You’re raising money for your emerging technology company. You’ve exhausted the money you can tap from friends and family. But your product or market is still early in its development, and you’re not quite ready for prime-time venture capitalists. Who you gonna call?
You might try Twin Cities Angels, a new seed-capital investment group based in Minneapolis. Twin Cities Angels “went live” on May 15, with 30 members each committing $50,000, or a total of $1.5 million, to this new fund. “It’s the right thing for Minnesota,” says John Alexander, the group’s cofounder. “We need more early-stage investments here.”
Alexander helped direct Little Canada–based St. Jude Medical’s acquisitions strategy until 1996, when he founded a management consulting firm specializing in emerging companies. There, he began to wonder if there wasn’t a way to improve start-ups’ survival chances. He and Brent Shelton, who has had a career of more than 20 years with Fridley-based Medtronic, believe that in cofounding Twin Cities Angels, they have an early-stage investment model that will work in Minnesota.
“There are lots of angels here, but they’ve not been well organized,” Alexander says. “And unless they have skin in the game, they don’t stay involved.” Each of Twin Cities Angels’ accredited-investor participants—Alexander calls them members—are required to participate in the due-diligence investigation of promising investment opportunities. The group now has 32 members, though Alexander says it won’t disclose its member list. “The group doesn’t want to get spammed into oblivion,” he says.
Alexander expects Twin Cities Angels to make between 8 and 12 investments over the next two years. The group’s Web site clearly lays out the group’s investment criteria and how the investment process works. It indicates a total investment range per deal from $25,000 to $2 million. The current Twin Cities Angels fund would invest only up to $200,000 per deal. But members also have the right to co-invest through the fund as individuals, which could raise that funding amount higher.
To date, the group is seeing eight or nine deals a month, with the “quality ranging from pure junk to great opportunities,” Alexander reports. Since the group wants to actively mentor the companies it invests in, its focus is on the Upper Midwest—“companies we can drive to,” he adds.
What inspires financial angels? Beyond the goal of helping early-stage companies, it’s the dream of making outsized returns. Consider Ram Shriram of Silicon Valley. One of a handful of early-stage investors in Google, his investment of less than a million dollars made him a billionaire. More usually, according to Alexander, a fund like his produces, out of every 10 deals, one to two home runs and a couple of singles. The rest are strikeouts.
In recent years, seed-capital funds have made little money for their investors. Too often, their returns suffered in subsequent financing rounds when larger investors “crammed down” on their investment, to use venture-capital industry jargon—that is, they imposed financing terms that punished earlier-stage investors by diluting those early investors’ ownership stake. Alexander believes his group can sidestep that with better deal selection and an enhanced due-diligence process.
“With lots of smart people involved who’ve had previous business success, collectively we’ll make better investment decisions than we could as individuals,” Alexander says.
