By Sam Waltz
For those less-than-familiar with the role of funds or networks in early-stage investing, think of it as a Match.com-type or singles bar-type function for introducing entrepreneurs who need early-stage capital to launch or grow a business to people of wealth who have the higher-than-normal risk profile and capital to put into such businesses.
Educating and introducing people on both sides of the prospective transaction is the objective of a new group forming in Delaware, www.FirstStateAngels.com, headed by Pedro Moore, a longtime fund manager with the Delaware Innovation Fund and Innovation Capital, each of them headquartered in upstairs offices over a former sub shop at Independence Mall on Concord Pike.
More than 20 prospective “angel investors” turned out May 12 at the New Castle County Chamber of Commerce, along with nearly another dozen employees and leaders from the chamber and the funds.
“The angel investor writes checks … [she or he is usually] an affluent, usually accredited investor, provides capital for business start-up, usually in exchange for convertible debt or ownership equity,” said Michael Kelley, principal in the Center for Venture Research in New Hampshire and a longtime Delaware Valley early-stage investment fund leader. “A small but increasing number organize themselves into angel groups.”
By law, the “qualified investor” is supposed to have either a $1 million net worth excluding the value of the primary residence, by himself or with a spouse, or earned income in excess of $200,000 annually, or $300,000 with a spouse in each of the prior two years, with the expectation of the same for the current year.
“Is supposed to have” is an important operative consideration because such investor profiles are not ordinarily subject to any public or private audit for conformance, so many investors reportedly may not match that profile.
“First State Angels is an angel investor network based in the state of Delaware that finds, funds and mentors early-stage companies within the region,” said Moore. “Our members meet monthly to evaluate prospective investment opportunities.”
“Each company that presents to our members is carefully vetted and coached prior to presenting to assure industry investment standards are met. Our members collaborate with each other to conduct their own thorough review of each company and make their own individual investment decisions,” added Moore.
While the May meeting was introductory for the topic, Moore said several more such workshops are planned as the First State Angels group recruits and fills out its “angels class.” Moore said candidates may reach him at (302) 777-1516 or PMoore@InnovationCapital.com to learn more about it.
Topics likely to be covered include:
- Deal flow sourcing, deal selection, and preliminary due diligence
- The term sheet
- Detailed due diligence
- Closing — papering the deal
- Managing and monitoring the deal; wealth creation and exit
Among the attendees at the May meeting were Don Sturgeon, a recent DuPont Co. retiree involved in early-stage ventures; Carl Turner, a former insurance company owner from Baltimore interested in Delaware; Martin Hunt, a former MBNA exec who has operated his own Private Equity firm since 2005; Larry DiSabatino of DiSabatino Construction; Diane Ferry, founder and principal in MedStar; and Chris Burkhart of the Outside-In human capital companies (each of whom has been featured in the Delaware Business Times); Steve Fasick, a private equity lender with a background in the mortgage industry; Dev Sitram, a Newark engineering firm principal; Paresh “Perry” Patel, a not-for-profit exec and hotel owner with Milind Patel; Phil Sugar, who has started and sold three software companies, and John Ferretti, who built and sold Foxfire Printing.
Foxfire Printing is regarded as one of the “success stories” of the Delaware Innovation Fund. Ferretti had started the company, and had been friends with Delaware Investment Fund founder David Freschman. Ferretti had merged his company with another, but ultimately wanted to buy it back. Freschman’s fund assisted that, and then subsequently assisted Ferretti with capital for some subsequent acquisitions.
“We exited in the last few years,” Ferretti said, “and everyone who came in made out well.” Pat Foley, who chaired the fund board and worked closely in harness with Freschman, agreed.
Now, Ferretti is back in the market, looking for deals in which he might get involved. A recent call to him found him enjoying the life of the successful entrepreneur after an exit, taking the call from the sidelines of a child’s sporting event.
Kelley talked about the benefits of angel investing as a group, including:
- Share expertise
- Learn from others
- See more deals
- Can do bigger deals
- Socialize with peers
- Minimize costs
In markets such as New York, Kelley said, it is easy for a network to see 30 prospective deals a month. “In Delaware, it’s not quite the same thing,” as David Freschman frequently discussed as he talked about the challenges with the Delaware Innovation Fund that finally prompted him to look at deals well beyond Delaware.
Some such networks operate as “loose,” where each angel “makes his own investment decisions,” and others as “tight,” where the angels commit to investing and the majority rules on each decision.
In some, angels buy shares — as they have in the Leading Edge Fund organized by Delawareans such as Vance Kershner and Ernie Dianastasis — and in others they pledge money to be used when deals are funded.
Kelley talked about the high-risk proposition of early stage investing, where the “five-and-ten” proposition is a cornerstone, that is, that the objective is to make 10-times ROI (return on investment) in five years, one of the many such standards that focus on high-return potential to offset the significant numbers of inevitable losses.
Moore urges others with an interest to reach out to him.