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Seed Capital From Angel Investors: Elizabeth Marchi, Frontier Angel Fund (Part 4)

Posted on Friday, Oct 8th 2010

By guest author Irina Patterson

Irina: Do you have any sector preference?

Liz: No, we just want to invest in companies that we can exit and make money in. We just don’t have the luxury. Now, I will tell you, we don’t invest in things we know absolutely nothing about.

We don’t invest in real estate because we feel there’s a lot of — well, there used to be a whole lot of other options for investing in real estate. And we don’t invest in movies, because nobody knows anything about movies. And oddly enough in Montana, we get quite a few requests for that.

We love technology. We do software, we’ve got some clean energy technologies, we’ve got some hardware investments, and right now we kind of like food. We’ve invested in two food products recently. One is a chai tea company, and the other is a new butter substitute called melt.

Irina: I like chai. I’m Russian.

Liz: It’s very good. And we just found out yesterday that Dean & DeLuca in New York is going start carrying it. So we’re excited about that.

Irina: Do you invest in e-commerce?

Liz: I don’t think we have an e-commerce companies. Not to say that we wouldn’t, but we haven’t. Well, the chai tea company would have an e-commerce platform, in addition to all the retail.

Irina: How about cloud computing?

Liz: No. I do have a plan coming in on that though, but we have no investment in that thus far.

Irina: How about an enterprise software?

Liz: Yes, we do. We have a nice product called NTractive, that is an Apple-based product for business management. It’s a complete office management system for Mac. It is a licensed product. It’s pretty complex. And then we’ve also just recently committed to do an investment in a very large enterprise software — global enterprise software company. We’re just going to take a very small piece of it.

Irina: What is your investment type?

Liz: We always do preferred stock. We don’t do convertible debt.

Irina: And, you said you have units. How does that work?

Liz: Well, the offering, that’s how we did our fund, our offering was for $50,000 dollar units, you could buy up to three units — you could buy all of the units you wanted, but you couldn’t have more than three votes.

We didn’t want any one person having sort of undue influence. We invest with the fund and do the terms, and then our individual investors can invest side-by-side along with the fund, if they particularly like that deal. And that happens almost all the time. But the terms are negotiated and it’s just are more efficient way than individuals are trying to do the investments.

The units are sold previous to any investment. And those were in the bank, and that’s done. And then when we make an investment, then the fund writes a check for however how much we decided to invest, you know, $25,000 or $500,000 or $300,000. And then the members, if they want to do additional investments, write checks out of their own pockets.

They become co-investors. And oddly enough, interesting things have happened over the course of three years. Sometimes the fund will do due diligence, and wouldn’t invest, but an individual investor would like it and invest. This is kind of interesting; I didn’t expect that to happen but it did.

For example, we don’t invest in companies where there’s a pending litigation. We just have some kind of red flags for the fund. But we’ve had two instances where we had two really good company that we very much liked, but they both had pending litigation. The investors went ahead and invested, and the fund didn’t.

Irina: How did it turn out?

Liz: One of them turned out really well; for the other one, we don’t know how it’s going to turn out. It’s still technically wrong and the lawsuit issues were resolved. But one the companies has grown extremely nicely. And the other one is doing fine, but neither of them has had an exit yet.

Irina: How long you prefer to stay invested?

Liz: We would love to have an exit fairly soon. We’ve been at this now — let’s see, three and a half years? In a “normal world,” three years would’ve been a potential exit time. I think everything has been slowed because of this economy, in fact, that’s going to be a real focus for us this year. We’ve got a couple companies we’re really going to work hard to exit from.

This segment is part 4 in the series : Seed Capital From Angel Investors: Elizabeth Marchi, Frontier Angel Fund
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