In episode 2, Dave walks us through the investment path a new company typically follows. The earliest operating capital comes from bootstrapping founders, followed by friends and family. With some success, the company is ready to engage angel investors, who are accredited and often work through collectives like Seedfunders. Next we consider what makes a company investable and what makes a good angel investor.
Today we’re going to get into Angel investing, and specifically these new Floridians that are coming and building our ecosystem and investing. So, first who and what are these new Floridians?
As I said, in our previous podcast there have been 1000 people per day moving to Florida. Now, that counts births and deaths but basically most of those are new residents coming to Florida. They’re coming, largely from up north, New York, Boston, Philadelphia. They’re retired, semi-retired and maybe they sold their company. They want to stay active. They have some funding. They want to get involved. They want to be involved. They don’t want to sit back and retire and play golf all the time. So, we have seen in SeedFunders in the last three years, a number of these relatively new residents coming to Florida and wanting to join a group like ours. They want to be involved in what’s going on in Florida. And as I said in our previous podcast, it is really exploding now. And this is a really good time to get involved. Some of these individuals may have been involved up north. They may be an investor in a SeedFunders group or an early-stage group up north. And they want to continue that here. So, they’re joining new groups in Florida. They are coming into Florida. And also, a number of residents in Florida who may have sold their companies and never been involved in seed funding or early-stage funding. They as well, would benefit from a lot of the activity that’s going on in the State.
So, there’s are a lot of ways to invest. There’s stocks, there’s funds, and then there’s this thing called Angel investing? What specifically is Angel investing?
I think to understand Angel investing, you have to understand that there are various levels of investing. Basically, when somebody starts a company, they first go to friends and family. That’s usually the initial capital that starts a company, with their friends and family. Once they’re a little bit established, and they’ve got something going, they could go to what’s called Angel investors. After the Angel investors invest, then it goes to Venture capital. We’ll talk a lot more detail about all that in future podcasts. But right now, first of all, to be an Angel investor, you have to be what’s called an accredited investor. An accredited investor, there isn’t any form that you fill out or there isn’t any prequalifications. Basically, just by definition of the SCC. An accredited investor is someone whose net worth is over $1 million, not counting the value of their personal residents and/or they make $200,000 per year or $300,000 joint with a spouse. That is the definition of an accredited investor. People either are or aren’t. There’s no qualifications to become one. You either are or aren’t an accredited investor. If you are an accredited investor, then you could become an Angel investor. As I said, after the friends and family round and sometimes bootstrapping as well. The founder or the entrepreneur has some funds of their own, they go to what is called Angel investors. There are two types. They can be individuals or groups – Angel investment groups. These individuals sometimes come on, and quite frankly don’t do enough due diligence. They may hear of a deal, and they invest in a deal because they think it’s a great deal. But they don’t do enough due diligence, which is the advantage of joining a group. The group does due diligence. When you get in an Angel investment group, there’s a lot of due diligence since this lessens the risk. As I said, the next step is Venture capital. That’s a whole other podcast to talk about Venture capital. But we’re talking about Angel investing. The difference between a fund – as I mentioned earlier – and an Angel investment is funds use other people’s money. If someone wants to invest in a fund, that money just goes in there. The managers of the fund use that money to invest. Angel investing is completely different. In an Angel group basically, also called syndication, Angel groups use their own money to invest. They make the decisions. The Angel groups do their own due diligence. They can be on the boards as we talked before, and offer support and offer knowledge and assistance. That’s the big difference with what an Angel investor is versus what a Venture capitalist is or what’s called friends and family or sometimes called family enforce. But Angel investing really is unique, because you can invest in the company you want to invest in. You could be part of a group, due diligence together. And you could actually the company by being on the board.
People who want to passively exist, they may put their money into one fund. And just know that a tiny bit of it goes into every deal. What’s really neat about Angel investing is, you can dial up or dial down based on your specific comfort level and interest in the company. That really is what you get beyond just throwing the money into a fund.
That’s exactly right, and we’ll talk a little bit about the different Angel groups, because every group in the State – and there a number of them. Every group in the State runs a little differently. So, it’s a matter of choice of how you want to be involved or how you want to have your funds allocated. We can talk later about that as well.
Let’s do that. Let’s explore the different ways these groups are structured. And maybe give us a couple of examples of Florida-based organizations that fall into each of the categories.
Sure, my definition of an Angel group is basically where the investors invest in deals and have the ability to call which deals they’re going to invest in. That’s the difference – as we said – between an Angel group and a fund. Now, if you look at the various Angel groups in Florida, they’re really about seven or eight. New World Angels is the oldest, and perhaps the most prestigious. They’ve been around for a number of years. You have Miami Angels which is funded by the Night Foundation. Out of Miami, you have SeedFunders of course which is here in St. Pete, as well as our SeedFunders Orlando and SeedFunders Miami partnerships. You got Bridge Angels which is out of Sarasota. Jack’s Angels, as I said in the previous podcast, has just been started in Jacksonville. You have venVelo which is a company out of Orlando. They are in harvest mode right now. They aren’t doing any new investments at this point. Then you have Beresford Capital that also does investments. Every one of those is different in how the membership works, how the participants work, how the investment works. They’re not all exactly the same. If anybody is interested in any of those of course, I can go into further depth on that. But there are groups that maybe people might think are Angel groups that really are not. I’d like to talk about those as well. You have Tamiami Angels. They called themselves Tamiami Angels in Naples, great group run by Tim Cartwright. But it’s really a fund. These Angels and these individuals put their money into a fund. Then Tim and his partners run the fund and make the investments for them. That’s really a fund. The same with DeepWork Capital. Ben, Kathy and Mitch out of Orlando run DeepWork Capital. They raised their second fund. Then again, it’s a fund. It’s not an Angel Group. Florida Funders is another one. Florida Funders, when I started that started as an Angel Group essentially, where we use crowdfunding to bring all the accredited investors together to make deals. But since Tom and Marc have been running it, they’ve done an incredible job and raised first of all, an 18 million-dollar fund. That fund is fully invested. And they’re raising another funding and investing from that fund. Again, it’s kind of a hybrid now. It still has the crowd and the crowdfunding portion of it. There’s also a fund that basically invests the money for you, if you want to put your money into the fund. Again, I don’t consider Florida Funders to really be a real Angel group at this point. The most important thing – I think – in selecting an Angel group to be involved with is really the location. Because you want to interact. You want to interact with your fellow investors. If you’re part of a group that’s not local, it’s really tough to get involved and go to the meetings. As I said, there haven’t been too many meetings in the past year, but those will be starting up again. You really want to meet new people in your group, get to know each other. It’s sort of camaraderie and the fun that goes along with being in an Angel group. I think one of the most important decisions in joining an Angel group is the location of where it is and where you are, to be able to actually take full advantage of being a member of an Angel group.
I can attest. It’s really fun. We start every week off at SeedFunders with a two-hour meeting. To get that much brain power under one Zoom at this point, but under one roof historically. To really dig in and talk about, and examine startups is so much fun to get the perspectives and the intelligence and the experience. I really feel like I’m almost getting in a little bit of an MBA class every time I attend a meeting. One of the words that get thrown around a lot is crowdfunding. There are a couple of different ways; things like kick starters, then there were the JOBS Act. Can you break down crowdfunding for us, the word?
Sure, and again this could be a whole podcast alone on crowdfunding. When I started Florida Funders again eight years ago, when I said I wanted to use crowdfunding to make investments in startups basically, there were only two entities in the country that started that. There was Funders Club and Angel List out of California. Florida Funders became the third national entity to start using crowdfunding. I went to conferences and things and people said, “That’s illegal,” or, “It could never work,” but of course it was legal. It does work, but there are certain important things to understand about crowdfunding. First of all, the JOBS Act which was passed in 2012 initiated the concept of crowdfunding. Again, I’ve done whole lectures; hours and long lectures on this. But I’ll try to brief here. There’s two important parts of the JOBS Act; Title II and Title III. Title II is for accredited investors. That’s what we’re talking about here. Being Angel investors is being accredited investors. Title III resulted in what’s called Reg CF, which is called retail crowdfunding. That is for non-accredited investors. The non-accredited investors can invest in crowdfunding through Title III of the JOBS Act. With the accredited investors, where we’re talking about Angel groups or individual Angels or accredited investors, they go through Title II of the JOBS Act. The procedures and processes are all different, but in a way, crowdfunding is type of Angel investing, if you’re talking about doing it through a Title II versus a Title III. As I said, when I started Florida Funders, we basically started it with the Title II of accredited investors only. You could sign up online. Florida Funders then lists the deals for funding. You can invest as little as $5000. The crowd really is kind of like part of an Angel group. However – as we discussed – there is no due diligence. You can’t get involved in the due diligence on the companies. There’s no board seat. You can’t give advice. You can’t really get actively involved with the company that you’re investing in, which is the big difference between Angel investing and other sorts of investing or crowdfunding as far as the crowdfunding has been implemented. It’s really just about finding the organization that fits your needs.
We’ve been digging a lot into startup investing from the word investing. Let’s go a little back to the startup piece of it. Can you define a startup and the different types of startups that one may invest in?
Basically, I would consider two types of startups. One is called, lifestyle business or a family business. This is somebody who wants to start a restaurant or a computer repair shop or a clothing shop, or be a consultant or buy a franchise. Those are lifestyle businesses. They can create a great life for the entrepreneur and the founders, but they’re not really what I would call investible. They aren’t investible, because they’re not really that scalable. Investors want to see something that’s scalable. That they could put their money in, and their money is going to grow fast and big. With a consulting firm or a clothing shop or something like that, they could be successful. But it’s not really the type of success that investors want to see. That’s not for professional investment, because it’s not highly scalable. What we’re talking about as far as startups in Florida and the ecosystem here is, tech startups. This is technology that can scale rapidly. These are things like software systems or SaaS systems – Software as a Service system, artificial intelligence, tech-enabled businesses or hardware that gathers data. And you could do data analytics with it. The Internet of things, anything that’s cloud enabled where data is transferred. All that kind of technology. Those companies, you could think of companies that are no longer startups that were startups at one time in technology: Facebook, Microsoft, PayPal, Netflix, Google, Apple. These were all one-time startups. They were technology startups. They’ve now graduated. They aren’t startups anymore obviously, because they’ve become very successful, but basically, what we’re trying to do in Florida right now is find those companies – the future Facebook, the future PayPal or Apple. How can we find those companies? By investing in the seed stage as accredited investors that are Angel investors, to invest in those companies. To make them, to help them get to that level where they can be the next PayPal or Netflix. The other thing I would say about a startup is, once a company is mature and making profit, it’s no longer a startup. Even if a company has been in business for one year, and all of a sudden, they’re making a profit. And they’re bankable, I wouldn’t consider that a startup anymore, because they’ve gotten past the startup phase. They don’t need the funding from Angel investors anymore, because they are now making money. They are profitable. They can go to a bank. Once they’re bankable, I don’t consider that to be a startup anymore
Interesting. So, when you think about a startup and investing – we’ve looked at startup now. We’ve looked at investing. Let’s turn around and look back at the actual investor. What makes a good Angel investor?
First of all, as I said, you have to be an accredited investor. Just to repeat quickly. Accredited investor is someone that’s worth $1 million or more. Not counting the value of their personal residence or makes $200,000 a year for the past two years or $300,000 with a spouse. The issues about accredited investors or about Angel investors really, you have to be able to take risk. You have to understand risk. The typical numbers that we see is a three to 5% of your active portfolio, of your investible portfolio. If somebody is willing to invest three to 5% of their active portfolio, that would make a good Angel investor. It’s not going all out and doing 10% or 50% or a lot of your investible money, but basically three to 5%. You could choose those deals. That’s what makes a good Angel investor. On top of that, one of the most important parts of being a good Angel investor is the wanting to learn. Wanting to understand different things and new technologies or meet new people and just want to get out there. As you said, that’s the biggest fun. The most fun I have in Angel investing is seeing different things happen. Learning from what people are doing. I’ve got a story about one of our partners. Basically, we were having a presentation. And it was a new form of a catheter. It was a catheter company that had this new way to do… I know nothing about catheters. And most of the people, most of our partners in the room didn’t. About three quarters way through the presentation, one of our partners said, “I have a question. I had a catheter company.” Everybody’s jaw dropped, then said, “You had a catheter company!” basically, he knew the business inside out and was able to ask really great questions that all the rest of us could learn from. It’s always so fun when you have a partner that comes out and says, “I did that. I had something like that. I invested in a company. I started a company like that.” You learn that it’s so nice to be able to learn new things, whether or not we were going to invest in the company. It’s just a learning experience. Also, basically you meet like-minded people, and people who have the same goals as you do. You develop friendships and camaraderie. It’s just a great way to go. Anybody, if you want to be a good Angel investor, if you’re an accredited investor and you can risk a small part of your portfolio, you want to learn, meet people and get involved and stay involved in the local community, Angel investing could be for you.
Wonderful, seedfunders.com to get started. Another good episode. Lots of meaty information. Thank you, closing remarks.
I always say this. I say, “We’re Capitalists. We’re doing this to make money, but we’re also doing social good by starting companies. Getting these companies launched and getting them started. So, we’re looking to make money, but we’re doing social good. Then another story, our first investment. First investment was a company called TSO Life. We invested $150,000 in a company that had a lot of potential, but no real track record, and no real funding available. Because the other groups would not fund an early-stage company. I was on the board, and within a year that company was able to receive over $1 million in follow on funding, after we did the first $150,000. When that follow on funding took place, the founder said to me, “They never would have survived that year, had we not done the $150,000 in funding.” We agreed in that funding to use part of that to pay the founders the salary for that year. People can’t work full time on something without being paid. If they want to start a company, investors want to invest, you’ve got to provide the funds that they can pay themselves to get to successful. We are doing social good by getting companies started and launched, that never would survive had we not made the initial investment. The third thing is, we’re having fun doing it. We’re having fun while doing social good to make money. How can you not love being an Angel investor?
Fantastic, thank you.