Angels, Not Just for Technology Companies Any More
Monday, September 22, 2008 | By: bryanjaf
As I have blogged about previously, conceiving of, developing and growing to profitability a consumer company is a different proposition than it was a decade ago. In a variety of progressive consumer niches (namely natural products), the success of predecessors (e.g., Glaceau, Burt’s Bees, Izze, Tom’s of Maine, etc.) has breed a handful of “me toos”. The proliferation of competing offerings (I counted 22 new energy drink companies at the last beverage show I attended) has created substantial noise in the channel. If you have recently walked the isles of a Whole Foods Market, this is but one example, this would readily evident to you.
As a result of this noise, consumer companies find themselves faced with a the need to spend more money on marketing and advertisement to differentiate themselves. This can be problematic, as these things take money. Long gone are the days of Nantucket Nectars where you could raise $250,000 from friends and family, make and overcome a litany of operational mistakes, right the ship and never look back for capital. Today, it is not uncommon to see a company take in and spend $5 - $10 million generating its first $5 million in sales. This has led to a sea change in the investment paradigm for consumer companies; namely it has brought angels into the funding equation.
It used to be, angel investing was confined to the technology domain. And while the majority of the 250,000 active angels continue to focus on technology investments, the percentage that consider consumer investments has grown exponentially. This makes intuitive sense, as affluent individuals interact with products and develop an affinity, they become open to investing in other products within that category. The exits that investors have experienced have also served to attract investor attention. More angel investing organizations have begun to incorporate non-technology investing into their opportunity evaluation.
Angel investing, like consumer capital needs, has also evolved. The number of organized societies, groups of 10 - 250 accredited investors who belong to an organization that is responsible for generating deal flow, has grown from 10 in 1995 to over 300 in 2008. These groups pool their resources to evaluate opportunities, perform due diligence and establish larger positions in companies. Today Keiretsu Forum is the largest of these groups, possessing 750 accredited investors who have deployed $180 million in capital in 200 companies since the groups inception in 2000. Increasingly these organizations are getting cozy with venture firms who provide deal acumen and in return get a first look with respect to follow-on investments.
When I suggest angel organizations to entrepreneurs, I am generally hit with, in return for my free sage advice, a variety of pre-conceived notions. A list of the common complaints is as follows:
> Forums do not provide me access to the types of investors I would value. This view generally stems from a lack of knowledge about who they might get to invest through a forum process. Most people want investors who are value add in some capacity, and who wouldn’t. What I have found is that, in an effort to get access to more consistent deal flow, successful business professionals with expertise in vertical markets, company development and governance can be found through forums and investment societies. Often times I have run into venture capitalist who do their personal investing through forums. At my last forum experience, I met a former Fortune 500 beverage CEO who was “looking for new beverages companies to invest in and help with distribution deals”. If I were an emerging beverage company seeking money I would value that audience. Having a conversation with the management organization of the forum or society can provide you insight into the background of its investor base. From there one can make an educated decision.
> I shouldn’t have to pay to present. Ultimately, time is money. A one off angel investment process can be fruitful if you have strong connections within your local community. However, every hour you spend not closing an investor, or closing an investor on a small amount of money, is an hour with a low ROI associated with it. In contrast, the opportunity to close on many investors within that hour would be generate a significant return relative to time invested. Forums and societies provide you ROI well in excess of the processing cost. The feedback you will get through the screening process will also be highly valuable in honing your pitch. It is also worth noting that the fees associated with hiring someone to raise your angel round (success fee, warrant coverage, etc.) are egregious relative to what presenting at a society might cost you.
> I need more money than a forum can provide. Forums are effective for up to $5 million in capital for strong concepts. Adina for Life and Earth Class Mail are examples of consumer companies that raise at least $5 million through the Keiretsu Forum. As societies have opened multiple locations, it has made it possible for the best concepts in a given geography to do follow-on presentations in other attractive markets. Generally speaking, most seed rounds should be serviceable by larger angel group.
I recently attended the Zino Society Zillionaire Forum where 30 companies presented to accredited investors with $150,000 also up for grabs in three categories (in addition to contributions directly from society members) through Zino’s dedicated investment fund. Approximately 50% of the presenting companies were consumer in their orientation and the winner in the non-technology category, CHERRish, was also the winner of the “Best Overall Investment” (I voted for Byndoo). Reaction to a number of the consumer deals was very strong. I do believe that there is considerable pent up demand from angels for consumer deals. With the technology IPO market closed and technology M&A multiples languishing, I expect more angels to jump over to, what used to be the dark side. What will be interesting to watch is how the macro-economic climate impacts the pace of angel investing in 2009.