It is important for entrepreneurs to network with people and organizations that can mentors startups. These relationships often distinguish thriving businesses from stagnant companies. In the spirit of networking and mentorship, the GLC will post short interviews with different business organization executives, innovators, and other essential people who affect economic development throughout the state. The first interview is with Richard Frederick of Eastern NY Angels. He offered great insight on early-stage funding.
Richard Frederick is an experienced C level executive and serial entrepreneur with over 35 years of experience. He spent the last fifteen years of his career building and growing early stage companies. He has served as a mentor and coach to over 100 companies in the past 5 years. In 2010 Mr. Frederick co-founded the Eastern NY Angels (ENYA). ENYA funds early stage companies located in Tech Valley. In addition Mr. Frederick taught Entrepreneurship at a number of local colleges, was the Entrepreneur in Residence at the Lally School, and ran the RPI business incubator, EVE. His primary area of concentration is entrepreneurship and all aspects of developing business plans, specifically financial management, operations and marketing.
Mr. Frederick continues to focus his time on funding and growing early stage companies and is the Entrepreneur in Residence for the New York State Small Business Development Center in Albany.
What is the difference between Angel investors and Venture Capital?
Angel investing is a process by which high net-worth individuals look for opportunities to invest. These are people looking to invest in their community. Angel investments are typically smaller compared to venture funding. Venture capital firms, on the other hand, are usually more concerned with a return on investment. Venture funds are larger and the individual investments are larger. Typically Angels invest from $50,000 to $250,000 where VC’s start at the $1,000,000 level and go from there. Venture firms also seek to exert some form of control in their investments to increase the likelihood of a strong return on investment. In short, Angels look more toward stimulating their individual communities and Venture Capital firms look to drastically increase revenue of the businesses.
How do entrepreneurs secure Angel funding?
There are a few different ways. In the broadest sense, a lot of Angel investors, Eastern New York Angels (ENYA) for example, are part of a group called the Angel Capital Association (ACA). The ACA is a collective membership of 2500 angel investing organizations around the world. As a member, angel investors have access to GUST, a database for entrepreneurs seeking investments. GUST lets entrepreneurs set up a profile explaining the business and sharing information that investors looking to invest should know. In addition to showcasing their business, GUST lets entrepreneurs seek out investors. So entrepreneurs can seek angel funding through GUST or by approaching angel firms on their own.
Once an entrepreneur submits a funding request, angel investors start a screening process. Preliminarily, ENYA looks at the current status of the company—company prototypes or products, the business plan, the money the company needs to go to market, the founders specifically, anything that gives us a good sense about the company. One of the key things we look for is a coachable management team that is looking for support. It’s common that angel investors will want to mentor early stage companies. If the screening goes well, we invite the entrepreneurs to give a presentation to all the investors. The company is given 15 minutes to present, followed by a 15 minute question-and-answer segment. If, from that presentation, the members of ENYA decide to move forward with this business, we form a due diligence committee, which takes a detailed review of the company: what’s the product, what’s the management team, what is the business structure, what’s the technology, does the business have enough substance to warrant an investment, what is an appropriate investment, etc. Based on the due diligence research, the committee files a report and makes an investment recommendation to the investors for a final decision. This process typically takes between 60 and 90 days, but this varies depending on the company.
What makes a business stick out to you as a good investment?
This answer has two parts. First, I look at the tech community. Different parts of New York produce different kinds tech. If I were to invest in Buffalo, I’d be looking at medical technology, or if in Rochester, optical technology. Here in Albany there is a lot of engineering technology. The ecosystem of the community sets the tone of our screening, we look at the tech and ask, is it scalable. Next, I look to see whether the entrepreneur is passionate about his or her business. A lot of the decision depends on how passionate the entrepreneur is in that first presentation. Enthusiasm and fire, this says that a person is going to do whatever he or she needs to do to make this business successful.
Just because an entrepreneur gets turned down by a group of Angel investors the first time doesn’t mean she or he should give up. Listen to why you weren’t brought into a second interview and go back to the drawing board. A lot of “no’s” are not bad. It’s normal. Just to give you an idea, every two weeks we screen the ENYA website. In 2012 we looked at 238 proposals, 49.8% came from New York, which is where we invest. Of the proposals, we researched due diligence on 12 and invested in 2.
A lot of new business owners worry that they will have to give up significant control in order to raise money through investors. As an investor, do you have any advice or warnings for entrepreneurs that are concerned about this?
This is a very common issue and has stopped new businesses from growing. Entrepreneurs need to understand the difference between ownership and control. You can own 99% of your company, but if you’ve given control rights to that 1% coming from an investor, you effectively do not have control over the business decisions. When negotiating with investors you should distinguish ownership and control. Venture capital firms like to have control in their investment. Angels are far less predatory in this regard. An angel investor’s goal is to get the company started and running. If an entrepreneur is worried about losing control, he or she should deal with Angels as long as possible.
What is the most important thing an entrepreneur should do if he or she is seeking Angel funding?
Understand that Angels are there to help and if you’re just looking for money and not help, you’re probably not going to get funding. A good idea isn’t worth a lot unless there’s a good plan behind it and a team to push it forward. When I see a product, I assume anyone can build it if given the right amount of money so I look at everything else. The three questions you must have answered before talking to investors: who is the target customer, how are you getting your product into the market, and why do consumers need it.
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