Angel Investors Support Fertile Entrepreneur Ecosystem

Angel (n.): 1. An immortal spiritual being. 2. A guardian spirit or guiding influence. 3. One who manifests goodness and selflessness. 4. A financial backer of an enterprise. Angel investor (n.): A high net-worth individual who invests money in a company at its earlier stages in exchange for an ownership stake in the business.

For entrepreneurs, investors willing to fund their fledgling startups really are angels in every sense of the word. Without them, many well-known startups in Wisconsin would never have been started.

“After tapping into personal savings and loans from friends and family, founders of many of Wisconsin’s most successful startups looked to angel investors to turn their ideas into real, high-potential businesses and job creators,” says Tim Cooley, director of capital development for WEDC.

It’s impossible to know exactly how many angel-assisted startups there are in Wisconsin (many investments are negotiated privately and directly between investors and companies), but it’s likely higher than one would think. Nationwide, 17 times more companies receive angel financing than venture capital. (See accompanying chart.)

Across the state, numerous angel investor groups, organized both formally and informally, collectively invest in entrepreneurial companies, with some bringing together just a few investors to some reporting 50 or more members.  As an example of their impact over the last year, 77 companies received $111 million in financing in 2012 from a variety of private, angel and venture capital investors that have been tracked by the state’s Qualified New Business Venture (QNBV) program, which targets startups in select industry sectors.

Golden Angels Investors, LLC in Milwaukee is one of them. Founder Tim Keane says Golden Angels has 75 total members who are interested in developing the region’s entrepreneurial community. The group is currently investing in 11 companies with capital outlays ranging from $300,000 to $4.5 million.

“We target companies where we can really make a difference, those that are beyond the idea stage but don’t yet have a revenue stream,” Keane says. “We join their boards, help the entrepreneur think about strategy, use our networking connections to help grow business contacts, and help them get their product ready to market.”

This firsthand involvement is a primary motivator for angel investors, who may have experience in the startup’s specific market niche or wish to be personally involved in their investments. While they expect a reasonable return, they understand the high risk of startup investing and the patience needed to see investment profits. They also typically invest only a small percentage of their total portfolio in this segment and invest small amounts in several companies, as statistics show that a portfolio of at least 10 investments is often needed to appropriately moderate the high risk of each individual investment.

Finding success

Emergency Management Systems (now Intermedix EM Systems) is one such business assisted by Golden Angels. EMS, begun by physicians to let first responders know of the specialized services local hospitals offer, approached Golden Angels in 2005. The team helped EMS recruit a CEO and build their business. EMS was serving 40 percent of U.S. hospitals when Golden Angels sold it for 10 times its investment in 2008.

“Despite the sale, and another since, the company is still headquartered in Wisconsin,” Keane says. “It created more than 60 jobs here and helped support many more by spending millions building its infrastructure, purchasing equipment, and using local accounting and legal consulting services. Having groups in the state willing to invest in these types of ventures is critical to growing our economy, as research shows that most new jobs are created by startups.”

Investing in Wisconsin’s economy

More sources for capital funding are needed, however.

Wisconsin ranks 40th in start-up activity, according to the Kaufmann Foundation, which studies and promotes entrepreneurship, and that’s likely due to lack of funding.

“Wisconsin is developing an entrepreneurial ecosystem of support and networking that rivals anything done in other states, but we face a choke point of limited startup financing that severely limits our growth,” says Lisa Johnson, vice president of entrepreneurship and innovation at WEDC.

“Angel investors are important because they work on smaller, local deals and will consider a greater variety of industries, which is important given Wisconsin’s geographic and industrial diversity,” says Dick Leazer, former head of the Wisconsin Alumni Research Foundation and founder of Wisconsin Investment Partners, a leading angel group in the state. “They look at companies with a competitive edge, a good business model, and entrepreneurs who can execute on their plan. Those are critical factors favorable for making a good investment, rather than just companies with the potential to become huge.”

Keane agrees that more capital funding options are needed, from seed and early stages into middle and expansion stages. “Water quality company Aquamost started at UW-Madison with a commercialization idea, and Golden Angels has invested in them three times. They need more capital to get to the next level, and it’s not as readily available in Wisconsin as you would hope.”

Wisconsin’s funding capacity is out of sync with the state’s research spending and patent transfer for which UW is near the top. Keane says companies with unmet capital needs must grow more slowly or move out of the state, and that limits job growth.

“We do a great job educating kids in Wisconsin, but if we want them to stay here, we need opportunities for them,” he says. “And when we invest in startups, we not only get an investment return but also build our jobs and tax revenue base.”

Leazer adds that nurturing startups is good for the state.  “While we’ve made progress over the years, Wisconsin needs to do much more to develop startup and seed-stage investment capacity to take advantage of the talent and innovations taking place in our state,” he says.

Growing the ecosystem

That sentiment is at the heart of the current legislation proposal to establish a collaborative public-private capital funding structure. But regardless of the result, encouraging and supporting entrepreneurs will drive business and job growth in Wisconsin. (See “The Three Things Entrepreneurs Do for Our Economy” to learn more.)

“Building an investment structure to encourage start-up activity won’t happen because of what’s done only in Madison [at the Capitol],” Leazer says. “We need to work with civic leaders in targeted geographic and industry areas, connect with high net worth Wisconsin residents who have moved out of state but still strongly identify with the state through family and university connections, help rebuild angel networks that have become inactive, and create an association to better connect the disparate activities taking place.”

Angels on the Water was formed last year in Oshkosh, Wis., to focus on investing in northeast Wisconsin projects. According to Mickey Noone, one of the founders, the network has 31 investors with an investment portfolio of $1.25 million. The network’s focus is on providing seed and early-stage capital and has assisted three information technology ventures already. “Early-stage capital has been most restricted for small businesses during the economic downturn, so our goal was to address that critical need in our area,” he says.

With continued support and encouragement, there’s real potential that more investor groups will form to further build and diversify the entrepreneurial ecosystem in Wisconsin.  “It’s critical that we develop and support these angel investors,” says WEDC’s Johnson.  “Our state’s competitiveness, ability to create jobs throughout our economy, and our very future depends on it. Without healthy and vibrant startups at the very beginning of the pipeline, we will not see growing companies that will be the employers and drivers of our state’s economy going forward.”

For more information:

Tim Cooley
WEDC Capital Development Director

Tim Keane
Golden Angels Investors, LLC

Mickey Noone
Angels on the Water

(January 2013)