Attracting Pre Seed Funding from Angel Investors [PODCAST]

Securing investment funds to support an early-stage business can be a significant challenge. In a recent episode of The Transaction Abstract, Joe Hellman got the inside story from Reed Robinson of Groove Capital, whose firm provides angel investor and venture capitalist funds to emerging businesses throughout Minnesota.Listen to this episode to learn how Groove looks to sources such as incubators to recommend prospective funding recipients and what it takes to get your up-and-coming enterprise on the short list for angel investor consideration.

Angel Investor or Venture Capitalist vs. Private Equity 

Groove Capital operates as both a venture capital funder and as an angel investor. As a traditional VC, the firm draws from a pool funded by multiple venture capitalists. It invests in many businesses early on. The hope is that those investments produce higher returns for investors because they are so early. 

However, companies that are still in the proof-of-concept stage or are only a year or two old do not yet qualify for VC funding. So Groove Capital separately provides angel investor funds – typically smaller sums around $100,000 to founders they believe have what it takes to move their business forward. Angels often receive greater equity for their investment because the risk is greater.

Angel and VC funders rarely, if ever, get involved in business operations. 

“I would say private equity is much more involved than venture capital investors,” says Reed. “Our investment is at such an early stage, and we invest in so many companies, we can't possibly be responsible for dramatically influencing every single one. So we come in, we provide capital and provide a network, that's really the extent of it. We're not responsible for the P&L or the cash flow or a lot of that…Private equity, on the other hand, is more focused on the operational side of things.”

Private equity investors are usually heavily involved in advising or otherwise guiding operations and financial management. That is not to say angel investors will not study your financial statements, Reed warns.

Connecting with an Angel Investor 

Opportunities to invest come from a wide range of sources including:

• Other institutional investors for which the company in question is not a good fit
• Other individual angel investors
• Founders of other companies (start-up founders often know one another well enough to refer with confidence)
• Service providers such as attorneys and accountants
• Entrepreneurial support organizations such as incubators and accelerators that house and provide basic functional support for emerging companies

“We have very close connections with all of those here in Minnesota,” notes Reed, adding “we are actively trying to figure out which are the best ones within each of these programs that we want to invest in.”

Each year, Groove Capital hosts Angel Fest, a 1-day conference that brings angel investors and those people interested in that space together in the Twin Cities. This year’s Angel Fest is Thursday, June 2 at Huntington Bank Stadium in Minneapolis. 

The Vetting Process

Since angel investor checks are comparatively small, Groove Capital is able to do multiple deals each month. At the top of the funnel, they may consider 20-40 opportunities, paring that number down as they perform due diligence on each candidate. In a given week, they may sit through five or six 40-minute presentations.

Still, there is not much performance data available since the investment prospects are so new. Therefore Groove uses two other criteria to make investing decisions.

The people

• Who is the team?
• What are their backgrounds and expertise?
• Are they the right people for the job – the ones who can make this specific business succeed?

The market opportunity

• Is the marketplace so vast that this company can not succeed unless they have very precise positioning?
• Is the market growing?
• Is it uber-competitive or blue ocean?

Groove is looking for visionary leaders who can also perform as functional builders to develop their teams and company. But they have to be sellers, too. On the market side, there must be enough evidence that any investment will produce a substantial return.

Groove uses a template that asks for financial, legal, and IP information as well as resumes for the founder and key team members and customer references, if any. The information goes into a “data room” to be reviewed and assessed. The result is more questions for the founder.

“What we’re trying to understand is how they think,” Reed explains. “Do they understand the way that this business works? If we change an assumption just slightly and it dramatically explodes the revenue model, well then, have you validated that assumption? Let’s talk about that.”

Groove invites angels and subject matter experts to participate in this process, to help dig deeper and get a clearer picture of the emerging company’s viability.

“Every new person adds a whole new layer of expertise,” says Reed. “They introduce their friends, they introduce other businesses, and now all of a sudden it makes the quality of the investments increase with every person.”