BlueWater Angels Doubles Investing in Each of Last Three Years

By: Ken Kousky, angel investor, Executive Director of BlueWater Angels (Midland, MI), and member of ACA’s public policy committee. We invite you to get to know Ken and other ACA members via this periodic feature. If you have a great idea for a member profile, please contact Sarah Dickey.

How and when did you get involved in angel investing?
I have been making angel investments since the 1980s before we called it angel investing. My company, Cache Data Products, was acquired by Novell when they went public. While I continued to work for Novell, I had the opportunity to meet and support startups that were in our networking infrastructure space. Most needed seed capital.

I spent a lot of time making arrangements with potential investors on behalf of these companies before there was a formal angel community available. Some of these startups were my earliest angel investments. Even then emerging technologies weren’t bankable and needed creative forms of financing.

What has been your most unusual investment and/or exit?
My most unusual exit experience was a software development company I invested in while teaching at Washington University in St. Louis. After some early investments, the company raised a venture round and the VCs didn’t want angels in the deal. This was at the time of the millennial startup bubble and when the market plummeted the relationship between the VC and the company followed. I was asked to be on the Board as an intermediary. Unknown to me my warrants were never expired and eight years later the when company was acquired I received the only surprise exit payment of my life.

How did BlueWater Angels get started?
I had moved to Michigan to be close to family and repeatedly heard that although the community produced promising startups, there was not the early stage capital available to support them. We worked through a local incubator to get the Angel Resource Institute training for angels as an organizing tool to launch our group in 2008. We had more interest than even I expected and nearly twenty angels signed up right away.

Our investment momentum took a while to build. We only invested in one company in our first two years, but we now have member leadership and over the past three years we have doubled our investments each year, which now totals nearly $12M in 40 investment rounds to date. In fact, according to a state venture capital report, BlueWater Angels now represents one-third of angel deals and dollars to startups in Michigan. Although we started in 2008, more than half of our investments are less than two years old and we have several prospects for exit in the next 18 months.

What have you found to be the keys to success for growing investable startups in your community?
We have solid industrial heritage out of manufacturing and similar industries. Our challenge is that these have not historically created seed capital opportunities. In addition with the loss of home equity, which founders had used for startup financing, we have been working to develop programs to access some of the equity on corporate balance sheets as a funding option for startups.

Corporates in our area are traditionally focused on later stage deals, but we have found that they will support seed deals and opportunities in their sectors when involved from the beginning. We now include corporates as partners in our seed deals and startup showcases to create buy-in at the start of a company. For example, we recently held a life sciences showcase and our hospital host funded four deals with us in two months.

What has changed recently in the way you and/or angels in your area are investing?
Prior to 2008, we counted on the entrepreneurs to have already bootstrapped their company as well as have investments from family and friends. Now we are seeing entrepreneurs who get seed funds from accelerators or other programs and do not have skin in the game. We have seen this make entrepreneurs fail too fast because things expectedly get tough and there’s a fine line between the concept of “fail fast” and the “walk-away entrepreneur” giving up too early.

It is a buyers’ market for startups in our area and this can be a challenge for our entrepreneurs.

What is the most important issue or trend for your member angels to be aware of in the near future?
In the ACA public policy committee we are spending a lot of time looking at the current and potential impacts of Dodd Frank on angels and startups. As a nation we are beginning to rebuild our financial industries and after five years of jobless recovery and we need a system capable of funding startups. This is very apparent in the rust belt, with the lack of local focus among the consolidated banks the need for angels is substantial. Dropbox raised more venture money in their last round than many states raised for all their start-ups combined. There is still a vital need for additional startup financing so we’re finding great opportunities given the great needs.

The creation of the 21st century financial system is just beginning. I expect to see a lot of innovation and growth in this area – which means there will be big opportunities for angels.