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Seed Capital From Angel Investors: Elizabeth Marchi, Frontier Angel Fund (Part 5)

Posted on Saturday, Oct 9th 2010

By guest author Irina Patterson

Liz: You know, one of the things that happens in a bad economy is if a company is doing fairly well, sometimes the entrepreneurs don’t want to exit. Because they’re comfortable. They get their salary, they’re making money, the company’s doing OK . . . so it’s a little harder because the exit opportunities, they’re tough. I mean, nobody’s doing any IPO or anything, so it’s all M&A activity and they would just as soon stay in the company and make good salary.

I do think that’s something we are really going to focus on this year, making sure we’re not holding anything too long, and freaking out on these opportunities because that is a harder piece for angels.

Irina: How many investments have you made in the past 12 months?

Liz: I would say we’ve made three. And one follow-on, so that makes it four.

Irina: How much per deal do you usually invest?

Liz: We have down as little as $25,000, and we’ve done as large as a syndicate, not just our fund but as the lead; we’ve raised a million dollars. But that’s using other funds.

Irina: How long does it take for a company to receive funding from your group?

Liz: Well, it depends how long the due diligence takes, how long it takes to get the legal documents done — we’re actually pretty quick.

We can do a syndicate deal in two weeks. But we have a part of our operating agreement with our LLC is that you have to have a 10-day notice for an investment. So, even if an opportunity comes up completely vetted and due diligence and term sheet done and we like it, we have to do a 10-day notice to invest.

Irina: Do you think in terms of valuation when you review a deal?

Liz: Very interesting you should ask that, we’ve just done a complete analysis of that. Our typical valuation right now is between $1 million to $2 million. So, $1.5 million is the middle of that, but we think valuation in this economy has come down. We used to look at things that were up to $4 million; now, we don’t much work on anything that’s over $2 million in valuation.

Irina: And in terms of percentage, how much equity of a company you usually seek?

Liz: On a percentage basis, there’s not really an average, because we are all over the map. We own as little as 2 percent of a company. Actually, less than that. We own 1 percent of one company. And then we own as much as 40 percent of one company, but that is unusual. We much prefer to be in 20 percent or less range.

Irina: Do you think in terms of x times returns over a period of x years?

Liz: What we’re thinking of is, how much more money is going to take for this company to grow and exit? Our biggest driver, obviously – after you consider the actual business opportunity – is how can we protect our position so that venture capital doesn’t come in and dilute us. How can we avoid down rounds, so our money is devalued. That’s what we really think of.

We see a lot of companies that have good valuations and we love the business product, but they’re coming to us for $500,000 and you can already see that they’re going to need $5 million to get to where they need to be in the market.

And where’s that $5 million going to come from? Angels just don’t generally put that much money in. For that they are going to be going to VCs, and that’s going to be very costly for us as angels.

That’s why we syndicate in places where we don’t have a huge deal flow.

We do have a portfolio strategy, and it’s this: We would like to have 12 to 15 investments, we know from just the data that is available on this that half of our investments will get our money back — if we’re lucky. Or, mayby a third will get our money back, a third will go broke, and a third will provide all of our returns. So we need to be really looking for those that can get us that 30x or 40x return.

This segment is part 5 in the series : Seed Capital From Angel Investors: Elizabeth Marchi, Frontier Angel Fund
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