Whether it be the state of the economy, or the rise in interest in everything green, a lot of people are thinking about starting their own business with a focus on sustainability or social equity. Getting a new business off the ground requires tenacity, hard work, and cash. Lots of cash. One of the places to get that cash is through an angel investor, but, to many people, this type of investing is shrouded in mystery.
I had a chance to find out more about angel investing at the Green Financing for Green Businesses panel discussion, hosted by Urban Solutions, a San Francisco-based non-profit that promotes small and green business in disadvantaged communities. Speaking on the panel was Colin Wiel, an angel investor and founder of the San Francisco chapter of the Keiretsu Forum, the world’s largest angel investor network. Mr. Weil, whose accomplishments also include founding a 35-person software firm, gave an overview of who angel investors are, why they invest, and what types of businesses they invest in.
Angel investors generally invest in companies seeking $500,000 to $1 million. Due to the fact that the Keiretsu Forum invests as a group, investments of less than $500K would not allow enough members to participate. Investments of $2M or more are usually handled by VCs. Those seeking less than $500K should probably use their personal network, family, or friends.
According to Mr. Wiel, an angel investor is most likely a current or former business owner who enjoys engaging with businesses in the start-up phase. Starting a business is a very demanding proposition, and many angel investors, having already dedicated their time to one or more business, may seek to “stay in the game” by investing in someone else’s venture, leaving the day-to-day operations to the founders. Even so, angel investors still play a key role, by providing support and advice borne out of experience.
Of course, another important reason for early-stage investing is the potential for high returns. Because of the high risk, angel investors expect to something on the order of 10x return on their money within 5 years. This may seem crazy, but it takes into account the fact that most start-ups fail. Angel investors, much like venture capitalists, invest with the philosophy that only a few of their investments will succeed, but those that do will reap extremely high rewards.
Although angels do work with companies at a very early stage in their development, companies that are successfully funded usually have a product that is fully developed. R&D is deemed to be too risky and extremely costly.
Mr. Weil described the process for applying for funding by the Keiretsu Forum as follows: Every month, the Keiretsu Forum receives 30-50 applications for funding. The Forum has a number of topic-specific committees that screen these applications. 5 applicants are chosen to present to the chapter, and each presenter has 10 minutes to make his case. After this meeting, an ad-hoc team of Keiretsu members is formed to perform due diligence on the company. Members choose to invest based on these findings.
When asked about how social return on investment (SROI) factors into the investment decision, Mr. Weil indicated that it all depends on the focus of the investment group. While there are some angel funds that focus specifically on socially-responsible investing, such as Investor’s Circle, the required financial return on investment must be comparable to other business.
In today’s difficult financial environment, a lack of venture capital financing has caused some companies that are past the start-up phase to seek capital from angel funds. This has made acquiring angel funding that much more difficult. However, Mr Weil was able to cite some success stories from Keiretsu’s cleantech investments:
- Mariah Power, a Reno, Nevada-based manufacturer of small-scale vertical wind turbines.
- Helio mU, a micro utility focused on solar power purchase agreements.
- Propel Biofuels, an operator of biofuel fueling points.
Perhaps the most important factor for companies seeking angel investment is the strength and experience of the management team. Mr. Weil advises entrepreneurs to work with partners who have extensive experience in their target industry.
Steve Puma is a technologist and a sustainability and strategy consultant. He currently writes for bothTriplePundit and his personal blog,ThePumaBlog.com, about the intersection of sustainability, technology, innovation, and the future. Steve recently received his MBA in Sustainable Management from the Presidio School of Management in San Francisco, and holds a B.A. in Computer Science from Rutgers University.
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