Gregory Casagrande on the Benefits of Angel Investing
If you’ve seen the popular television programs Dragon’s Den or Shark Tank, you likely have a decent understanding of angel investing, whether you’ve assigned it that title or not. Angel investing is the practice of exchanging capital for equity in a company, product, or idea. In the case of the TV shows mentioned above, especially wealthy investors with specialties in different markets listen to pitches from various entrepreneurs and decide whether they think they can make a profit on their ideas. While an excellent source of entertainment, these programs don’t always discuss the nuanced benefits of angel investing.
Gregory Casagrande was a founding director of the Ice Angels, New Zealand’s largest angel investor group. He has, directly and indirectly, invested into dozens of small, entrepreneurial, technology ventures each led by a visionary entrepreneurial founder with global ambitions but constrained by access to new venture financing and in need of some seasoned guidance.
Casagrande, like many angel investors, brings more than money to his target investee companies. He brings a wealth of experience. In addition to the Ice Angels, Casagrande has founded and still works with microfinancing operations such as SPBD Microfinance Network, MicroDreams, and Transformative Ventures. He serves as the Executive Chairman of WaterHealth International and English-To-Go and was the founding Chairman of Biomatters until its recent successful exit to San Diego-based technology powerhouse — Insightful Science. Prior to these entrepreneurial endeavors he built an impressive history of achievement at huge corporations like Ford Motor Company, Mazda Motor company and PwC. As a serial entrepreneur, Gregory Casagrande understands the benefits of angel investing perhaps better than most.
Angel investing really got its name because of the incredible impact it can have on entrepreneurial business owners who have few other options,” says Casagrande. “It can really feel like a miracle.” Angel investing operates in the space between family-and-friends financing and venture capital financing.
Often those searching for angel investments have grown their business idea beyond the ability of their family and friends to finance. They are not yet ready, however, for the big leagues of venture capital financing or keen to obtain venture capital financing where the destiny of the company is often taken out of the entrepreneur’s hands and huge bets are placed where failure is the most likely outcome. Venture capitalists will build investment portfolios where only one or maybe two in ten companies will succeed but those select few will do exceptionally well. The other companies however will be out of business in 24 months and the entrepreneurs will be long forgotten. Casagrande explains that “many entrepreneurs are wisely not willing to roll the dice with this sort of VC investor and prefer to instead take financing from angel investors who bring smarts, guidance, and contacts along with the needed investment money.”
In typical Angel investing, the investor is almost always purchasing equity in the company. The company is not being burdened with debt that it may not be able to service during the early formation and growth stages. This means that the angel investor will become like a business partner to the entrepreneur.
Often angel investors will help the company become more formally run and organized by creating a board of directors, shareholders agreements and formal constitutions. The angel investor will likely be given a right to serve on the board. Angel investments are usually facilitated through term sheets that detail the specific terms of the investment. Often expectations are set in the term sheet and sometimes ratchet clauses and special rights may be detailed that provide the investor additional equity if the business fails to deliver on the original expectations.
Angel Investing Brings Smart Money
Having helpful angel investors who bring more than just money can be highly advantageous to an early stage entrepreneur. They can help the founder decide on how the business is run and in what direction it will go, which can work to both party’s advantage, particularly if the angel investor is well versed in business. The investor is essentially purchasing a share of the business and hence the rights to share in the potential profits of the company and to share in the proceeds of a hopefully big exit. And like the founder, if the business goes bust, the angel investor also loses the full value of his investment.
Angel investing is risky as many young companies do fail. Casagrande explains that, “To counter this risk, like venture capitalists, most angel investors will build a portfolio of angel investments. Any single angel investment carries significant unique risk but having a portfolio of a dozen or more angel investments will provide a typical angel investor with the investment risk reduction benefits of diversity.”
Many angel investors are experienced businesspersons, often seasoned entrepreneurs, who have already successfully built and exited from another company. They may be looking to re-invest some of the capital that they made from their own entrepreneurial venture and are keen to help guide and coach another, often younger, entrepreneur through the challenges and pitfalls of growing an early stage business. Casagrande explains that “by bringing together both smarts and early stage financing, angel investors can often aspire to making significantly better than average returns on their investments. As with any early stage investment however there is significant risk.”
Angel Investing as a Group
Some angel investors work together as a group, like the Ice Angels, and make investments together. There are great benefits from working together as a group. From the investee standpoint a group will bring deeper pockets. If you need a 2nd or 3rd or 4th round of investment, the group is less likely to run out of funds than your single angel investor. Likewise, the group will be able to offer a wider range of experienced guidance, mentorship, and helpful contacts than most individual angel investors could.
From the angel investor standpoint, a group is especially beneficial because it enables the investor to build a quality portfolio of angel investments more easily. Casagrande points out that, “The group will attract more potential promising young companies than an individual can on his own and as a result the deal pipeline will be significantly better. The group is also valuable during the due diligence process as many more resources can be brought to bear on the initial screening of the company. The group is also better suited for providing a variety of mentors, contacts, and potential board members. Also, when an investee company needs an unexpected subsequent round of financing, the pressure to financially support the company falls less squarely on one person’s shoulders and instead can be more easily carried by the group.” Generally, angel group supported investments will achieve better long-term outcomes and for that reason both investees and investors would do well looking for matches using the group methodology.
“If you have a good early stage business but not the capital or the Rolodex to reach the next level, angel investment is a great opportunity to consider,” says Casagrande. “Often, angel investors become more than just investors, but become your cheer-leading squad, your mentors, your business partners and members of your board for those especially difficult decisions.” As an added benefit, angel investors share the risk and only reap the rewards when you do too.
