Formed earlier this year, the Central Illinois Angels investment group is officially open for business. There are currently 46 members of the group who are looking to invest in new companies in the Peoria area and beyond. The Angels will bring expertise, experience, contacts and capital to help emerging and growing businesses.
How and with whom did the idea for the group originate?
Glen Barton: Angel investing has been occurring in the Peoria area for quite some time. A number of local startups have received investment, especially after Peoria NEXT was formed in late 2001, which led to a greater emphasis on the commercialization of technology. However, those investments were typically done between an individual investor and an individual company. In late 2003, the Tri-County Venture Capital Fund was formed with local investors and institutions. However, the Tri-County fund was set up as a follow-on fund that would invest alongside a “qualified venture capitalist.” So, the fund was somewhat limited in that it could only invest in companies that would be able to obtain venture capital funding. Both individual angel investments and Tri-County fund investments are continuing.
In June 2008, at a Tri-County fund investment meeting, there was discussion about needing to examine a way to bring together a group for early-stage investing prior to qualifying for venture capital. At the same time, The Heartland Partnership, which is the administrative organization for the Tri-County fund, was also looking for a way to help angel investing progress in the region. These discussions then turned to looking at angel investment groups that could be benchmarked and then implemented in central Illinois.
Glen Barton is the retired chairman and chief executive officer of Caterpillar Inc. He retired from Caterpillar on January 31, 2004. He is the past chairman of the Peoria Civic Federation and a founding director of Peoria NEXT and Central Illinois Angels.
Dave Parkinson CPA, MBA, has over 30 years of experience helping executives grow their businesses and prosper. He retired from McGladrey & Pullen last year after leading the Central Midwest Region as its partner in-charge for nearly 20 years.
Chuck Weaver is co-owner of Peoria Builders, Inc. and a founding director and president of Central Illinois Angels. His background includes education as an attorney, running the family fast food business, and involvement in over 20 other LLCs, including eight startup ventures.
Describe the initial meetings that led to its official formation.
Barton: At the very early stages, Kip McCoy from The Heartland Partnership began discussions with the Stateline Angels in Rockford and arranged a visit in July 2008. Jim McConoughey, Kip, and I attended the investment meeting with Stateline and came away with some starting points for a possible angel investment group. Those initial discussions also led us to the Angel Capital Association (ACA), which helped outline how a group might be formed. While we were benchmarking, we began to expand the initial group to include Dr. Andy Chiou and then Don Rohn. As the idea of a structured angel investment group began to take shape, Chuck Weaver and Dave Parkinson were added to the mix in late 2008. These beginning discussions centered not only on how to structure the group, but also on how to go about successfully recruiting members to the group.
How was the group modeled after similar angel investor groups around the country?
Dave Parkinson: Angel investment groups have really grown significantly over the past decade, with much of that growth likely being attributed to the assistance that the Angel Capital Association provides. The ACA is a spin-out of the Kauffman Foundation in Kansas City and is the national organization for angel investment groups. It is an absolute wealth of knowledge and provides angel investors and angel groups a tremendous amount of resources, including a complete guide to starting an angel group and sample implementation plans with accompanying documentation. We found that a number of angel groups have a fee-based membership and have a structured organization with a board of directors, committees and engaged members, all of which are items we included with Central Illinois Angels.
Describe the legal structure of the group.
Parkinson: The group is set up as a membership organization, similar to a chamber of commerce. Members pay yearly dues, and those dues are used to cover the operating expenses for the group, which includes membership meetings, administration, marketing and the like. Another important component is also educating our members, so dues will be utilized for those activities as well. For instance, in October we hosted a “Power of Angel Investing” seminar through the Angel Capital Education Foundation. We will look to have these types of events on a regular basis to help benefit our members to become more informed angel investors.
What are the requirements to be a member?
Parkinson: First, in order to be an angel investor, individuals must be accredited investors, which is defined by the SEC. Accredited investors are individuals who have had and will continue to have an annual income of $200,000 or a joint income of $300,000 or have a net worth of at least $1 million. Additionally, we ask that our members pay yearly dues and be active and engaged with the group. This includes attending meetings as well as investing at least $25,000 in two of their first three years of membership. We also ask that our members be willing to “champion” potential investments, which includes evaluating a technology or an industry that a company has or is in to help validate it for the entire membership.
Describe the working structure of the group.
Chuck Weaver: We have a board of directors, along with a number of committees. I think that the committee structure is really critical to the success of the organization because it will help to keep members active and involved. We’ve been talking to members about being a part of committees from the onset, and I’m pleased that a number of our members have chosen to become involved in this way. We have a Membership Committee to help with recruitment, sponsorship and membership communications. The Screening and Champion Committee takes a first look at potential investments and assigns “Champions” to those investments that show promise. We have a Due Diligence Committee that takes the lead on performing due diligence on companies in which the group may have an interest in which it would like to invest. There is also a Negotiations and Corporate Governance Committee that works in parallel to the Due Diligence Committee as investment opportunities are vetted.
Describe the “culture” that has been cultivated within the group from the beginning.
Weaver: I have been leading discussions about the group with the topic of the culture of the group. I believe that the culture of the group is critical to its success. We believe that successful investing is built around six keys: knowledgeable champions, active investors, investing $25,000 in 10 companies rather than $250,000 in one company, having an exit strategy as our language with entrepreneurs, realizing that there will always be another deal, and finally, that we’ll have self-discipline through the six phases of investment.
Specifically, our self-discipline revolves around: managing deal flow, screening, champions who must understand the industry and technology, in-depth due diligence, honest negotiating and active corporate governance.
How is angel investing different from investments by venture capital funds?
Weaver: Angel investing differs in several ways from venture capital investing. First, venture capital funds rarely invest in seed or startup companies. Seed and startup companies rarely have a full management team and often only have a prototype and no sales. These companies almost always have a pre-money valuation of less than $3 million, and angels will typically invest $500,000 to $1 million in these companies to help get them launched. However, venture capital funds rarely invest less than $5 million in companies.
Angel investing also involves coaching, which could be viewed as a kinder and gentler version of investing as compared to venture capitalists. While VCs will take control of a company, that is not always the case with angels, and angels usually are focused more on mentoring the entrepreneurs to help them grow their business. Additionally, at least with Central Illinois Angels, there is no committed capital that is invested, which is the case with VC firms. In our case, individual members make their own decisions about which companies in which to invest, whereas VCs will raise funds and then use those (typically institutional) funds to invest in later-stage companies. Finally, angel investing will usually involve at least some component of community goodwill, that is, making investments in local companies to help grow the local economy. VCs are typically investing with much less altruistic goals.
Barton: We plan to interact with VC groups as we move forward. As companies grow, they will need further funding which could come from VC groups. Having relationships up front with them and talking to them about companies we are working with will be beneficial for us and our investments. For instance, we can make sure that we begin to structure deals that make sense for subsequent rounds of investment.
Describe the roles of The Heartland Partnership and the Bradley Technology Commercialization Center.
Parkinson: Although we are a member-led organization, we recognize the important role that The Heartland Partnership had in getting the angel group started and now in the ongoing operation of the group. The Heartland Partnership helps provide structure for the organization, especially in terms of administrative, marketing and accounting services. It allows us to have one point of contact with our members and enables the members in turn to be able to work through one organization without having to overburden our members, who are volunteers for the organization.
Barton: The Heartland Partnership has worked on implementing important community initiatives over the last seven or eight years, including Peoria NEXT, the Tri-County Venture Capital Fund and the Innovation Center, just to cite some examples as they relate to the Central Illinois Angels.
Weaver: Both Heartland and the Bradley Technology Commercialization Center (BTCC) also help with the screening process. Both Kip (at Heartland) and Shad Sleeth (at BTCC) will review application submissions and work with entrepreneurs before they present to the Screening and Champion Committee. Again, this helps to alleviate some of the time requirements of the members and provides a common place for entrepreneurs to start a discussion about the Central Illinois Angels.
Where do you expect deal flow to come from?
Parkinson: We’re looking for deal flow on a number of fronts. First, we know that potential deals will come through The Heartland Partnership family of companies as well as BTCC. We know that startup companies come to The Heartland Partnership for assistance, and high-tech startups are coached by and work with BTCC. Other local small business assistance organizations, such as the SBDC and SCORE, could be sources of deals as well. Second, we want to work though our local professionals who would likely be working with startup companies that could be candidates for angel investment. This would include reaching out to attorneys, accountants and bankers, among others.
Weaver: We also expect potential deals to come through our members. Our members will be looking for investment opportunities to bring to the group to review, and we fully expect entrepreneurs and others within the community to approach our members with potential investments.
Barton: Central Illinois Angels is fortunate to have begun establishing relationships with a number of angel groups in Illinois and Wisconsin through the Midwest Co-Investment Network (MIN). The angel groups that are a part of MIN have a monthly conference call to share potential deals and discuss upcoming investment and education events. We plan to work through MIN to review deals and to share deals that Central Illinois Angels invests in.
What led you to join the group? What are the advantages to investing as a group?
Barton: Although I’ve been investing in companies for a number of years now, I believe that there are numerous benefits to looking at and investing in deals through a group. One major advantage is that you can leverage the knowledge and expertise of your fellow members to better understand companies that you may not have had a chance to fully review on your own. Second, you give yourself a chance to diversify your angel investments because you can leverage an investment with your fellow members and not have to rely on just one or two investors to carry the investment. Having a formalized screening and review process for looking at companies is also very helpful.
Weaver: I’m always looking to find ways to get smarter. Bringing the collective knowledge of a group together and to learn from what everyone brings to the table is extremely valuable and can help all of us make better decisions. I’m also interested in seeing and learning about new technological breakthroughs and what new investment opportunities are out there, especially in the local region. Another reason I joined was to get a chance to work with some of the best business people and professionals in the Peoria area. And speaking of Peoria, I’m also excited at the opportunity to invest in potentially high-growth companies in the region. It gives us a chance to measure what is often called a “double bottom line,” that is, the ability to help companies and investors be profitable while also benefiting the community with economic growth.
Parkinson: One reason I signed on is because we decided to run the organization like a business organization with a board, committees and a budget. Having this structure in place is important for long-term sustainability. Additionally, it was telling to see the statistics on the benefits of investing as a member of an angel group. In a study published in November 2007 (“Returns to Angel Investors in Groups” by Drs. Robert Wiltbank and Warren Boeker), over 500 angels that were members of angel groups submitted surveys indicating their returns on investment. Nearly all of the keys to more successful angel investing point directly to the benefits of investing in a group: spending more than 40 hours of collective due diligence resulted in a 7.1x return; investment multiples were twice as high for investments in companies connected to an investors’ industry expertise; interacting with a company more than once per month experience an overall return of 3.7x.
What types of companies are appropriate for angel investing? What types are not?
Weaver: Since Central Illinois Angels is still somewhat in a startup mode, we’re still looking at a moving target when it comes to narrowing down the type of company the group is looking to invest in. Typically, angel investments are in companies that will have the opportunity for significant growth and a pre-money valuation of less than $3 million. Angel investing, in general, is a high-risk, high-reward proposition. Angel investors are looking for companies that can grow to at least $20 to $50 million in revenues in three to five years and have the ability to provide at least a 10 to 15x return. This is determined in large part by the size of the overall market that the company is in and the amount of market that the company can capture. Companies will also usually have a barrier to entry, oftentimes in the form of a patent, which will keep potential competitors out of that particular space.
Barton: While lifestyle companies (such as single restaurants and “mom and pop” businesses) are a fine way to make a living and are quite important to the overall health of the economy, it is not the type of investment that angels are looking to invest in. Angel investments are usually in the $300,000-to-$750,000 range and are used to fuel significant growth. Additionally, angel investors want an exit strategy, at which time they expect a significant return on their investment, and that would often involve a company being sold to a strategic acquirer. This type of investment and subsequent exit strategy is just not appropriate for a lifestyle company.
How are these companies selected to present in front of the group?
Parkinson: Our Screening and Champion Committee, along with Kip and Shad, have put together screening criteria through an application on the website angelsoft.net. (Note: you can search the website for “Central Illinois Angels” and examine the application.) Some of the criteria were discussed when we talked about what companies might be appropriate for angel investment. In terms of the actual selection process, a company that is interested in investment will first be asked to submit their application to the Central Illinois Angels page on Angelsoft. Once the application is submitted, it is reviewed to determine if it fits the general criteria outlined on the application. There is then a response from Shad and Kip to let the company know if the company does not qualify, needs more work, or is ready to present to the Screening and Champion Committee.
Weaver: Companies are examined based on the business that they are in, the solution they are offering to their customers, the overall size of the market, the quality of the management team, the company’s competitive advantage, any intellectual property that the company has, and the business model. We also look at the pre-money valuation, the amount of capital that is being sought, and the proposed exit strategy.
Are there any limitations—geography, industry or otherwise—that would preclude a company from being examined for investment?
Barton: At this point, we do not have a limitation on the industries that we are looking at. We’re looking for the potential for high-growth opportunities, and that could be from a number of industries. However, we are currently looking for companies within a three- to five-hour drive of Peoria. Since angel investing normally involves more hands-on involvement, we want to be able to personally meet with the companies by driving several hours at most.
Describe how individual members’ knowledge is utilized when researching companies.
Parkinson: One of the true benefits of having a membership-based angel investment group is the vast amount of industry expertise that can be utilized when looking at potential investments. We want to make sure that we have at least one member of our group that can help validate the company in terms of the technology or the market. In addition, members can be utilized during the due diligence process as well to help validate a company and ultimately help determine if an investment would have the chance to yield a significant return.
Describe the process of “championing” a company to the rest of the group.
Weaver: I think that one of the keys to our success is going to be having knowledgeable champions involved with the companies as they come through the investment process. If there is a company that meets the screening criteria, we will then assign a “Champion” to the company. The Champion will have a number of duties, including validating the product, service or industry based on experience or expertise; coaching the company to make sure that they meet the requirements necessary to present to the entire group; providing the company with any feedback or direction through the due diligence process; and being the liaison between the company and Central Illinois Angels. Having a “Champion” involved is important because it has been shown that investment returns are significantly impacted by having knowledge of the industry in which the investment is made.
Describe the activities undertaken by the group (e.g. monthly meetings, etc).
Parkinson: We had a number of recruitment meetings over the summer as members were recruited. We expect to have additional recruitment meetings in the future, although the dates are still yet to be determined. We expect to have our committees meeting on a regular basis, including monthly Screening and Champion Committee meetings. We will look to have monthly full membership meetings where we have a company or companies that have been screened seeking investment.
Barton: We also had an education seminar hosted by a very well-recognized angel investor, Bill Payne. Bill is originally from Peoria. He went to the U of I, worked at a couple of firms, and then helped start and grow a couple of companies that were sold to strategic acquirers, including DuPont. Bill has been an angel investor since the early 1980s and was a founder of the Angel Capital Association and the Angel Capital Education Foundation. We utilized his knowledge to host a “Power of Angel Investing” seminar to get our group up to speed on all aspects of angel investing, including due diligence, deal structuring, valuation and post investment follow-up. I think that everyone found this seminar to be very helpful, and I’m certain that everyone who was able to attend took away some very valuable information. We look to continue to have these educational events for our members to help make all of us better investors.
Describe the importance of angel investing in terms of investment diversification.
Weaver: Angel investing in and of itself is a very distinct type of investment for accredited investors. Typically, it represents about five to 10 percent of a person’s net worth. It’s definitely high-risk, but it can also be highly rewarding through work with entrepreneurs and your fellow investors, not to mention the potential for very high investment return. Within angel investing, it’s important to be diversified. However, unlike the case with typical investment diversification, we are not talking about diversifying into different types of industries and different asset classes. The diversification comes from the sheer number of investments. I’ve continually said that it’s better to have $25,000 in 10 companies rather than $250,000 in one company. That’s because angel investing tends to be risky, and out of 10 investments, you’ll likely have just one or two home runs. The other investments will include some where you’ll break even and some where you lose your entire investment. But, that one home run could be a 15x or 20x return that will more than make up for the other investments. At that point you would take some money off of the table and then look to continue to play with “house money.”
How are investments tied to milestones?
Weaver: Having milestones is one way in which risk can be mitigated and also helps to keep the entrepreneurs focused on a number of critical activities that should ultimately lead them to have success. For instance, if a company receives a $600,000 investment, it could be that the investment would come in three $200,000 increments that would be tied to achieving milestones. If the milestones are not met, it’s possible that they could be renegotiated, or that the company would not receive its full funding.
About how many companies do you think would be examined in an average year, and how many would actually receive investment?
Parkinson: It’s hard to say exactly how many companies might come before the group in a year. We expect to have at least 10 full membership meetings per year to review companies, and it’s likely that we’ll have a couple of companies presenting at each. So, a range of 15 to 25 would probably be about right in terms of companies that will present to the full group. In terms of investments, those decisions are left to individual members. There is no pool of funds that would be deployed, so it’s difficult to determine which companies would interest particular members and what each member’s particular comfort level would be in terms of investing in a company. I can say that based on what we’ve heard from experienced angels, the average number of investments by individual angels is about two per year.
What are the ancillary benefits to the community at large?
Parkinson: There are a number of ancillary benefits that our members will get from being members of the Central Illinois Angels. It can be rewarding to play a role in the entrepreneurial process, and helping to get a business started and being a part of its growth can be both fun and satisfactory. For those of our members who are retired, becoming more involved with Central Illinois Angels and the companies it is working with can be almost like a new career. There is also the benefit of creating the “double bottom line,” that is, the social or economic benefit from helping the community grow, along with the benefit of creating a return for oneself. Yet another benefit is the ability to learn from your peers in the group and from specific educational seminars. Everyone can take something away from their membership that will likely help them benefit within their own company as well as in future angel investments. iBi
