Best Targets Are The Ones Not Seen

Shortage of Quality Deals Above the Waterline

by Terry Stidham, President of Target Search Group

 

It has been said many times that “It’s Faster, Smarter, and Cheaper to buy than to build”. Mergers and acquisitions is one of the most effective aspects of a corporate business development strategy to help an enterprise grow. The challenge today is how or where to find the businesses to buy or invest into. 

How many times have you said or heard it said, “If we had known that company was for sale we would have bought it or at least tried to buy it" or "Why aren't we getting more targets to look at"? 

The fact is that the vast majority of business owners who would like to sell don’t want it known on the street that they are for sale. The business owners would prefer for a premium or strategic buyer to identify who they are, prove that they have the intent and means to buy and then to enter into serious discussions as to what they would like to accomplish.

 

Simple enough, Right?

 

I often get requests for my advice on something along these lines; “Our Company is looking to grow through acquisitions. I have used business intermediaries and we have an in-house person or team that is tasked with finding companies. What other options are available to us? We are not getting enough of the “right deals” to look at without too many strings attached. We have very specific requirements as to the size and geographic service area of the company we would be interested in purchasing. Efforts so far have not had very many positive results. Any suggestions or help would be appreciated.”

Strategic Buyers, Private Equity and VC firms are all faced with the challenge getting enough of the “right deals” to look at and to ultimately buy or invest into. The “right deals” are the ones that are aligned with the investment objectives that fit the strategy, size and focus of the investor.

 

Having spent the last 15 years sourcing deals, I can tell you that without a doubt that there is no shortage of quality companies to buy or to invest into. Below the waterline is where one has to go to find them. The outlook for targets to acquire looks extremely good as the baby boomers, who currently own over 60% of the businesses, continue to seek an exit in increasing numbers. 

 

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Warren Buffet to his share holders in 1989

 

The Majority of Deal Flow is being sourced from:

• Brokers or Intermediaries
• Web Sources
• In-house Business Development Teams
• Networking
• Referrals

This may be adequate for the very large players that have dedicated resources to source, review and scrub enough opportunities to meet their investment objectives. The numbers and the amount of dry powder tell us that for many this is simply not the case. Most strategic buyers and investors that are looking to grow through acquisitions may at best have a person or two that is assigned with the task of sourcing deal flow.

 

Abundance of capital (dry powder) to invest as of Q1:

• Approximately $900 Billion with private equity firms 
• Strategic Buyers (non-financial companies) with over $1 Trillion 

“Insanity is To Do the Same Thing Over and Over Again and Expecting Different Results” often attributed to Albert Einstein

 

Investors that are not meeting their acquisition/ investment objectives need to initiate or increase their Business Development efforts - either through in-house efforts or outsourcing it to a business development and deal sourcing specialist firm.

 

Advantages are exponential for the following reasons:

• The Deal is Typically Un-shopped
• Majority of the Quality Deals are Below the Waterline
• Avoidance of the Auction Process
• Committed Sellers
• Quicker Closings
• Confidentiality is Easier to Maintain
• Less Time Wasted on Deals that are Unaligned
• More Cost Effective

Successful business development to source proprietary acquisition/ investment opportunities involves being able to:

• Speak the Language of Both the Buyer and the Seller
• Segment Markets
• Identify Targets
• Establish Lines of Communication
• Gather Base Level of Information to Determine Suitability
• Get Level of Understanding as to Owners Initial Expectations

Call or contact me with your questions of comments.


About the Author:  Terry Stidham is a Sales and Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment. He has served as the head of entrepreneurial organizations as well as Fortune 500 companies. He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. Mr. Stidham has instructed thousands of business owners on how to prepare for a successful exit. He improves operational efficiencies leading to significant increased value.

QE Fuels Inflows

Markets Surge

by Terry Stidham

The U.S. will not end its quantitative easing program (an asset purchasing program in which the Fed has been buying $85 billion in Treasuries and mortgages a month in order to provide monetary stimulus) before 2014, according to Christian Menegatti, managing director of research at Roubini Global Economics. The U.S. central bank has kept benchmark interest rates close to zero since 2009 and has tried to stimulate the economy through three rounds of quantitative easing, or bond purchases.

This has meant good news for equity markets, which have gotten used to the flow of easy money. Wall Street's Dow Jones Industrial Average has rallied over 17 percent so far this year.

Private Equity - 130 private equity funds raised $69.3 billion globally in the first quarter of 2013. This is similar to 2012 when on average $73.7 billion was raised in each quarter. However, the total represents a significant upside vs. fund targets of $59.9 billion. Although the LP's have improved confidence they continue to seek firms that can deliver.

VC - VC Funds invested $6.9bn in US start-ups across 841 deals during the first 3 months of this year, up from $6.8bn in the fourth quarter of 2012, which saw 834 transactions, a study by industry database CB Insights has estimated.

According to the analysis, funding for internet companies soared by 12% on a sequential basis during the first quarter of 2013, to over $2.7bn.

Hedge Funds – The Hedge Fund Review reports that the hedge fund industry assets surged by $122 billion to a record $2.375 trillion, with the top ten funds receiving the majority of the new capital in Q1. John Van, VP of Van Hedge Fund Advisors reported that, “The average U.S. hedge fund was up 4 percent through March, while the average equity mutual fund was up only 1.7 percent”. 

IPOs - U.S. companies are on track to raise the most money through initial public offerings since before the financial crisis, driven by the same thirst for risk among investors that has pushed the stock market to new highs.

Through Q1, 64 U.S.-listed public offerings had raised $16.8 billion, according to Dealogic. In the same period in 2012, the biggest year in dollars since the financial crisis, 73 companies raised a total of $13.1 billion.

If an investor had bought shares in every IPO raising more than $25 million in 2013, they would be up 15% so far this year, according to Dealogic, matching a 15% gain if they had owned the Russell 3000, which includes large- and small-cap companies, since the beginning of the year.

Mutual Funds - U.S. investors poured $184 billion into long-term mutual funds in the first quarter. With the stock market climbing, investors “are buying at a higher price. But are they overpaying? They’re sick of being cautious and making nothing. They've got kids to send to college. They need cash. They’re telling their advisers to address the issue that they’re not getting enough of a return on their investments.

As they have for nearly two years, taxable bond funds made the strongest showing during the quarter. But funds focused on U.S. stocks showed signs of life, posting their first positive quarter since early 2011, according to a Morningstar Inc. report. Investors plowed nearly $80 billion in new money into all stock funds in the first quarter, compared to net inflows of $5.3 billion a year ago.

Boston mutual fund giant Fidelity Investments saw net inflows of $8.9 billion in the first quarter, and just shy of $3 billion in March, according to Morningstar. A year ago, Fidelity’s net inflows were $4 billion in the first quarter and $425 million in March.

Eaton Vance also saw a dramatic turnaround, with inflows of $5 billion for the quarter and $1.5 billion for March. That’s compared to net outflows of nearly $900 million for the first quarter a year ago and $365 million in March 2012.

Net inflows were $362 million in the first quarter at Putnam Investments, which was hit hard during the Great Recession. It saw net outflows of $60 million in March. A year prior, Putnam’s first quarter outflows were nearly $1.1 billion, and outflows for March totaled $350 million.

In addition to U.S. stocks, international stock funds and alternative investment funds posted strong first quarter flows compared to a year ago. Inflows to international stock funds were about $47 billion for the quarter compared to $5 billion a year ago, while net flows into alternative funds totaled $9 billion for the quarter compared to $3 billion the previous year.

Leon Black with Apollo Global Management recently said that he has never seen such a good debt market. “The financing market is as good as we have ever seen it. It’s back to 2007 levels. There is no institutional memory,” Black said. He believes that rising equity markets and cash-rich corporations are making it difficult to buy and much easier to sell. With interest rates at historic lows, how can someone afford not to be an active investor?

Musical Chairs – We all know the game and what happens when the music stops. Somebody is eliminated, the music restarts and the game proceeds until there is only one person left who is deemed the winner.  Can anybody answer what happens when the music or in this case the presses stop and we still have all of this capital floating around in the economy?  How will the markets react? What happens to interest rates when the Feds stops the repos? Is it time to care? Should we care? or as they say in South Louisiana, "Laissez les Bon Temps Roulez".

If you are executing or contemplating an acquisition or investment strategy and need help in sourcing targeted opportunities then contact the business development and deal flow specialists at Target Search Group today.  

Investors Move into the Hedges

Follow the Money

by Terry Stidham, President of Target Search Group

Q1, 2013 funding for VCs and for Private Equity are up and according to Hedge Fund Review, hedge fund industry assets surged by $122 billion to a record $2.375 trillion, with the top ten funds receiving the majority of the new capital. John Van, VP of Van Hedge Fund Advisors reports that, “The average U.S. hedge fund is up 4 percent through March, while the average equity mutual fund is up only 1.7 percent”. 

Investors like the performance of late along with the flexibility hedge funds have to make among a broad set of short-term investments.  Many strategies are being used (long/short equity, credit, macro, statistical arbitration, etc) with trades lasting from milliseconds to years.  Most hedge funds are staying in relatively liquid securities so that they can trade out at any point in time to lock in their profits.

Sondra Harris gives us the following 8 Reasons Why the Hedge Fund Industry Deserves a Second Look in 2013 that she picked up from Michael Collins at the Investment Management Institute earlier this month:

1. Managers are better than ever - With the froth of the ’90s over, we are seeing less of the accompanying frenzy that had people putting money into hedge funds without really knowing what they were getting.

Today there is an expanding group of good managers, a better crop than we've ever seen, so the quality tends to be good, and because of the various market forces at work, their fees are going down. 

2. Correlations in markets are down, and that’s a strong tailwind for hedge fund strategies - The high market correlations in recent years contributed greatly to dampened hedge fund returns. That’s changing. Spikes in correlation over the last 18 months are far shorter. That gives managers some breathing room and prevents whiplash. They can put on the trades, make a profit and move on. This type of environment should help raise the tide for all hedge funds.

3. Hedge funds are good bond alternatives - This is even more important for institutional investors like pension plans. They know that holding a portfolio with a 30/40 percent traditional bond allocation may be a potential time bomb. The free ride on their bond portfolio for the last 30 years is over. They’re all focused on it. Good hedge fund managers will either avoid unattractive bonds completely or profit from the inevitable sell-off.

Hedge funds can do very well in those sell-offs. Managers can short or actively trade a hedged portfolio of bonds, whereas, traditional bond funds cannot. Increasingly, investment advisors are substituting a diversified portfolio of hedge funds for part of their traditional bond allocation.

4. Holding periods are shorter; manager expertise is deeper - Geopolitical shocks and general market sentiment are driving hedge funds away from longer duration holding periods. Managers are using a variety of trading strategies, not just putting the position on, taking it off and going on to something else, but being able to trade it both ways and do that very profitably.

They can do this nowadays by relying on markets with deeper liquidity. This is good for individual investors, as well, whose own time horizon has come in dramatically in the last couple years.

5. It’s a buyer’s market for hedge funds - In general, redemption terms for all of the very best performing hedge funds will become more favorable as all funds are going to have to compete for assets. Frankly, it’s become a buyer’s market. Again, a good thing for investors. It also means more liquidity. In fact, liquidity has become as important an indicator as performance when evaluating hedge funds.

6. The general landscape for hedge funds will become even more populated - This will happen as the number of options for new and creative ways to trade and manage risk becomes more sophisticated. Investors who want to add hedge funds to their portfolios will need help from their advisor in selecting managers who can build a dynamic and diversified portfolio.

7. Fundamental long-short managers are paying a lot more attention to technical indicators - Traders have acquired new tools and quicker access to more data over the past couple of decades. These modernizations of hedge fund trading can improve managers’ abilities to protect their capital should the unexpected shock occur. Frankly, as we’re all beginning to learn, tail events seem to be the new normal. The good news is that the managers are even more aware and prepared to adapt quickly to different environments.

8. We’re seeing more and more hedge fund mutual funds - This used to be considered an oxymoron. It’s now becoming a necessity, driven by demand from investors who want even more transparency. They also want more liquidity, daily liquidity. They want daily NAV. 

The funds that demonstrate performance and innovative strategies will continue to attract the bulk of the investors. Other major investor considerations are:

• Investment Objective: Is it lower volatility, enhanced return, less correlation to other investments, etc?
• Structure: Is the fund have a single manager / strategy fund to build out an allocation or is it a fund of funds?
• Team: What is the makeup of the investment team in terms of diversity, experience and history, and the culture of the overall organization?
• Sophisticated Risk Management: Is risk management an independent function that provides checks and balances to the investment process?
• Operations: Does the fund have a sound operational infrastructure backed by dedicated support groups (e.g. legal, technology, due diligence) to allow the investment team to focus solely on investing?
• Improved Transparency 

Terry Stidham is the President and founder of Target Search Group. He is a Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.

Generalist Funds Prevailing

Capital is Available for Funds that have Delivered Strong and Consistent Results

Mary Kathleen Flynn with Source Media recently wrote the following post on how firms like Huron Capital Partners are going against the common wisdom of the last few years that generalist funds were waning.

“Huron Capital Partners LLC is among a handful of private equity firms that have recently raised new generalist funds, going against the common wisdom of the last few years that generalist funds were waning. At $500 million, Huron Fund IV is the Detroit firm's biggest fund to date. Like Huron's previous funds, it will make control investments in lower middle-market companies.

The fundraising climate today is "tough overall," reports partner Gretchen Perkins. "But capital is available for funds that have delivered strong and consistent results."

Although the firm raised funds quickly - fundraising began in October, and the fund closed in December - the process was more challenging than it had been for the previous fund, which was raised during the exuberant market of 2007.

"Limited partners are much pickier today," explains Perkins. "They conduct a far greater level of due diligence, and it requires more resources internally to respond to all of that."

Huron went into the process well prepared, Perkins says. "We found that great LPs were prepared to move, with lots of detailed, comprehensive backup."

The firm added some new investors, as well as retaining past investors.

The new fund will invest in companies with the same criteria as previous funds, without a focus on particular industries. "While we do invest in a range of industries and sectors, we do focus very specifically on solid companies where we believe we can improve operations to create value," explains Perkins about the firm's investment thesis.

"We will continue to invest $10 million to $50 million of equity in lower middle-market companies in the new fund. Additionally, we can invest up to $100 million and, therefore, close deals with no outside financing."

The last three businesses that Huron has invested in from its third fund are "representative of the types of businesses in which we will continue to invest from our new fund," she says. These include Six Month Smiles, a provider of cosmetic orthodontics; Ronnoco Coffee, a coffee roaster and distributor; and Bloomer Plastics, a producer of engineered plastic films.

When asked how the dealmaking environment is shaping up in 2013, Perkins responds, ‘I would say stable. We are closing on three companies now, which is on pace with 2012."’

Terry Stidham is the founder and principal of Target Search Group. He is a B2B Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.

PE Assets in Unsold Companies at Record Levels

PE Sets on Record Collection of Unsold Portfolio Co's in the Asset Class. Investors Take Notice.

Arleen Jacobius recently wrote the following post elaborating on several of my recent posts that looks at  the overhang of unsold companies and LP's sentiment. 

The glut is enormous: an estimated 6,500 unsold portfolio companies as of year end, representing 69% of private equity firms' total assets under management as of Sept. 30. That is the highest number of unsold portfolio companies ever recorded by PitchBook Data Inc.  It is estimated to double that of 2006.

Institutional investors are beginning to ask managers about these portfolio companies and the likelihood of achieving exits — before committing capital to new funds. Whether these holdings are sold for sizable profits could affect private equity returns in years to come.

For example, both the $41 billion Los Angeles County Employees' Retirement Association, Pasadena, and the $38 billion Teachers' Retirement System of the State of Illinois, Springfield, tracked Silver Lake Partners' portfolio company exits before making commitments to its latest fund, Silver Lake Partners IV. Each eventually committed $150 million.

Investment Concerns

LACERA's staff named exits of unsold portfolio companies as one of its two “investment concerns” related to investing in Silver Lake's fourth fund, according to a staff memo for the Feb. 13 board of investments meeting. The staff noted Silver Lake has about $7.6 billion invested in 24 still active companies. Some 70% of the capital invested in Silver Lake's second fund, which closed in 2004, and 75% of the capital invested in Silver Lake's third fund, which closed in 2007 is still active.

And it's not just Silver Lake. LACERA staff noted in the memo that a “lingering impact of the financial crisis is the large quantity of unsold portfolio companies building up in large buyout funds.”

Andrew R. Cristinzio, McLean, Va.-based partner in PricewaterhouseCoopers LLP's deals practice, estimated the overhang in assets is double 2006 levels.

“If you look at private-equity-backed portfolio companies back at pre-crisis levels, current private-equity-backed portfolio company overhang at the end of 2012 was somewhere around 6,500, which is estimated to be double that of the pre-2006 period,” said Mr. Cristinzio, citing PitchBook data.

Indeed, of the more than $3.27 trillion in total worldwide private equity assets under management as of Sept. 30, $2.27 trillion is “unrealized portfolio value” or unsold portfolio companies, according to data prepared for Pensions & Investments by Preqin, a London-based alternative investment research firm.

The worst offender in terms of vintage year is 2007 funds, which as a group have the highest unrealized value of portfolio companies — $527 billion — compared with total assets under management of $617 billion, the Preqin data show.

When Preqin compared the proportion of private equity companies invested in each year since 2006 that are still being held by fund managers, 70% of companies invested in throughout 2006 are still being held, said Nicholas Jelfs, Preqin senior analyst and press officer.

The overhang in unsold private equity portfolio companies has never been higher in the history of the asset class, asserted Michael G. Fisch, president and CEO of American Securities LLC, a private equity firm in New York.

“The overhang that is not sufficiently talked about is not the overhang of capital, but the overhang of older portfolio companies and older funds that have not been sold and need to be sold,” Mr. Fisch said.

What ends up happening to this glut of unsold portfolio companies could have a big impact on the private equity industry.

Some firms can't sell some of their portfolio companies because they are worth less than their original investment, Mr. Fisch said.

“What will happen to them? Who will buy them? When will they get sold? What will happen to the returns of the industry when they do get sold?” Mr. Fisch asked.

Every situation will be different, he said. If a manager's relationship with the firm's limited partners is good, investors will give the general partners more time to sell their portfolio companies.

Where the general partner-limited partner relationship is not good, the entire private equity fund might be sold to another general partner, or investors might bring in a new general partner because they have lost faith in the original one, Mr. Fisch said.

New Commitments
Holding onto portfolio companies also can affect investors' ability to make new commitments, said Sanjay R. Mansukhani, senior manager research consultant in the New York office of Towers Watson Investment Services Inc. That's because exiting companies is a prime source of distributions back to limited partners. “When net asset value is not coming back in distributions, investors find themselves overallocated” to private equity, Mr. Mansukhani said.

Given the lessons of the financial crisis, when overexposure to alternative investments made the entire portfolio less liquid, investors are loath to increase their target allocation in order to commit capital to additional private equity funds, he explained.

Portfolio company refinancing, called recapitalizations, has led to some distributions to limited partners, but most distributions in Towers Watson's portfolio are from portfolio company exits, Mr. Mansukhani said.

This makes it tougher for general partners to raise money, even when their portfolio valuations are rising from the effect of the uptick in the equity markets in the U.S. and the value general partners have added to the portfolio companies, Mr. Mansukhani said.

"Even core investors are giving less money, even for great-performing funds,” he said.

Distributions also are a sign that a private equity firm is a solid performer, noted David Fann, president and CEO of TorreyCove Capital Partners LLC, a San Diego private equity consulting firm.

“Most private equity investors would like to see at least a portion of the prior fund's investments achieve realizations before committing to a new fund,” Mr. Fann said. “Realized investments validate performance and success.”

Damage to Returns
Another aspect of this historic overhang of portfolio companies is the damage it is expected to do to overall private equity returns.

“It's just on the math of the internal rate of returns,” Mr. Mansukhani said.

A longer portfolio company holding period will affect internal rate of return because IRR is time based.

“General partners may gain a little multiple by holding out for a better price, but what it is going to do is dilute the internal rate of return,” he said. “You have to balance those two things.”

It also becomes an issue of capacity, whether a manager with a collection of portfolio companies in older funds and a new fund has enough executives to manage the entire portfolio, Mr. Mansukhani said.

“It's about bandwidth,” Mr. Fann said. “Understanding the capacity of general partners to make new investments is critical. Investors want their GPs to work solely on their behalf. Investors don't want to commit to funds whose general partners are consumed working on the previous fund's investments.”

However, some industry executives are betting the portfolio company overhang might diminish if the economy, at least in the U.S., continues to improve and debt for deals remains available.

“Clearly, there's a general acknowledgement that there's been an increase in the average hold time from investments made in the 2007-2008 time frame,” said PricewaterhouseCoopers' Mr. Cristinzio. “But if the economy continues on the current trend and financing continues being available as it is, we will see an increase in exits.”

Terry Stidham is the founder and principal of Target Search Group. He is a B2B Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.

Do Business with an Angel

Angel Investors: For Startups

by Terry Stidham

There are currently between 5-7.2 million people in the United States who are accepted as accredited investors. This group of people, which represents as little as 1% of the U.S. population, is made up of wealthy individuals that make $200,000 or more in base salary every year, or maintain a net worth of over $1,000,000.

A common investing trend where the wealthy commit part of their portfolio in startups is called angel investing. According to the recent Reynolds survey, there are currently 756,000 angel investors in the U.S. who have made an angel investment or participated in a friends and family round of financing.

 

Angel Investors

The term angel investor originally comes from Broadway, where it was used when describing the people that provided financing for theatrical productions.

Angel investors invest their own money, where the typical amount raised ranges from $150,000 to $2,000,000. Since angel investors are very often individuals that have held executive positions at large corporations, they can often provide fantastic advice and introductions to the entrepreneur, in addition to the funds. A Harvard report provided information on how angel funded startups had a higher chance of survival.

Angel investments are high-risk, which is why this strategy normally doesn’t represent over 10% of the investment portfolio of any given individual. What angel investors look for is a great team with a good market that could potentially return 10 times their initial investment in a period of 5 years. The exits, or liquidity events, are for the most part via an initial public offering or an acquisition.

According to the Halo Report, angel investors particularly like startups operating in the following industries: internet (37.4%), healthcare (23.5%), mobile & telecom (10.4%), energy & utilities (4.3%), electronics (4.3%), consumer products & Svcs (3.5%), and other industries (16.5%).

In today’s competitive business world, there are times when a business runs out of capital funds. The easiest and most convenient source of funding during such times, are the angel investors. This however doesn’t mean that they should accept cash from any angel investor. Choosing the right kind of angel investor is an important consideration.

While there are several kinds of angel investors, they can widely be categorized as –

7 Types of Angel Investors

1. Return on Investment (ROI) Angels - One thing about ROI angels is that, they invest only when the market is doing well. This is because; such investors are mainly concerned with the financial rewards they will be able to reap given the high-risk investments they make. For the ROI angels each investment is like another significant addition to their already diversified portfolio.
2. Corporate Angels - These angels are most often former business executives who have either been replaced from large corporations downsized or taken voluntary retirement. While these investors seem to be making investments only for the sake of profitability, they are actually looking for a paid & secured position in the company they are investing in.
3. High -Tech Angels - Though these investors are less in experience, the investments made by them in modern technology is quite significant. These investors value profitability as much as they value the exhilaration of introducing a novel technology in the market.
4. Entrepreneurial Angels - These are successful investors who have their own brilliant businesses, which provide them with a steady flow of income for making high-risk investments in start-up companies. While they make all efforts to help entrepreneurs launch their start-ups, they do not actively get involved in the operations of the company.
5. Core Angels - These are investors with extensive business experience, who have accumulated enormous amount of wealth over extended period of time. One important fact about these investors is that, they usually tend to make high-risk investments in spite of their losses, which adds-up to their diversified portfolio. Core Angels not just make capital investments but also useful knowledge investments.
6. Professional Angels - Being professionally employed as lawyers, physicians, etc, these angels make investments into companies of their fields. At times, they may invest in several companies simultaneously. Professional angels are extremely valuable for initial capital investments.
7. Micromanagement Angels - These are considered to be the most serious types of investors. While some of them are born with a silver spoon, others acquire their wealth through sheer hard work. These investors usually seek a board position & tend to implicate the business strategies they have incorporated in their own companies into the companies they are investing in.

Angel Investment Returns

Data collected by the Kauffman Foundation shows that the best estimate for angel investor returns is 2.5 times their investment even though the odds of a positive return are less than 50%, which is absolutely competitive with the venture capital returns.

The secret recipe for getting a good ROI is to diversify your investments into multiple startups and hedge your bet. Angel investors should look to position themselves as investors in at least 10 startups in order to play the startup game right. However, carefully selecting your picks and knowing who you are getting into bed with, so to speak, is very important. The due diligence process should be taken very seriously before making any type of decisions.

 

Angel Groups

During the last 15 years, angel investors have joined different angel groups in order to get access to quality deals. According to the Angel Capital Association, there are over 330 groups in the United States and Canada that are active within the startup community.

One disadvantage of joining an angel group is the time commitment of having to go to their events and networking with the group. In addition, most of the angel groups require member attendance to the screening process, which takes hours out of your schedule. Another requirement is that members need to invest a certain amount every year. For example, the New York Angels require every member to invest at least $50,000 during a 12-month period.

Investment Crowdfunding

Times are changing, and the new way to access deals is via investment crowdfunding. With investment crowdfunding, angel investors are able to navigate quality deals from home without any limitations and requirements, being able to invest lower minimums, allowing angels to hedge their bets with more startups.

Angel groups on average review around 80 deals per month. Another positive ingredient that investment crowdfunding platforms provide is the fact that they’ve done most of the due diligence process for you. Typically the venture follows this process:

• The entrepreneur submits all the business information (business plan, executive summary, financial information, investor presentation, etc.)
• The application is reviewed and the business analyst team decides whether or not it makes sense to move forward. This step is all about the compelling story, the uniqueness, and the traction that the business has been able to accomplish.
• The deals that pass the above filters are forwarded to the investment committee comprised of individuals with vast experience in acquisitions. All of them are active angel investors. The main focus during this process is to review the financials, legal structure, and deal terms.
• If the company passes the investment committee’s due diligence process, then the investment committee would schedule a conference call with the entrepreneur for additional questions and a full walk through of the pitch.
• If the call and additional background checks are passed the deal is posted on the platform and the interaction with the registered accredited investors begins.

Conclusion

One of the positive factors about investing in startups is not only the potential of getting a return, but also being able to be a part of something great. As opposed to investing in the public markets, investing in startup companies gives the investor the chance to be in communication with the team and opens the opportunity to be part of the growth.

Angel investing is positive all around. Not only because it could provide gains, but also because every single investment contributes to the US economy thanks to the jobs that these ventures create. It is important to note that during the past 17 years, startups were accountable for creating 65% of the net new jobs. Providing them with access to capital is without a doubt something that is needed in this country.

Angel investing is becoming the new venture capital. 50,000 companies were started by seed capital last year while venture capital firms financed only 600.

About the author Terry Stidham

Terry Stidham is the founder and principal of Target Search Group. He is a B2B Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.