A Report Card on the Boise Angel Alliance

I have been arguing for some time in this column (these blog posts are originally published as a column in the Idaho Statesman's Business Insider magazine)  that an important component of the ecosystem for entrepreneurship is the availability of risk capital.  I have also argued that using best practices, angel investments can produce nice returns to the angels in addition to helping entrepreneurs.

Here’s a report card of sorts on some of the Treasure Valley angel activity.

The Boise Angel Alliance was formed about 2003.  Unfortunately, we didn't keep any investment records in the early days.  But for the first five years there was relatively little activity.  As a result, a group of us formed a “fund” to try to stimulate more investment.  A fund is a limited liability company.  The members of the fund agree to contribute cash capital to the fund as investments are made.

Our thought in forming the fund was that it would result in making investments since the cash would be in the bank waiting to be invested.  A fund has the added advantage of spreading risk since each investor has a small piece of a number of investments.

We formed our first fund in the spring of 2007.  Members agreed to contribute up to $50,000 each.  We received commitments for $1,350,000 and began to invest. It took us five years to fully invest the first fund.  Last year we formed the second fund.  Coincidentally, we also received commitments for $1,350,000, so between the two funds up to $2,700,000 will be available to local entrepreneurs.

So what’s happened? 

We have invested a modest amount of money outside the valley with partner angel groups around the northwest, but this article is about the local impact.

The two funds have invested to date a total of $1,535,000 into 14 Treasure Valley companies. Now that is not a large amount of money per company (our largest investment is $160,000 and our smallest is $25,000).  But the money was generally invested early in the companies’ lives and helped the entrepreneurs move their companies to the next level.  We haven't kept track of how much capital the companies have raised since we made our investments, but it is tens of millions of dollars more.

How have the companies done?  All 14 are in business and continuing to execute their business plans.  Some are growing rapidly; some are struggling to find the right path forward. But today all are still in business. 

Collectively their Treasure Valley employment as of June 30, 2013 has increased by 146 positions since we made our investments in each.  If the positions average  $40,000 a year in salary, then that’s an annual impact of nearly $6 million in salary alone in our valley.  

How have the investors done?  It’s too soon to know as angel investments take years to mature.  One of our local companies and one of our non-local companies have been acquired.  One non-local company went bankrupt and we lost our investment.  However, we are starting to get a picture.

Investors in the first fund have received back nearly all of their capital.  Of the $1,350,000 of committed capital, the fund has returned all but about $50,000.  And the fund still holds about  $1 million of stock in portfolio companies at cost.  Those companies will be sold over the next few years and the proceeds distributed to the investors.  At this time it looks like the investors in the first fund will likely be quite happy with their returns.

So, thus far the angel funds have been good for the Treasure Valley economy, good for the entrepreneurs, and good for the investors.

Market Feedback is Critical to Early-Stage Companies

The local Boise angels like to invest in “Seed-Stage” companies. A seed-stage company has a workable product or service in the market place and is beginning to generate some revenue. It needs to test the market and learn which customers will find the offering most attractive, how those customers can be reached and what product features are of most interest.

Often what happens is the entrepreneurs will learn that they need to make changes to the product and/or their original market is not the most interesting market.  Many years ago the company I co-founded, Learned-Mahn brought a computer-based accounting system to the market.  Our hypothesis was that most small businesses would find this attractive.  At the time most did their books by hand.

Our market tests helped us learn that our product cost too much for small businesses, and there was no efficient way to reach the target market.  But as we attempted to sell the system, we learned there was a niche with certain large companies that we could profitably reach and who needed what we had to offer. We went on to license the software to AT&T, Campbell Soup and the 1984 Olympics to name a few.

Good entrepreneurs know that almost never will the first version of a product be what the customer will pay for and that frequently the initial target market will not be most productive market.  The most important step for them to take is to bring something to the market as quickly and inexpensively as possible so that they can start to get feedback from real customers. 

We have learned that no matter how much you know about a market, you need to get out of the office and talk to that market.  And the best way to talk to a market is to ask it to actually purchase something. When you do, you get real information about real consumer behavior.

Steve Jobs knew this better than most.  His entire career he brought out less than fully featured products and got instant market-based feedback. Think of the changes that have been made to the iPhone since the first one was released, or the iPad.  Apple is superb at learning from the market place and then releasing a new version of a product that captures a much larger market.

An example of a local company who has brought an early service to the market and learned from its experience is Social Good Network.  Both the Statesman’s reporters and I have written about Social Good Network before.

The Boise Angel Alliance has invested in Social Good Network through its two angel funds. (Full disclosure, I am an investor in those funds.) The purpose of our funding was to enable the company to test its services in the market.

The company provides an on-line fund raising community for charities.  It offers several services:

•       Consumers can shop on line merchants through the community.  When they do, Social Good Network earns a commission. The consumer can then designate 50% of that commission to a charity of his or her choice.  
•        The consumer can make a direct donation to the charity through the on line community. 
•        Charities can install unique patent pending software directly on their web sites, which allows contributors to make donations without leaving the charities’ sites.

The November/December time frame was a perfect time to test these services, both shopping as well as contributions.  Their theory was that they were a consumer centric community focused primarily on shopping.  They learned that the charities were more excited about the donation services.

Armed with this information, the company now knows where to focus its valuable resources. It is changing its software road map and marketing to respond to the information it gained from taking the initial product to the market place.

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Kevin Learned is the Director of Venture College at Boise State University, and the co-founder of two angel funds which invest in early stage companies in the Boise, Idaho area.

Boise Angel Alliance Year in Review

The Boise Angel Alliance had the most active year in 2012 since we created our first angel fund in 2007.

There are many individual angels in the valley. So far as I am aware, there is only one formal angel organization, the Boise Angel Alliance. The purpose of the Alliance is to encourage the availability of capital for entrepreneurs.  It has created two funds, the Boise Angel Fund and the Treasure Valley Angel Fund.  The below data are drawn from the records of the two funds.

The Boise Angel Fund made its last angel investment in 2012, and is now fully committed. The new Treasure Valley Angel Fund was formed and as of this writing has $1.1 million of committed capital and continues to raise additional capital. 

We had our first successful “exit” in 2012. An exit is angel-speak for selling or otherwise disposing of an investment.  We invested $45,000 in a Spokane based company along side the angels there.  We were paid about $188,000 for our stock and have the potential for additional proceeds.  We have had one unsuccessful exit, a bankruptcy where we lost our entire $25,000 investment. 

In 2012 the funds invested $500,000 in five companies.  This is the most that has been invested in one year since the first fund came into being in 2006.  Simple math would suggest that the funds invested an average of $100,000 per deal. But that ignores the leadership of the funds. 

Once we commit an investment to a company, we then try to help raise additional capital. That additional capital may come from our own members, other groups in the Northwest with whom we have trusting relationships, and other angels that may study our efforts and decide to invest along side our investment. The total capital raised by those five companies in these rounds was $1,395,000 or about two dollars additional capital for every dollar invested by the funds. 

The five companies are:

CoreConcepts.  This is a local manufacturer and distributor of high performance outdoor clothing sold through specialty retailers.

MealTicket.  Meal Ticket enables food manufacturers to promote products directly to restaurants and other food service providers.

Sawtooth Ideas. Sawtooth provides an online marketplace where designers of woodworking plans can sell plans, along with innovative software that turns traditional two-dimensional plans into three-dimensional, dynamic plans.

Social GoodNetwork.  They enable consumers to shop on line and do good, by capturing referral commissions and allowing the shopper to designate a portion to charity.

VoxbrightTechnologies. Voxbright develops voice recognition software for cable television and Internet TV platforms.

The angels also provide mentoring and advice to the companies before and after the investment transaction.  One of our members serves as a director in four of the five companies.  Our collective membership of about fifty individuals is actively involved in promoting and assisting the companies wherever we can.  For example, I purchased and proudly wear clothes from Core Concepts.  My family and I shop on line through Social Good Network.

These companies will have an impact on our local economy.  At the time of our investments, they employed about 15 people.  Over time we expect that their employment will grow significantly.

Since 2007, our two funds have invested a total of $1,385,000.  Those companies have raised more than $19 million in the rounds in which we participated.  The Boise-based companies as December 31, 2012  had created about 110 new jobs.  

We recognize that these two funds can meet only a small portion of the demand for risk capital by our local entrepreneurs.  Many entrepreneurs were turned down.  Undoubtedly some of them were worthy of investment. We encourage others in a position to do so to consider investing a portion of their capital in valley entrepreneurs.  The Boise Angel Alliance stands ready to assist.  Both entrepreneurs seeking funding and those considering investing can learn more through Alliance website.

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Dr. Kevin Learned is on special assignment with the Division of Research and Economic Development at Boise State. He was the co-founder of Learned-Mahn, Inc., which he believes was the first commercial software company in Idaho.  He is past president of the Boise Angel Alliance and an investor in its funds, the Boise Angel Fund and the Treasure Valley Angel Fund.  He can be reached at kevinlearned@boisestate.edu, 208-426-3573

Treasure Valley Angel Fund -- A Lesson in Raising Capital

The valley’s second angel fund, The Treasure Valley Angel Fund is now open for business. It reached its first close milestone of $750,000 in July.  Full disclosure:  I am an investor in the fund and my firm, Loon Creek Capital helped guide the fund through the organizational effort.

The new fund presents a case study in the process of raising seed capital in Idaho. It took about 24 months from early discussions until the capital was raised.   Active fund raising began in January of this year and reached the minimum in July. 

Why does it take so long to raise capital?  There are several reasons:

• Investors are conservative.  There are always more reasons not to invest than there are to invest. 
• Investors are busy.  It’s hard to get the attention of busy people. In most cases someone has to sit down personally with an investor to review the business plan, explain the risks and the potential benefits. It takes time to get these appointments.
• There is usually a “minimum raise.” Most security offerings have a minimum amount to be raised before capital can be released to the company.  In the case of the angel fund, that minimum was $750,000.  While a minimum raise protects the investors, it usually means it will take longer to conclude the offering and begin to put the capital to work. 

The implication for entrepreneurs is it takes a long time to raise capital.  You must plan for this and be sure you are beginning to raise capital well in advance of the time you actually need it. 

Now that the fund has reached its minimum raise, it is accepting applications from entrepreneurs for funding.  Applications will be managed by the parent organization, the Boise Angel Alliance and can be submitted at www.boiseangelfund.com. 

In the first fund about 5% of the applicants actually received funding.  I don’t expect the second fund to be any less restrictive.  So entrepreneurs should make sure they have done their homework before applying.

The web site contains information on the kinds of deals in which the fund will invest, the typical terms, and the processes used to make the investment decision.  I strongly advise entrepreneurs to read through this information before submitting an application.  And they are welcome to contact me for an informal discussion if they believe that would be helpful.

The fund is authorized to raise a total of $2 million and will continue to seek qualified investors as it begins considering investments in local entrepreneurs.  To be qualified, investors must be residents of the State of Idaho, must qualify as an accredited investor (generally a net worth of more than $1 million not including the equity in his or her primary residence), and must represent that the investment does not exceed 10% of the investor’s net worth, exclusive of the investor’s home, automobiles and furnishings.  Additional information for potential investors is available at www.treasurevalleyangelfund.com.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is President of the Boise Angel Alliance (www.boiseangelfund.com), an investor in both of its funds, and is a principal in Loon Creek Capital (www.looncreekcapital.com) which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875.

How To Make Convertible Notes Attractive to Investors

 A popular funding instrument for very early stage financing is a convertible note.  With this instrument, the investor loans the company money.  In exchange for the loan the investor accepts a promissory note.  The note will accrue interest at a high interest rate, perhaps prime plus 4% to 8% in today’s market.  Principle and interest are due at some point in the future.  At that time the investor can elect to convert principle and accumulated interest into stock in lieu of payment.

Typically the price at which the note can convert into equity is based upon a discount from the price at which stock is ultimately sold. The language may read something like:  “The note and accumulated interest can be converted into common stock at a discount of 20% from the price of the next equity round of at least $250,000.“

What this means is the entrepreneur and the investor do not have to negotiate the value of the company today.  Rather they recognize that at some point in the future the company will sell stock.  When that occurs, they will use the price of that stock sale to determine the price at which the investor can convert from debt to equity.

The advantages to the entrepreneur are that she does not have to negotiate and accept a lower value on her company today when the value will likely be higher later.  And, since convertible notes are simpler than stock sales they can usually be done faster and with lower legal fees than apply to stock sales. 

Theoretically, the investor’s position is at lower risk than had the funds been invested in stock.  But practically speaking, in an early stage company, there’s little difference between holding a note and holding stock.  If the company fails, both will be worthless.

A convertible note has one very large disadvantage to the investor.  His capital is at risk, but his upside is limited.  If, for example, the company is able to sell stock later at a valuation of $2 million, the investor will convert at a valuation of $1.6 million (20% discount from the $2 million).  This is likely substantially more than the investor would have paid had he insisted on purchasing stock rather than loaning the company money, even though his funds were at risk as if they were invested in stock.

For this reason many local angels do not participate in convertible debt offerings.  They don’t like the risk/return ratio.  However, a way around this is to negotiate a cap on the maximum value the entrepreneur will have to accept. For example, the above conversion language might be qualified:  “The note and accumulated interest can be converted into common stock at a discount of 20% from the price of the next equity round of at least $250,000, or a valuation of $1 million, whichever is less.“

This provision allows the entrepreneur to gain the benefits of a quick and relatively inexpensive transaction, while preserving for the investor the full upside should the company be highly successful.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is president of the Boise Angel Alliance (www.boiseangelfund.com) and a member of both of its affiliated angel funds. He is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875. A version of this post was previously published in the Idaho Statesman's Business Insider.

Why the Entrepreneurial Community Should Support the School Levies

I wrote earlier about the fact that new businesses account for most of the new jobs in our economy (“Where do jobs come from? June 20, 2011).  In that piece I argued that to create new jobs in the Treasure Valley, we needed to create an ecosystem that supported entrepreneurs.  Every since then I have been writing about one component of a healthy entrepreneurial ecosystem-early stage capital provided by angel investors.

Today I want to talk about another component of this ecosystem—intellectual capital.  We now live in the knowledge economy where much of the goods and services created by our  businesses, especially our new businesses, are dependent upon a well-educated workforce that can supply the necessary skills and knowledge.

All eleven of the businesses supported by the Boise Angel Fund depend upon access to an educated workforce to provide the brainpower they need to produce and market their cutting edge products and services.  They need, for example, engineers and marketeers; accountants, financiers and intellectual property attorneys; computer software writers and food chemists. None of them need unskilled or semi-skilled workers. 

We obtain these knowledge workers from two sources.  Some are produced by our education system locally.  Others are recruited to move here.  First lets address our own production.

We are not producing enough knowledge workers for our economy. For example, KTVB reported in November that Treasure Valley employers had openings for hundreds of computer programmers that they could not fill (“Demand for software engineers in the Treasure Valley outweighs workforce,” KTVB, November 15, 2011).

There is no quick or easy fix for this problem.  We will solve it only by providing a high quality, challenging education system, from kindergarten through Ph.D programs.

Our state, like most, has had to reduce the resources it can provide to the entire educational system.  Our educators have done a terrific job at holding the system together in the face of declining resources, but the system is fraying. 

Our colleges and universities have made up part of the shortfall through tuition increases, contributions and research grants.  But the K-12 schools have no such options.

They must either reduce services or ask the taxpayers to pay more.  Both the Meridian and Boise School Districts will ask the voters to raise their taxes to provide additional resources on March 13. 

It’s clear to me that the consequences of our failing to provide additional resources to the schools will be a lower quality education for these young people which will result ultimately result in fewer workers with the skills needed to match the demands of our employers.  And without the skilled employee base, our entrepreneurs will not be successful in creating new businesses.

 A note about importing workers.  Yes, we know many people move here for our quality of life.  But they bring families with them and high on their list of requirements in determining to move is the quality of the public education system.

So, my argument to the entrepreneurs who create our exciting new businesses and the angels who finance them, as well as to those who believe a healthy entrepreneurial ecosystem is important to our valley, is to support our local school districts by voting to increase their resources. 

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds.  He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875. 

New Angel Fund Under Development

I am delighted to report that a new angel fund, to be known as the Treasure Valley Angel Fund is in formation and seeking investors.  The purpose of the Fund is to support economic development efforts by providing capital and advice to local entrepreneurs while providing an opportunity for the investors to make a return on their investment.

The CORE, an economic development group based in Meridian and focused on creating a CORE competency in the state in Health and Research sponsored the initiation of the fund. Leadership of the Core worked extensively with the Department of Finance to develop offering parameters that ensure that sales of interests in the Fund are properly qualified under the Idaho Uniform Securities Act.

Over the past few years both the Boise Angel Fund and Highway 12 have been potential sources of early stage capital for local entrepreneurs.   However, Highway 12 is no longer accepting applications for new investments and the Boise Angel Fund is nearly out of capital.  So a new source of capital interested in supporting valley entrepreneurs will be a welcome addition to the entrepreneurial ecosystem.

The Fund will be a “member-managed” LLC.  That means the investors (called “members”) in the fund will make the investment decisions. Once capitalized, the Fund members will appoint a screening committee to consider initial applications from entrepreneurs.  When the screening committee recommends an investment, a due diligence committee will be formed to thoroughly investigate the entrepreneur and his or her business plan, and if warranted, to negotiate the terms of a possible investment.  The recommended investment will then be brought to all the members for a vote.

Whether or not the Fund members agree to make an investment, members will be encouraged to help the entrepreneur by providing advice, access to their contacts, and such other assistance as may be appropriate.  Individual Fund members will be  free to make an investment in the company whether or not the Fund members decide to make an investment of Fund capital.

Before the Fund can make any investments, it must first raise capital to invest.  The Treasure Valley Fund is raising between $750,000 and $2 million.  Units of $50,000 each are being offered to qualified Idaho residents.

The offering to form the new fund is subject to a number of restrictions, the most important of which are:

1.  Only accredited investors (who generally must have a net worth greater than $1 million, excluding the equity in the investor’s primary resident or income greater than $200,000 per year) can participate in the Fund.

2.  Investors must be residents of the State of Idaho

3.  Any investment must not exceed 10% of the net worth of the investor excluding the value of the equity in the investor’s principle residence, furnishings and automobiles. 

Of course, such an investment is very risky and no one should invest in the Fund unless they can afford to lose their entire investment.

If you meet the above criteria and would like to know more, additional information and a copy of the Fund’s Confidential Placement Memorandum can be requested through the Fund’s web site at www.treasurevalleyangelfund.com.

I hope to chronicle the formation of the Treasure Valley Angel Fund over the coming months so that others interested in forming such capital pools might learn from the experience of the Fund.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. Loon Creek Capital provides consulting services to the Treasure Valley Angel Fund. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875.