Advice from an American business angel
While angel investors, also known as business angels, are best-known for their investments in high-growth start-ups, we recently spoke to Marianne Hudson, Executive Director of the Angel Capital Association (ACA), to learn more about alternative business financing options in the wake of the global recession, the criteria used by angels for a sound investment, and how more established foreign firms can prepare to break into the American market.
GSC: Since the global recession, it has become more and more difficult for small- and medium-sized enterprises to receive funding from traditional lending institutions. In what ways have the investment activities of angel investors changed since the financial crisis?
Marianne Hudson: Angel capital is people's own money that they're investing, and we certainly took a huge hit in 2008, 2009, and 2010 – we also had less money in our pockets to invest as a result of the crisis. But, there has been a sort of resurgence in angel investing and we have seen some solid growth. There was a lot of loss of capital that was in public equity in the US, and this experience taught people that there is a lot of risk associated with investing in public markets. This made private investing, or angel investing, seem somehow less risky. The [post-crisis] recovery has been slower in Europe, […] but there is a resurgence – […] there are some great companies to invest in and more capital to invest.
GSC: Angel investors are known to finance innovative companies across all business sectors and at various stages of development (i.e. at the seed, start-up, early, or expansion stages). Which criteria are typically used to determine if an investment should be made?
Marianne Hudson: Every investor uses different criteria, but there are typically a combination of factors to consider. For example: Does the entrepreneur and their team have the ability to take their innovations and ideas and really sell them? Does the innovation solve a real customer need? Is the market for the product large enough (around $500 million)? Do they have quality products and plans for business growth and the protection of their innovations?
GSC: Angel investors are high net-worth individuals who invest their own money in innovative companies in exchange for an equity share of the business. After an investment is made, what kind of relationship does an angel investor maintain with the company? How involved is the angel in the strategy and the day-to-day operations of the company?
Marianne Hudson: An investment usually involves multiple angels, or what's called a group of angels. There are typically two angels that sit on the board of directors or serve as mentors to the CEO or someone at the C-level on their team. The angels are normally chosen based on their expertise and what it is that the company needs – sometimes the company needs help in sales or sometimes they need help with technology. From a strategy stand-point, a board of directors will clearly be involved in a lot of the overall strategy. But we often see an angel become a mentor of or an advisor to a company instead, in which case the relationship is usually based on what the company needs and how open to advice they are – this could range from the angel being super-involved to just talking a couple of times per year.
GSC: Since you've been an angel investor, have you noticed a great number of companies from typically risk-averse countries, such as Germany, searching for angel investors in the USA, where investors are more open to taking risks?
Marianne Hudson: American investors are a little less risk-averse than investors elsewhere, but you know, we're not all from Silicon Valley. The risk tolerance in some places is probably not all that much different than in Germany, and there is a growing set of angels who invest at later stages of development to mitigate some of the risks associated with investing in a true start-up. I think that a lot of the processes and the way that [European investors] look at investments are similar – particularly in the UK. There's a lot more government policy that is involved in how the Europeans look at angel investing. They've got more public policy support than we have here in the US, for example, through tax credits.
GSC: Can you offer any advice to foreign firms looking to get their start in the American market? Are there any angel groups that you know of that are open to investing in foreign firms in the US?
Marianne Hudson: Angel investing is very local – as angel investors invest with their own money, they tend to invest in companies that are located within a couple of hours drive. Typically if a company is looking to expand from one country to another, their starting point should be looking at investors that are close to their original base. It would be unlikely for an American angel to invest in a company from a foreign country on their own initiative, however, they often follow on an investment made by someone they know and trust. My advice would be to find a European angel who has connections to American or Canadian angel groups. There are also several North American angel groups that think globally and are more likely to consider investing in foreign companies – a list of these groups can be found on the ACA website. I would also advise companies looking to move to the US to work with their consulates and embassies. Many countries have set up successful consulate offices in the US, with one of their focuses being on connecting companies from their countries with potential American investors or strategic partners (who, especially in the case of manufacturers, may be a very viable source of capital or revenue as customers). Some of [these consulates] are excellent at developing relationships with American angels, VCs, and accelerators and creating opportunities for education and/or investment meetings. They can be very helpful in getting companies to think through the right American (or Canadian) location for their business and connecting them to events and other opportunities to get connected to the American technology ecosystem.
GSC: Thank you for this interview, Ms. Hudson.
The Angel Capital Association is the world's leading professional and trade association for angel investors. The ACA's members include more than 200 angel groups and upwards of 12,000 individual accredited investors across America, who receive support from the association as they make investments in high-growth, early-stage ventures. An angel investor herself, Ms. Hudson has long been dedicated to entrepreneurship and the development of sustainable, innovative companies. Prior to joining the ACA as the Executive Director, Ms. Hudson ran the angel initiative at the Kauffman Foundation and oversaw entrepreneurial mentoring programs at the Angel Resource Institute.
More information: http://www.angelcapitalassociation.org
More information on entering the American market is available from The Council of American States in Europe or SelectUSA.