Two scrappy entrepreneurs squared off with two beneficent angel financiers to discuss the state of entrepreneurial innovation at the MIT Enterprise Forum on Tuesday, March 16. The entrepreneurs were Jeff Judge of Interactive Mediums, which provides a platform for managing and implementing mobile ad campaigns, and Chris Hill of PerkSpot which helps corporations communicate and manage access to third-party employee benefits, like AFLAC or discount programs from Dell or Six Flags. Judge is not seeing capital while Hill is quietly raising a round of that he says he would like to be $1M.
The investors were Jeff Carter of Chicago’s Hyde Park Angels and Laurence Hayward of Cornerstone Angels. They represent “angel” consortia, groups of investors who buy into early stage companies. Angel investors come into companies early — often before they have any customers and invest smaller amounts than “Venture Capital” firms. Angel investments will typically be rounds that range from $100K to $1M, while Venture Capital invests in the $3M – $7M range.
Linda Darragh, Director of Entrepreneurship Programs and Adjunct Associate Professor of Entrepreneurship at the University of Chicago’s Booth School of Business was an excellent and knowledgeable moderator.
Both of the entrepreneurial bootstrappers were very successful. Both had started their companies with their own money, and not a lot of it by venture standards. Both companies have Fortune 100 companies in their client portfolio. PerkSpot was lucky to get Anixter (just out of the Fortune 100) as one of their first clients. They had a contact in Human Resources who needed their product and who walked them into the office of the VP.
Interactive Mediums started out with several bars and restaurants, small local businesses with a hip, mobile-friendly clientele. Then they want to a trade show (with four employees and four friends, a classic fake-it-until-you-make-it move) and found some corporate marketers who wanted an easy, inexpensive way to test out mobile campaigns. Judge said he was caught off-guard when the first corporate client said “yes”!
Both companies have grown, and from the sound of it, Judge’s company has changed the most in terms of their product offerings. He says that the company will transform dramatically in the next six months in terms of who they target and what their system does.
While this wasn’t a formal “pitch session”, both of the investors responded favorably to the entrepreneurs. They have solid products. They described good teams and an ability to adapt to the marketplace. Most importantly, both had “marquee customers.”
In terms of “elevator pitches,” neither described themselves as solving a “big, pressing problem” and neither discussed their competition, be it a company or the status quo. Nor did the discuss barriers to entry for competitors.
Since neither was pitching for investments at this event, it was understandable that they did not address the issue of how an investor would make money out of the deal, which would include a discussion of how scalable the business is and who would be potential acquirers.
Interactive Mediums’ Judge said he would avoid outside investment as much as possible. His biggest concern was that Angels and VC’s don’t sufficiently value the founder’s equity. Hill expressed more flexibility. Both agreed that seeking funds and keeping investors engaged and happy would take up much of the CEO’s time and energy.
When asked “how did you bootstrap?” Hill said that there is “a major lack of early funding in Chicago. I bootstrapped because of that environment.” He focused on solving the problem of companies communicating and managing discount programs for employees and looked for his first sale. He wanted a good developer and used equity as an incentive.
Judge started with personal funds and, before the credit crunch, was able to get a $100K loan. He follows the formula, for every $10K in increased monthly revenue, he can hire one more person.
On the investment side, Carter and Hayward provided some insights into Angel Investors in general and Hyde Park Angels and Cornerstone in particular.
Cornerstone has done 17 deals since 2006, investing $4.5M. There is wide variation between deals, from $50K to about $750M. The entrepreneurs are mostly looking for $500K to $2M. They funded three manufacturing companies who had “better processes” for industry.
They have twenty full members and they have five or six investment meetings where two or three candidate companies present. These events get forty to fifty people by invitation only, generally members and some entrepreneur guests. Members collaborate on due diligence and write individual investment checks. Only a third to a half of the presenting entrepreneurs get funding from these events.
In addition, Cornerstone holds five or six screening events per year, with 5-10 members from the screening committee in attendance. This year, Hayward says there are good entrepreneurs are coming out of the woodwork. Even the best connected entrepreneurs are having trouble finding funding from their close circles of friends and family, so more deals are coming to light in semi-private Angel Investment circles.
Cornerstone will invest outside the Midwest, while Hyde Park Angels keeps their investments “one day’s drive” from Chicago. They have fifty-five angels and will cap membership at one hundred.
Hyde Park Angels lists four companies on their portfolio page, with a fifth deal recently closed and the Chicago Tribune reports they have invested “about $3M” in the four companies.
Hyde Park’s investment criteria can be found at http://hydeparkangels.com/invest.html In addition, Carter has two other investments outside of HPA. They are in Tallgrassbeef.com, and windetergent.com.
Angel groups like to get other angel groups to invest with them. It spreads the capital risk to other communities and brings in capital from places other than Chicago and the Midwest. Angels want to get the first round of financing full because later rounds will often dilute their equity position.
In contrast, VC investments average around $7M (Carter says that “over $3M is VC territory”).
Hyde Park Angels works with the Polsky Center for Entrepreneurship at Chicago Booth. They have ten interns (hiring 5 per year from a pool of over a hundred applicants). Carter praises the U of C students as being critical to the success of HPA. Entrepreneurs pay $100 fee to submit a deal. Hyde Park gives “a fast no and a slow yes.” They present three potentially qualified deals at each quarterly meeting, and their goal is for members to fund all three of those deals. The format of the meeting is 10 minutes to pitch and 10 minutes Q&A with the panel.
Carter brought up that .05% of companies go public, so investors want to know how they will get paid. Hayward explained that investors are looking for an IRR from their fund of 19%. Since one or two out of ten investments provide 90% of the return, they are targeting a minimum of 25% IRR from each deal.
The point was made more than once that angels look to invest in scalable businesses that can be acquired, not “lifestyle businesses.” This is a key point. Many entrepreneurs have really great ideas for businesses. They might not be a perfect fit for an angel investor because they are not scalable enough to become big business as envisioned by the entrepreneur. However, this shouldn’t dissuade entrepreneurs from starting businesses. You can provide a pretty good income for yourself and family by starting up and running your own business.
As is usual with the MIT-EF meetings, there were some excellent questions. Both of the investors said they would like to see a social platform where they could have visibility to all local “deal flow” — who is seeking funding, and who is investing. Carter recommended the book “World Wide Rave” by David Meerman Scott on the subject of Social Networking. He encourages every entrepreneur (and angel) to read it. The entrepreneurs were split on the value of Intellectual Property protection, but neither had pursued patents due to costs (much to the chagrin, I’m sure, of event organizer Bob Brill and event sponsor Ungaretti & Harris). The issue of control came up. The Angels generally take a minority position. Hyde Park Angels want a seat on the board, while that’s not always a requirement for Cornerstone’s investments.
As always, feel free to contact me with any questions or corrections (grammatical edits aside).