredible technologies. And of course, there's a notion of return on investment that attracts many. The end result is that angels and angel groups are larger in number in the area and more active.

So, what does this mean for area tech companies? Several things. First, it shows that we have improved the access to early stage capital formation and made the process for obtaining it more efficient. Part of this improved access comes from better transparency. Ten years ago, companies in the area typically needed to know someone or know someone who knew someone who ultimately made an angel investment. Now, while personal contacts are still the best way to get angel investments, many companies are getting angel funding through more established networks. It is now easier to know who to approach, who is investing in what, and the kind of information that needs to be provided to angels. Access to early-stage capital, however, can get better and the process for obtaining it could be more efficient, but we've taken considerable steps forward.

Second, first impressions count. While the exchange of information and deal flow among angel groups is generally good in terms of syndication, efficiency, and timeliness of doing deals, it also can have an impact in a negative way. With an increase in cross-talking about early impressions and evaluation of opportunities, not-so-positive information can be passed along as well. So, companies need to be well-prepared even at the first investor presentation. Before approaching angel investors, early-stage companies need to work through those initial relevant product development, testing, and commercialization issues, they need to know the competition, have a plan for bringing in key people at relevant times, work through their capitalization strategy . . . And, probably most importantly, develop and refine a compelling and consistent “story” of how and why the company is going to succeed. Absent a substantial change in management or a fundamental change of the prospects for the company, rarely do companies get a second chance once they've been turned down.

Third, it puts a number of companies in a conundrum. In many early stage rounds, companies seek between $1 and 3 million. Unlike five years ago, it is no longer uncommon to see in the Midwest companies raising that amount of money (or substantially more) solely from angels and angels groups, especially through syndication. However, that range also coincides with most Midwest-based early stage investment funds. So, should a company seek venture capital money or angel money? Perhaps that's a topic for a future column.

More by Matt Storms:

• Matt Storms and Melissa Turczyn: Paying to play in the venture capital game
• Matt Storms: More terms for venture capital term sheets
• Matt Storms: New rules would expand the definition of "accredited investors"
• Matt Storms: In pursuit of capital, be sure to track your private offering