Financing Innovation

Angel investors are high net worth individuals having either $1M in assets or $200K in individual income. They typically make investments totaling less than $1M in any given company. Angel groups provide angels with deal flow and potential co-investors so they can spread the risk and work for any individual investment.

Currently, Michigan has seven angel groups:

• Great Lakes Angels
• Ann Arbor Angels
• Grand Angels
• Kalamazoo Angels
• Midland Angels
• Traverse Angels
• Battle Creek Angels

Terry summarizes the steps to accessing angel investment as follows:

• Initially, you should approach an angel group because that is one of the easier way to find individual angle investors.
• Provided you make it through the screening committee, you then do a 20 minute presentation followed by question and answer.
• Then the waiting game begins. If one or more investors takes interest, a series of meetings to explore the investment opportunity and perform due diligence will occur.
• Finally, if that process completes successfully, the investors and entrepreneurs will discuss terms. Currently, in the midst of the 2008 financial crisis in Michigan, entrepreneurs can expect to give up 30–40% ownership for investment on the order of $1M to $1.5M.

Angel groups we are aware of in Michigan include:

• Ann Arbor Angels in Ann Arbor
• Grand Angels in Grand Rapids
• Great Lakes Angels in Rochester
• First Angels in Kalamazoo
• Traverse Angels in Traverse City

Skip makes three points:

• On a national scale, Michigan falls in the mid to lower mid tier of states when venture capital activity is measured in number of firms or assets under management. The state is attempting to improve its position with the Venture Michigan and Twenty-First Century Jobs funds.
• If a Michigan company seeks venture capital and wishes to stay in Michigan, they will most likely work with a local Michigan venture capital firm. Even if the company gets funding from out-of-state venture capitalists, those venture capitalists will want someone with local presence as an investment partner.
• Michigan venture capitalists, like venture capitalists in the rest of the country, invest incrementally, waiting to see the extent to which the initial investment is succeeding before investing more. Over the 10 year life of an investment fund, they seek to provide a return of two to four times to their limited partner investors.

 Hennessey Capital focuses almost exclusively on working capital finance including working capital lines of credit and factoring. They target "pre-bankable" companies that do not yet have the track record to qualify for bank financing. In this context, the question arises as to how Hennessey assures themselves of the collateral value of these companies' working capital assets. Mike Semanco, President of Hennessey, provides the following insights:

• Often, pre-bankable clients do not have the systems in place to track performance of things like receivables. Hennessey has these systems, and with the client's help uses them to gain a more accurate view of the client's business.
• Once Hennessey has been tracking performance of various assets, it can adjust the terms under which it offers financing to clients. If the assets perform more favorably than anticipated, the financing terms can become more favorable.
• A major issue for firms in Fall 2008 is access to capital. Due to its tracking systems, Hennessey is able to serve a wider client base than most banks.
• Hennessey makes its loans using its own capital as well capital provided by other financial institutions.