By Roberta Codemo
Entrepreneurs are finding it increasingly difficult to access capital through traditional funding sources. According to the 2013 Sage Business Index, 57 percent of small businesses said they needed to look at alternative funding sources. Without access to financing, entrepreneurial startups cannot bring their dreams to life. When it comes to securing money, entrepreneurs need to get creative. Two of the most popular of alternative funding options are crowdsourcing and angel investors.
Angel investors are high net worth individuals who invest their own money in the early stages of an entrepreneurial startup in exchange for an equity stake in the company. Angels must meet the accredited investors guidelines set by the SEC and tend to look for both financial and intrinsic returns on their investments. They help entrepreneurs see the big picture and work with them to keep them from making the same mistakes they did. “They want to give back,” said Bruce Sommer, who is an angel investor and founder of Bluestem Ventures, the first angel group in Springfield – a group of investors who pool their resources to diversify and invest in more companies.
William Wetzel, the founding director of the Center for Venture Research at the University of New Hampshire, coined the phrase “angel” investor in 1978. The term originated on Broadway in the 1940s when private investors would front Broadway productions.
There were 134,895 individual angel investors in 2013, according to the Center for Venture Research. A total of 28,590 companies received angel funding, while angel investments totaled $9.7 billion. Typically, angel investors wish to remain anonymous.
The Angel Resource Institute said, as a rule, angel investors invest between $5,000 and $100,000 in an entrepreneurial startup. Angels must be comfortable with risk and willing to lose their investment. It can take an angel five to seven years to recoup their initial outlay.
Barnabas Helmy, CEO at SmashToast, LLC, a software / hardware engineering and design company in Springfield, first met Sommer at a meeting of the Innovation Viability Network (INVINT), a local nonprofit organization that works with central Illinois inventors, organized by Springfield patent attorney Robert Patino. Sommer spoke about funding sources for entrepreneurs.
“I was invited to present my idea at the meeting,” said Helmy. Afterwards, he and Sommer spoke further and Sommer told him his project was exactly what his group was looking for.
Helmy is developing The Sprocket, a hardware/software device that will change the way home users interact with their home electronic devices. He and his partner, Andrew Brown, founded the company in March. “It’s very exciting,” said Helmy, who came up with the idea one evening while sitting on the sofa and growing frustrated with the remote. He created a universal remote control partnered with a smartphone app.
He predicts it will take a half million dollars or more to get the product to market quickly. “Tech is deadline-based,” said Helmy. He needs to bring three developers on board. He has started reaching out to angel investors rather than pursuing traditional financing.
“This is not a traditional business,” said Helmy. He is looking for angel investors that fund technology projects to help his company navigate the waters of the tech world. “It’s important we get money before we run out of seed money,” he said. The company has reached the point where it can reach out to angel investors and make “the ask.”
Helmy has begun making his pitch to local angel investors. The response has been positive. Forming relationships is crucial because it’s important that investors understand where you’re coming from. He chose to bring on angel investors rather than pursue crowdfunding because angel investors have the expertise and experience. “They will be able to guide us,” he said.
Sommer said the relationship between an entrepreneur and an angel can be very emotional. “The greater the stakes, the greater the emotion,” he said. “It’s also rewarding. You get to see someone make their dream come true.” The true value of an angel investor lies in their intellectual capital, which is far more valuable to the success of a startup.
For its part, crowdfunding is growing in popularity as one way for entrepreneurs to launch their businesses. Unlike angel investors, who actively engage with and develop relationships with entrepreneurs, crowdfunding limits individual investors to financial investment alone. While proponents argue crowdfunding will create new businesses and thereby
more jobs, Sommer argues it is not sustainable. Because the chances of success are so small, overall it will be bad for the economy.
The two most prominent crowdfunding websites are Indiegogo and Kickstarter, where entrepreneurs solicit contributions from the public in exchange for a “reward.” With the passage of the 2012 Jumpstart Our Business Startups Act (the “JOBS” Act), the Entrepreneur Access to Credit provision will allow businesses to sell equity stakes in their companies online to individual investors through a process called equity crowdfunding to raise funds.
Prior to this, the federal Securities and Exchange Commission (SEC) only allowed accredited investors – investors with an individual net worth of $1 million plus or an annual income of $250,000 or more – to purchase equity shares online. While the SEC is still finalizing the rules, the provision is expected to take effect later this year.
When this happens, Bruce Sommer – who in addition to his investment activities is also Entrepreneur-In-Residence and Visiting Lecturer at University of Illinois Springfield – said it will open the floodgates and allow individual investors to acquire equity positions in startups. At the same time, he is concerned about the relative worthiness of companies receiving (and failing to receive) funding. “The public will need to educate themselves,” he said.
The risk will also shift from the entrepreneur to the investor. “If you don’t understand risk, bad things can happen,” said Sommer.
Most entrepreneurial startups fail. According to the United States Small Business Administration, more than 50 percent of small businesses fail within the first five years. Because investors will not recoup their money if a business fails, that money is taken out of the economy.
Luke Schuette is the president of Lamboo, Inc., the world’s leading materials technology company. Founded in Springfield in 2003 and based here, Lamboo specializes in engineered bamboo for architectural, structural and OEM industrial applications. The company’s first product line was released in 2009.
“We’re a little company,” said Schuette, this despite the fact it’s the world’s leader in structural and performance-based engineered bamboo. He sees tremendous growth over the next five years.
Schuette said a small portion of the initial startup costs came from angel investors. The company has since bought out several because the investors did not fit. “Angel investors limit a company like ours,” he said.
“We were never properly funded from the beginning,” continued Schuette, who has always practiced a conservative financing strategy. He has funded the company through a mix of different financing options. He acknowledges he did not handle the company’s financing strategy the right way. In retrospect, he said, crowdfunding might have proved a better way of funding his company. Crowdfunding is most successful with technology startups that are quick and inexpensive to start.
Schuette believes Springfield has the potential to become a new Silicone Valley but it’s not there yet. “It is the perfect environment for business development,” he said. “Our company will be creating the best jobs in Springfield,” he said.
The capital city should have been creating entrepreneurial opportunities 10 or 12 years ago. “There should be a plan in place,” said Schuette. He wants and hopes that city officials and business leaders talk about and recognize that Springfield offers entrepreneurial opportunities.
“We need to move forward,” said Schuette.
Roberta Codemo is a full-time freelance writer and started Codemo Writing Services in 2012. She works with small business owners to help create compelling online content and build their web presence. She can be reached at firstname.lastname@example.org.