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Seed Capital From Angel Investors: Peter Birkeland, RAIN Fund Program Manager, RAIN Source Capital (Part 5)

Posted on Saturday, Jul 3rd 2010

By guest authors Irina Patterson and Candice Arnold

Irina: What percentage of a company’s equity do you usually seek?

Pete: Typically, anywhere from 10% to 30%, depending on the round.

Irina: What’s the typical return that you’d like to receive?

Pete: We’d like to get seven times to ten times in five to seven years.

Irina: In what stage of a business’ development do you usually like to come in?

Pete: We’d like to see them with some type of beta product or something thought out. We usually come in after friends and family, as most angels do. But, we’d like to see a fairly decent idea of what at least the initial product’s going to look like and with an idea of a path to the market.

Irina: Do they have to have customers?

Pete: Not really, no. But they’d better be close, fairly close. If someone comes in and says, We’ve worked up this product, we’ve got a couple people testing it, they’re giving us some feedback and I think we can be out in the market in the next nine to twelve months, that carries some weight.

If someone comes in and says, Well, I’ve got to build my prototype and then it’s going to take a couple years, that’s really struggling to get financing right now, at least from our network.

Irina: What total available market size is OK for you?

Pete: It’s really dependent upon the opportunity. Obviously, it’s got to be large enough to support multiple competitors and support a market that will be acceptable or be amenable to merger and acquisition activity. It’s got to be that big. Does it have to be over $1 billion? I don’t think so. So, I really don’t want to put numbers on it.

Irina: Would you invest in a company that has a market of $20 million?

Pete: Probably not. It’s probably got to be $200 million and growing. Some of it gets driven a lot by what the members want to do. Members may know this market very well and it may be a smaller type market but they’ll say, No, this company’s in the right spot. They can take a very strong position in this market and they’re going to be acquired. So, some of that depends upon how good a due diligence we get and how comfortable we get with the market.

Let’s define that a little bit, total addressable market. What market are you serving? You could say in a global market, let’s say in a global software market, it might be $4 billion, but when you get down to really what the application is and who the customers are, the market may be $100 million to $150 million, $200 million and then that’s what you base your decision on. So, that’s kind of where we’ll end up stratifying, and part of due diligence is working through that.

Irina: There are also a lot of niche markets now and they’re smaller than $100 million. Are there some opportunities there?

Pete: Yes. I think there are. I think a lot of things that you look back on three or four years ago and say, Wow, why didn’t I invest in that?

Well, part of it is that the market wasn’t there. We’re looking at a company’s total addressable market today, and maybe it’s looking at total addressable market in 2014 or 2015 because you think about something like a software product or even a mobile content product.

If you started in 2008, you’d say Well, we’re going to be on the Internet and blah, blah, blah. And now today, it’s okay, how am I going to be mobile, how am I going to be engaged in all of those platforms and that. Things that you couldn’t even fathom too much two years ago.

This segment is part 5 in the series : Seed Capital From Angel Investors: Peter Birkeland, RAIN Fund Program Manager, RAIN Source Capital
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