Crossposted from the Herald-Times, November 27, 2020
One of the things we do at The Mill is to help entrepreneurs find capital. For tech startups, this often means finding angel investors. Angel investing is when individuals invest in tech startups in exchange for shares of the company. A tech startup is a company in the initial stages of business that has created a new innovation, perhaps software or a medical device, for example. A startup requires investment up front and loses money for a period of time, before experiencing rapid growth in revenue and jobs. A chart of startup revenue would show this characteristic “hockey-stick” pattern—imagine the hockey stick on its side and the “toe” sticking up. Angel investors also commit their time to the startup, helping coach and advise the company.
Why do tech startups need angel investment?
The technology business is unique in its limited lifespan; everything created today will quickly become obsolete. The traditional business cycle takes too long to gather enough capital to grow a tech business. You won’t be able to grow it fast enough; your technology will become obsolete before you can optimize it and build a customer base.
By contrast, if you opened a pizzeria, you might save a little money and then buy a pizza oven. You could start making pizzas, and if you’re good at it, you might be able to save a little money and buy a second oven. If you’re really good at it, over a few years you could save enough to open a second pizzeria. This life cycle works because making pizzas hasn’t changed in 200 years.
If a tech startup approached growth in this way, whatever was valid about its innovation would be moot by the time it was financially ready for expansion. Tech startups can’t go to a bank for a loan, because banks need assets as collateral for loans. Since tech startups don’t have hard assets, they need the support of angels.
Why do angels invest?
There are three reasons for angel investing:
The first is to make money. If you make 12 investments, there’s a 75% probability of 2.6x return, asserts Rob Wiltbank in his 2016 returns study for the Angel Resource Institute. Annually, that’s 20–25%, which far outpaces the stock market.
The second is to contribute to the future. It’s fun to see the world through someone else’s vision and even more fun to see the latest innovation or technology and affect its direction.
The third is to be helpful. Most successful entrepreneurs got where we are because of someone else’s belief in our vision. Angel investing—and more importantly, mentoring—is a way to pay it back.
How much money is involved?
Contrary to popular belief, you don’t need hundreds of thousands of dollars to get started in angel investing. More money certainly helps, but the minimum to get started is much lower. If you’re in a group like VisionTech or Flywheel Fund where you can pool your resources with other investors, $10,000 is the minimum to justify the time and attention you will also contribute.
VisionTech is a statewide angel group that hears two pitches every other month. VisionTech startups are usually from Indiana but can also span nationwide. Angels can contribute as much or as little as they want in each startup, and the group manager handles the paperwork on angels’ behalf. VisionTech charges an annual membership, an ongoing fee to defray operations costs, and receives a percentage of the profits.
Flywheel Fund is a Bloomington-based group at The Mill that hears one pitch every other month. The tech startups have a Bloomington or IU connection, and the fund is quickly expanding to the rest of Indiana and the Midwest. Each person invests $10,000 annually, and the group votes on the tech startups to invest in. Flywheel also charges an annual membership fee and receives a percentage of the profits.
Pat East is Executive Director of The Mill.