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The Making Of An Angel
Thursday, February 11, 2010
Rick Galdi is what Michigan's leadership hopes will become a growing breed. Galdi is an angel investor. Otherwise known as the rich guy who writes big checks to people with even bigger business dreams, helping their fledgling companies to stand on their own.
Angel investors bridge the money gap between the cash that entrepreneurs raise from friends and family to start their businesses and the six-to-seven-figure checks that come from venture capital firms. And in Michigan today, they are a hot commodity. The state is filling up with start-ups hungry for seed capital. Angels are the people who invest early and often in companies, hoping to see big returns on their investment when business takes off.
Galdi knows all about that. He began investing in early-stage Internet start-ups during the Dot-com boom of the late 1990s. His first angel investment consisted of a series of checks that totaled around $50,000. One of these start-ups went public in 1999. It paid off so handsomely that Galdi went to San Francisco searching for his next Internet winner.
"I was nervous at first," says Galdi, who was 28 at the time. "I had never written checks that big for this type of thing. As things progress you become more and more confident. As you see the symbol fly across the ticker at the bottom of the TV screen you feel like you did the right thing. It is very exciting."
Galdi is now the president of the
Great Lakes Angels
, a group of about 20 angel investors with an office in
business incubator. He is also a founding partner in a Canadian angel investment firm. He has made eight investments that average about $25,000 apiece over his career. Some of those have been more successful than others, but all have left him wiser from the experience and hungry for more.
"I saw what was possible if you get into a company early enough," Galdi says. "By taking that risk, the multiplier on your investment can be very great."
Michigan's Arch Angel
A common refrain in angel investing is that not every company turns out to be a Google. Or you'll make 10 risky investments for the chance at one Google-style success. Or how many Googles are really out there? The gist is that getting in on the ground floor of a Google-like company is the Holy Grail of angel investing.
knows all about that.
If there is a choir of angel investors in Michigan, Cross is the conductor. The Grosse Pointe native has run with the bulls on Wall Street and helped funnel venture capital into start-ups from
Sand Hill Road
. He recently returned home to serve as Wayne State University's first Entrepreneurial Executive in Residence.
Cross likes to joke that he was an angel investor before those two words were even put together. At age 22, he made his first investment ($2,500) in a company that made a new terminal strip for electric boxes in 1962. The investment did exceptionally well, he says. That started him on a road that eventually put him in a room with the angel investors that gave Google its second cash infusion.
"That covered a lot of mistakes," Cross says.
The words "a lot of mistakes" are going to become a reality for anyone who dabbles in angel investing. Cross estimates that he made 46 more angel investments after his first. Of those, 28 completely failed, 10 are among the living dead (they don't make a profit and he can't sell them or write them off as losses) and the other eight have produced significant returns. And those are hall-of-fame statistics.
Right now, Metro Detroit and Michigan need more players in the game. Cross and his peers don't use words like strong, deep or generous to describe the local angel community. To put it nicely, the angel investor community has a lot of room to grow, but in fairness, it has come a long way from where it was even 10 years ago.
"Certainly the angel community has grown and gotten stronger in the last decade," says
, CEO of the
Renaissance Venture Capital Fund
. "However, it would have been hard to identify a local angel community a decade ago. Today there are several angel groups."
Eight to be exact, plus it's even harder to keep track of rogue angel investors who make deals that rarely, if ever, are counted (or even come to light). Some estimate the number of angels in Michigan to be a few hundred at best, a considerably low number since this state has one of the highest concentration of millionaires in the world and Oakland County is routinely listed as one of the Top 5 richest counties in the U.S..
The rub is that a lot of that money is a few generations removed from the people who earned it, meaning it's locked up in conservative trust-fund investments that focus on protecting wealth more than maximizing it. Compare that to the dynamic angel investing communities on the coasts, where the money is newer and the people who made it more adept to taking bigger risks to maximize economic opportunity.
Ideally, the number of angel investors in Michigan should number in the thousands. And they should be more aggressive with their investments and more willing to help build businesses by opening up their Rolodex (or V-Card file) filled with contacts from an established career. That in turn would help more start-ups and entrepreneurs dying for seed capital to grow. It would also help build the local venture capital community by readying more start-ups for profitable acquisitions, initial public offerings, or just plain profits.
"I think there is a circle of life the angel community can play an important part in,"
says. "It will make the investment community much stronger."
Harder, better, faster, stronger
It's an idea Lansing is starting to take seriously. Gov. Jennifer Granholm made encouraging and enabling angel investors a principal part of her last State of the State speech. Policy wonks are working to revamp the state's angel investing incentives in the hopes of opening the flood gates of seed capital.
The chief piece of that new policy is revamping the state's angel tax credit. Current policy allows for an accredited investor ($1 million in liquid assets or an annual income of $200,000) to invest in a firm less than five years old and roll the profits from it tax-free into another angel investment.
"I don't think there has been a single investor to take advantage of it," says Paul Brown, manager of the Capital Markets Development Group for the
Michigan Economic Development Corp
He and his peers are working on molding a new tax incentive off what is being used in Wisconsin, which is considered the benchmark for angel investing policy. The new policy will allow angels to deduct somewhere between 20-30 percent of an investment against their income taxes.
"Michigan can benefit from this more than most states," Brown says. "We're in the Top 10 for millionaires but we don't have a very well developed angel community here. This will wake them up and get them investing in our young companies."
As important as incentives are, education is a vital part of the mix. Local leaders in the angel community are organizing classes, seminars and mentorships to help get more people in the game, investing in more local start-ups and spawning new jobs.
Ann Arbor SPARK
has started a pilot program for training angel investors that is available to accredited investors on an invitation-only basis. A baker's dozen of these people from the Ann Arbor area are taking part in three intensive workshops. The hope is it will produce another dozen trained recruits for Michigan's growing legion of angel investors. The better educated they are about the process, the more likely they will be to invest.
"Every start-up needs three things," says
, director of business accelerator services for Ann Arbor SPARK.
"First, they need a competitive, innovative idea. Second, they need a management team to execute a plan to bring the product to market. Third, they need capital. One of the biggest things local start-ups are missing is capital."
Even more important is the expertise and connections that an angel investor gives for free. Most angels invest in companies based in sectors where they have built their careers. An angel's contacts can be instrumental in nurturing success because it can lead to revenues, which can lead to profits, which can lead to what everyone wants - a successful exit.
"They're too focused on the money," Cross says. "The most valuable incentive you'll get from an investor, whether they're an angel or in venture capital, is access to their Rolodex."
Investor, meet innovator
Howard Brown is one of those entrepreneurs searching for the ever elusive seed capital and expertise for his start-up -
The Franklin-based firm focuses on providing web and social media services to churches and religious organizations. CircleBuilder has raised $2.5 million in seed capital since 2007. That's money from friends, family, angel investors and angel investing groups, including Cross. These are people who have written him checks worth $25,000, $50,000, and even more.
"It's not chicken scratch,"
says. "That's where you look them in the eye and know they believe in you and your idea."
It helps that Howard Brown is a Silicon Valley veteran who has played both sides, helping to grow start-ups as the entrepreneur and as the angel investor. He has a well-developed business plan with which he is creating revenues and a growing client base. He is ahead of the curve compared to the average Metro Detroit entrepreneur trying to make a go with their first or second start-up. It's why CircleBuilder earned one of the first investments from the Great Lakes Angels in a few years.
"That's crazy. You want a group that's writing checks," Howard Brown says. "Angel money is the seeds of innovation. Every successful company gets angel money. That's basically striking the match for a successful company."
is maturing into one of those entrepreneurial pyromaniacs. The Ann Arbor-based businessman recently made his first investment in a local start-up called
. He is opening up his Rolodex and working with the management team to grow the Rochester-based footwear firm into a winner. He wants to score a few hits instead of trying to always swing for the fences.
"I was taken with the business," Ferrario says. "Warren Buffett says you should only invest in things you like. I wanted to invest in and mentor this company."
Jon Zemke is the news editor for
. His wife thinks he's an angel.
His previous article was
A Tale Of Two Downtowns
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Marvin Shaouni Photography
3D rendering at the Now House with P15 - Birmingham
Fuse Communication at the Now House - Birmingham
Howard Brown, founder of CircleBuilder
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