-Hi, my name is Rick Vaughn, I'm the Managing Director of the Mid America Angels which is
a local angel group here in Kansas City.
We are the oldest and largest angel investor group in the region, we've been around for
about 10 years, we started in 2006.
We had about 20 members when we started and we've grown to over 120 investors today.
Well, angel investing typically talks about folks that are investing in early stage or
startup companies so these are often companies that are very early in their life cycle.
They may have completed what we would call a Minimum Viable Product so think of that
as kind of version 1.0 of their product or service.
And they may have a few customers that are paying them for that product or service but
they are still burning cash, they are not at a point where they are cash flow break
even yet.
And, the angel investors themselves, I think it's probably helpful to understand a little
bit about who they are.
You know, these are typically individuals that are investing their own money.
Most times, they're referred to as accredited investors which simply means it's a Securities
and Exchange Commission definition where the investor has to either have a high net worth,
which is defined as a million dollars or more of net worth excluding their primary residence
or they have to have a high annual income of $200,000 or more annually or if their spouse
also is employed, it would be $300,000.
But these folks typically like to invest in local or regional companies, and as I said
they're investing their own money.
They are looking for fairly high rates of return because this particular asset category
is pretty high risk and pretty illiquid so those are the folks that are doing it.
They can either operate on their own, invest on their own, directly with the entrepreneur
of the company, or more and more today we're seeing that they operate as part of a group
like Mid America Angels where they basically work together to look at and vet these particular
opportunities before making an investment.
Well this is a type of financing that usually works best for a company that is growing rapidly
and has a scalable business model so think of it in terms of a company that is probably,
you know, they may have very little revenue today but they have the ability to grow and
scale to the point where they may have $20,000,000 or $25,000,000 or more of revenues within,
let's say, five years or so.
The other example of a type of company it's appropriate for would be a company that is
working on a very disruptive technology that might be worth millions of dollars to another
company.
And I think one of the things that you have to understand, appreciate, is that, again,
when the investors put their money into these type of deals, they know that it's going to
be a while before they get a return on their investment.
So, the other area where you need alignment between the entrepreneur and the investors
is just having an understanding that the business is really being grown and built to the point
where you're going to sell it at some point down the road, and usually that's within a
five, six, seven-year period of time and, again, when the sale of the business occurs
is really when the investors get their return on investment.
The type of business that it's probably not appropriate for would be what I would refer
to as more of a lifestyle business so think of that in terms of, maybe, a single owner
that may be serving a smaller group of customers, you know, this could range, the business might
be generating anywhere from a few hundred thousand to a few million in annual revenues
but that particular business owner is not really looking to aggressively grow the business
and they maybe aren't thinking about an exit, you know, they may be planning to run that
business for the next 20 to 25 years so if the lifestyle business is the kind of business
you have, then angel investing is probably not appropriate whereas, as I mentioned earlier,
if you have a business that's growing and scaling, that probably is more appropriate.
Well, there's a lot that goes into this process so I think from a preparation standpoint,
there are a number of things they need to think about.
Certainly, it starts with having a fully fleshed-out business plan.
Most angel groups will have a website where the owner can apply for financing, they go
in and fill out an online application.
And usually as part of that online process, the angel group will also request at least
the executive summary if not the full business plan so you need to make sure that you've
prepared for that.
The process itself, the thing that I would tell any entrepreneur or owner that's thinking
about this type of financing is that you're really looking at a process that could take
anywhere from three to six months from start to finish.
There are a number of steps that you have to go through.
Most of the time, as I mentioned, that starts with an online application.
Once you've submitted that application the next step usually is that you will be contacted
by the angel group and a meeting will be scheduled either in person or over the phone.
And usually, at that point, you're talking to one or two of the angels in the group and
they're really kind of doing what we call pre-screening.
They're evaluating the opportunity to see if they think it's an appropriate fit to put
in front of the broader group.
And that then is the next step, if you pass muster at the pre-screening then usually the
next step is that you're asked to come in and present in front of the full angel group.
And, again, process may vary from group to group but to give you an idea with Mid America
Angels, if the entrepreneur comes in to present to us, they have 15 minutes to do their presentation
and then that's followed by 10 minutes of question and answer so usually about 25 minutes
to run through the whole presentation piece of it.
If they pass muster at that point in time, then usually the next step is what we would
call due diligence and at that point the angel group is going to be asking for, certainly,
if they haven't before they're certainly going to ask for your full business plan at that
point in time.
They're probably going to do a background check on the entrepreneur or on the management
team.
They're going to really look very deeply at the business itself, they'll look at the financial
projections to see whether they feel those are reasonable or not.
They may want to talk to some of the customers.
They're going to want to meet the rest of the team and on and on.
It's a fairly in-depth process and it usually takes 30 days or so.
Following the due diligence process, often, the entrepreneur is asked to come back to
present again in front of the angel group and at that point, they're really being asked
about any of the issues or questions that came up as part of the due diligence process.
The other thing that often happens during the due diligence process is that one or more
of the angels is working with the entrepreneur negotiating the terms and conditions of the
investment so it's often, you come out of that process with something called the term
sheet which really kind of defines what the terms and conditions around the investment
will be.
And then following that, usually you will get an investment closing within a couple
of weeks so, again, that entire process from start to finish can take you about 90 days
so there is a lot of preparation work that your typical entrepreneur needs to go through
before applying for funding.
I think the advantage of it is that you can raise a fairly large sum of capital, you know,
typically, again, the type of company here that we see is usually looking to raise somewhere
between a half million dollars and a million and a half dollars and so you can raise a
fairly significant amount of capital for an early stage company by going through this
process, and I think the other thing that you often see is that there's not, most of
the angel groups do not have any sort of an application fee.
Occasionally you'll see one that might have a fee of a hundred or two hundred dollars
but a lot of groups including Mid America Angels, they do not charge anything for the
entrepreneur to apply and really the most significant cost the entrepreneur has to be
prepared for is the fact that they're probably going to need to hire a securities attorney
to help them with the necessary legal documents through the process.
Well, I think the disadvantage is the fact that you're giving up ownership in your business
so, you know, most angel groups, when they invest, they're looking for equity ownership
in the business or, you know, an actual piece of the business.
They're really not in the business of doing loans, you know, like a bank, they want a
piece of ownership.
So, the disadvantage is, it's a fairly expensive type of capital and usually at the early stage,
you know, the business is not worth as much as it will be later on so you're having to
give up a bigger piece of equity in the business in order to get the financing completed.
Well certainly the thing that I would recommend to any entrepreneur that's considering this
process is to get help.
You know, go out and talk to other entrepreneurs that have raised capital so you better understand
what the process is like.
Take advantage of the numerous entrepreneurial resource organizations in the area, folks
like the Enterprise Center of Johnson County or like the Small Business Development Center
located here at Johnson County Community College.
There are a number of organizations that can give you some guidance and counsel around
how the process works.
You know, some of these organizations have workshops that you can go to but the key thing
is to get as much help as you can to make sure you are thoroughly prepared and that
you really understand the process because there are a number of places along the way
that the process can kind of come off the rails if you're not fully prepared or fully
organized going into it so that would be my best advice.