By: Bill Warner, Paladin and Associates
Well, who isn’t angry about this economic mess we find ourselves in? Angel investors are positively angry. That is, they are just as angry as anyone else, but they also see positive action that is needed to pull through this.
I just returned from a three day conference of the Southeast Angels held in Savannah, GA, where 75 angels from 8 states were in attendance, representing 16 of the 25 Angel Capital Association (ACA) (www.angelcapitalassociation.org) member organizations in the southeast, including North Carolina angels from the East Carolina University Angels, Inception Micro Angel Fund, Piedmont Angel Network, Triangle Accredited Capital Forum and the Wilmington Investor Network.
The conference was the best ever, with greatly increased attendance and some very interesting investment deals presented. But, the talk that penetrated every presentation and discussion was about what they are going to do concerning the failures in the financial markets.
Reasons for Anger
A lot of realities have just hit angels very hard, and it isn’t pretty. Most are not new, but have suddenly become very pressing:
If they are invested in the public markets, they are seeing a tremendous decline in the value of their investments.
Depending on what they are invested in, their losses could be astronomical especially if they are invested in financial institutions or the real estate market.
Their own companies are feeling the impact of the slow movement of credit as they try to borrow money for business operations.
Revenue growth for their portfolio companies is curtailed because customer buying is declining.
The chances of getting another round of funding, either from angels or venture capital are greatly reduced as sources for these funds tighten up.
Any portfolio company that is not cash flow positive now is in trouble.
The Angel’s Response
Overall, most angels are focusing on the fundamentals by instructing their companies to pay attention to what they can control. They are getting back to basics on sales generation, cost management, expense control, wise capital expenditures and reducing debt, as they batten down the hatches for the rough times ahead. Here’s what is going on:
Angels are insisting that their companies have a realistic view of sales generation and revising their revenue, cost and expense forecasts accordingly. In other words, it’s now critical to be really real.
If one of their portfolio companies has a chance to close an investment round now, they should do it without delay, even though valuations will probably be lower. The opportunity may be short lived.
A portfolio company that is not cash flow positive now and hasn’t figured out how to make it so very quickly may face a rapid shut down. The likelihood of getting another chance to achieve positive cash flow is slim.
Capital getting squeezed
They realize that venture capital is going to get squeezed by their limited partners and new funds are going to be tougher to find, and subsequent rounds, if any, will be smaller. That means they are going to have to hold more in reserve to provide further financing of the part of their portfolio that has a chance of surviving.
The capital calls that are made to fuel additional investments are going to feel resistance as angel members have less money to invest.
Valuations will be dampened and M&A transactions will be tougher to find. Angels want to see more aggressive strategies for exits and they will be willing to take a lower return to cash out earlier.
Getting them interested in a new start-up investment is going to be extremely difficult. Entrepreneurs will have to really focus on putting together businesses that move rapidly to profitability and positive cash flow by showing how customer sales will occur reliably and that cost and expense infrastructures are appropriate.
Angels will become much more prescriptive about financial management by digging into every aspect of marketing and sales plans, development operations, support infrastructures, capital expenditures and employee salaries.
They are going to pay a lot of attention to how their money is spent.
Angels may move to more mature companies
As occurred early this decade with VC’s, angels may move to more mature companies that represent lower risks. This will challenge entrepreneurs to form businesses that can rapidly reach profitability and positive cash flow.
Angel groups will engage in increased syndication in order to aggregate enough money to finance new companies and to further share in the risk of these investments.
Individual angels that are not experienced and are not members of an angel organization will get weeded out as their confidence gets shaken by the failure of their current investments.
As one of our most seasoned angel investors, Horace Stimson, recently told me, “I am always looking for the silver lining when times are tough. Capital does need to be put to work at some point and in productive ways.”
Horace, like many angel investors, see opportunities for great deals at low prices as the demand for capital continues to be strong. Horace also sees a movement of private angels to joining angel organizations where they get the opportunity to share risk, learn from the judgment of others and diversify their investments.
The Inception Micro Angel Fund (IMAF) (http://www.inceptionmicroangelfund.com) and the Triangle Accredited Capital Forum (http://www.capital-forum.com) have been growing recently as more and more angels take the opportunity to join angel groups.
As we have done over and over again, we will pull through this and respond to the new economic realities. After all, we are dealing with the beginnings of new businesses that fuel the majority of our economy.
About the author: Bill Warner is the Managing Partner of Paladin and Associates (http://www.paladinandassociates.com/), a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum (http://www.capital-forum.com/), an angel investor network with members throughout North Carolina
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