Thursday, July 17, 2008

Angel Investment Program by the Federal Government -- HR 3567 Bill Proposed

You know you’re getting big when the federal government wants to step in and help you. Here’s a case in point.

The HR 3567 Bill is an amendment to the Small Business Investment Act of 1958. It is currently making its way through Congress and would provide federal funding to angel organizations in addition to creating an office in the SBA to carry out the program. The program would include building a database of angel investors and setting up a matching funds program up to $2M per group.

The Angel Capital Association researched the bill and surveyed the membership as policy advocation for angel investing is now becoming a higher priority based on membership feedback. The survey showed that members found two positives in the bill:

1. Having the office focus on connecting resources of financing (angels) with users (entrepreneurs) may lead to market efficiencies;

2. The office will provide a point of entry at the federal level for angel investors and angel groups to discuss and address other issues related to angel investing.

The survey also revealed two cons to the bill:

1. The bill could lead to a reduction in angel investments because many angels would not want to report their investment activity to the government office;

2. Some question the need for angel legislation when the number has increased from 67 percent since 1999 and angel investments annually total more than $26 billion.

Currently, the ACA does not take a position at this time. Relevant text from the proposed bill is below:

Title III - Angel Investment Program
Section 301 -
Establishes within the Investment Division of the SBA the Office of Angel Investment, headed by a Director, to provide support for the development of angel investment opportunities for small businesses.

Requires the Director to establish and carry out a program, to be known as the Angel Investment Program, to provide financing to approved angel groups. Limits to $2 million the financing to an angel group. Provides a matching funds requirement. Establishes an Angel Investment Fund. Authorizes appropriations.

Requires the Director to establish and maintain a searchable database, to be known as the Federal Angel Network, to assist small businesses in identifying angel investors. Authorizes appropriations.

Requires: (1) the Director to establish and carry out a program to make grants for the development of new or existing angel groups and to increase awareness and education about angel investing; and (2) each grant recipient to report to the Administrator describing the use of grant funds. Authorizes appropriations.

Best regards,
Hall T.

Monday, July 14, 2008

Best Practices for Entrepreneurs Seeking Funding

I work with entrepreneurs every day who are going through the fund raising process. Over time, I’ve found some entrepreneurs employing practices that make the process go smoothly. For those who seek funding here are some best practices to consider in your fund raising efforts:

Develop a relationship with investors early on

I often come across entrepreneurs who say that don’t need funding right now so they don’t need to talk with investors. I sometimes ask when they will need funding and am surprised that the answer is usually six to twelve months later. I advise the entrepreneur to start developing relationships now. If you wait six months and then start looking you’re behind. In meeting with an investor the entrepreneur can state that he’s not ready for investment but then lay out the plans for developing the business. By building a relationship now and keeping the investor informed of your progress, the entrepreneur will be in a better position when it comes time to raise the funding.

Have ready the executive summary, slide deck, and business plan with financials

It helps to have the core three documents – executive summary (one-page only), slide deck, and business plan already developed and ready to go. As the entrepreneur meets prospective investors he can use the appropriate docs for each meeting.

Publish a periodical email newsletter for interested investors

In the fund raising process, I see some entrepreneurs sending out email updates to highlight the progress of the company. Some come as often as weekly to show progress in sales, product plans, and other milestones. This shows the company’s ability to execute.

Find a lead angel to develop a terms sheet and start off the funding round

By finding a lead angel and creating a terms sheet, the entrepreneur removes the biggest barrier to fund raising – the negotiation process. There are numerous angel investors who find the initial negotiation and due diligence process too time consuming. By eliminating this hurdle, the entrepreneur opens up the deal to a larger number of investors.

Make the deal terms “investor friendly”

Of course every deal must be negotiated. The harder the terms for the investor to accept the longer the time it will take to negotiate. By making the terms “investor friendly” through reasonable pre-money valuations, preferences, and other terms, the faster the process goes.

Push all due diligence docs to a password-protected web-site so interested angels can perform due diligence more easily

The due diligence phase can be sped up by having all the key docs already available. I’ve seen some entrepreneurs put everything on a protected web-site and then give out the password to interested investors. This knocks down the hurdle of trying to send 600 MB worth of documents through the email system.

Continue the quarterly email newsletter after funding so investors stay with you

It’s important to keep investors up to date even after the funds are raised since investors can help in other ways. Some investors bring a rolodex of contacts while others bring experience and coaching. By keeping them informed of your progress and challenges, they may be able to help. This practice is also useful for when it comes time for follow-on fund raising.

Best regards,
Hall T.