Entrepreneurs: Angel investors short on risk

The Springfield Angel Network is facing criticism that it is failing in its mission to give entrepreneurs the lift they need to get businesses off the ground.

Since the Springfield group’s inception in 2008, roughly a dozen companies have been funded by local angels – less than half the average for angel networks, according to investor network organizers. A resistance to provide hard numbers by the Springfield Area Chamber of Commerce, now the sole institutional member of the network, underscores what some close to the group consider an overall lack of financial commitments.

“The activity is not where we had hoped it would be to date,” said Brian Kincaid, Missouri State University’s business incubator coordinator, who introduces angel investors and capital hungry entrepreneurs before pitches are made.

Grumblings from a few entrepreneurs have come Jason Graf’s way. As co-founder of Springfield-based crowdfunding website CrowdIt.com, Graf said entrepreneurs have expressed to him local angel investors – aka angels – aren’t taking the risks and making the investments expected from such a network.

“I know some of the frustrations that the entrepreneurs have experienced. But really, I think we are in a more conservative market. Springfield doesn’t have a proven track record of success to work from and to spur further investments,” Graf said, adding a couple of those seeking Springfield Angel Network support have turned to CrowdIt.com for alternative funding attempts.

Before changing the network’s administrative model, the chamber’s 2011 annual report showed 96 businesses had contacted the group for funding support, but only four secured the backing they were seeking.

Getting started
The Springfield Angel Network started five years ago as a collaborative effort between Drury University’s Edward Jones Center for Entrepreneurship, Missouri State University’s Jordan Valley Innovation Center, Springfield Innovation Inc. and the Springfield chamber. However, Kincaid said organizers have since moved the network exclusively under the chamber’s management to free up the support infrastructure for entrepreneurs as the eFactory came on line.

“We were advised that legally it would be better to remove the entities that were working with the entrepreneurs because otherwise we’d be working with the entrepreneurs and investors, and we’d create a pseudo-brokerage relationship, which we wanted to stay away from,” Kincaid said, noting the university now operates under a memorandum of understanding to offer support services.  

Under less common angel network models, Kincaid said investors establish a fund run by a fund manager and board, which distribute money to the businesses it sees fit.

The purpose of the Springfield Angel Network is to introduce accredited investors to potential funding opportunities through invitation-only presentation events, according to Kincaid. However, local angels are under no obligation to invest in any particular opportunity. Accredited investors must demonstrate a net worth exceeding $1 million, excluding primary residences, or annual income exceeding $200,000.

Kincaid said it typically takes four to seven years for a business to grow to a point of an investor exit, which would most likely take the form of an equity buyout.

He said early results have been disappointing because investors have more often chosen to remain on the sidelines instead of taking chances on projects that have potential.

“We need local success stories in order to build momentum for this investment activity,” Kincaid said.

Kincaid declined to disclose specific performance metrics tied to the group, referring instead to the 2011 report released by the chamber.

In the chamber’s report, four businesses were identified as receiving funds between mid-2010 and late 2011: Aisle411 Inc., New Horizons Hardwoods, Stacker Bottle and U.S. Photonics. St. Louis-based Aisle411 is showing progress with its business model, having picked up $6.3 million in additional money in September to help grow its in-store product search app, bringing the money it has raised since its 2008 inception to more than $10 million.

Ryan Mooney, senior vice president of economic development for the Springfield Area Chamber of Commerce, declined to release specific data tied to performance, citing confidentiality agreements between investors and entrepreneurs.

Big picture
Marianne Hudson is executive director of the Overland Park, Kan.-based Angel Capital Association, which represents more than 200 angel networks, including the Springfield group, with 10,000 accredited investor across North America. She said it is common for the networks to fund between four and 10 projects per year.

“There might be fewer investments at first,” Hudson said, noting smaller metropolitan areas are often more conservative. “You’ve got a lot of people new to investing who might be more conservative than, say, someone in Silicon Valley.”

According to a November 2007 study by the Angel Capital Association that interviewed 539 angel investors from 86 groups, the average return reported by those who participated was 2.6 times their investment. While some investors netted big returns – 7 percent of investor exits returned more than 10 times the investment – about half of the 1,137 exits resulted in losses for investors.

Hudson, a recent investor in the Kansas City market who said she has yet to earn an exit return, said the typical angel should expect hits and misses.

Kincaid said angels from other groups appear to be taking more chances.

“What we see happening is investors sitting back and waiting for a perfect deal, which is exceptionally difficult to predict and in some cases makes us miss opportunities to fund some very good companies,” Kincaid said. “We are in a community that is perhaps not as familiar with angel investing.”

Among those who have been turned down by local angel investors is Chase Tweel, who in September launched an online music stock exchange with the help of his father – a Nashville songwriter and industry veteran. In his presentation to local angels, he asked for $750,000, based on an estimate that his TweelX.com was valued at $3 million. He said he had planned to ask for a lesser amount based on an earlier $1 million valuation before the Nashville investment was in place.

“I think they were concerned about how uncharted the waters were for the business model – which is certainly fine,” Tweel said. “It made more sense for our money to come from Nashville because that’s where the music industry is and investors there have a sharper sense of music publishing.”

Graf declined to name entrepreneurs who have expressed frustration with the local network, but said the Springfield model faces challenges. “With an angel network, as opposed to a venture capital group, you are talking about smaller investments in the first place. You’re talking about seed money, early investment capital,” Graf said, adding local angels appear to have standards that are too high for the format. “It seems their stomach for investment is maybe not as hungry as some markets are.”[[In-content Ad]]