Protect Angel Funding

By Marianne Hudson, Executive Director Emeritus

The Securities and Exchange Commission issued a concept paper seeking comments on “harmonizing” securities offering exemptions a few months ago.  These exemptions, like Regulation D, which investors rely on for more than half of all private offerings, set the rules for how securities can be bought and sold without extensive registrations. This SEC paper provided a truly unprecedented opportunity for organizations like ACA to suggest improvements to regulations that impact angels and the startup companies we support. 

By: Marianne Hudson, ACA Executive Director

One of the most important and effective things ACA does for our members is to represent you in Washington, DC. We do this to ensure you have the best possible environment to invest in and support interesting entrepreneurs.  This gives you the best possible chance to enjoy your angel experience and to help wonderful companies exit, leading to good returns for you.

Sometimes our work is aimed at creating new tax benefits or legislation allowing more investors in a fund, but other times our work is truly “do no harm.”  In fact, over the last eight years, our main public policy work has focused on ensuring the definition of accredited investor is not changed in a way that cuts the number of angels in half.  The Securities and Exchange Commission (SEC) is lobbied all the time to raise the thresholds for net worth and income by inflation beginning in the 1980s, more than doubling the $1 million and $200,000 requirements.  Our past research with ACA members showed more than 30 percent of us would no longer be angel investors if that happened.  That’s what I call “existential!”

By: Marianne Hudson, ACA Executive Director

In recognition of the importance of innovative startups, several Congressmen and Senators have established Startup Day Across America, as a way to celebrate and meet with startup companies while they are in their home states and districts. This is a great time for ACA members to contact their Congressmen and suggest they visit a portfolio company or attend an angel roundtable. The official day is August 5th, but any day in August will work.

More and more Congressmen and Senators understand the importance of innovative startups to America’s economy, and some are also noting how angel investors support these job creators. I believe it is important to grow that understanding in our legislators and encourage ACA members to reach out to your US Representatives and Senators to meet with you and your portfolio companies during their August recess – many of them really enjoy talking with their constituent entrepreneurs and investors! Such a meeting can also bring local media attention to your angel group and portfolio companies, if you choose to promote it.

By: Alan S. Knitowski, Chairman, CEO & Co-Founder at Phunware, Inc.

Alan S. Knitowski is well versed in the world of entrepreneurship. Beyond experience as an angel investor and fund manager, Alan is a successful serial entrepreneur with multiple exits to companies such as Cisco Systems, Level 3 Communications and Internet Security Systems (now IBM). Currently Chairman and CEO of Phunware, which helps brands to engage, manage and monetize their customers across any connected device using its pioneering multiscreen as a service (MaaS) platform, Alan shared his perspective regarding the importance of accredited angel investors to his entrepreneurial success.

What role has angel capital played at Phunware?
Phunware was established in February 2009 and over the first five years we raised approximately $17.5M in angel money. In fact, this was the only type of external capital that we raised during our formative years as we purposefully chose not to take funding from any corporate, venture or institutional investors.

Because of the angel capital that we raised, we were able to achieve tremendous early success and literally exponential growth. The angel money enabled us to hire the people to build our platform and sustain our operations while we built out our sales organizations and filed patents vital to protecting the intellectual property of our business. The bigger balance sheet that we created with angel investment allowed us to grow both organically through our own efforts and inorganically through acquisitions as well. We now employ 230 people and were recently recognized as the fastest growing company in Central Texas (Austin Business Journal Fast50), the fourth fastest growing software company in the United States and the fortieth fastest growing company of any type in the United States (Inc. 500, 2013).

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.

By: Elizabeth Hess, CFO at TRX Systems, an ACA member portfolio company that provides algorithms and products that deliver location indoors and underground, in areas where GPS is unreliable or unavailable. Elizabeth shares her thoughts about the potential change to the accredited angel definition based on her experience with angel funding at TRX and other entrepreneurial companies.  

The potential re-definition of Accredited Investors would drastically reduce the number of angel investors, barring many from participating in backing new ventures. This is of great concern to those early stage investors, and an even greater concern to the entrepreneurs who rely on them.

Early stage financing is the most difficult to obtain but it is the basis for everything. Entrepreneurs may do technical research, talk to customers, validate the market, and flesh out key elements of a business plan- but to progress beyond the “slideware” phase, they must hire employees and start the actual development work. Employees reasonably look for some indication of viability before signing on, both from a financial standpoint and a technical standpoint. Angels are willing to invest at this stage, before there are any real proof points, because of their background and experience, their ability to dive deep during due diligence, and to make an informed decision to invest. The angel investor provides both the funds to bring people on and the assurance that there has been some validation of the business concept.

By: Marianne Hudson, ACA Executive Director

Last week, Scott Shane wrote a column in, Would a Higher Accredited Investor Threshold Clip Angels’ Wings? While the answer to that question to me is obviously “yes”, Scott concluded “data on the angel capital market’s response to the 2010 increase in the (accredited investor) threshold doesn’t support that view.”

I’ve read his column and traded an email or two with him since, and I have to say, Pardon Me?

An Interview with: Michael Bolick, Selah Genomics CEO

It is fair to say Selah Genomics CEO, Michael Bolick, knows a thing or two about angel investment. As a serial entrepreneur with 25 years of experience in the life science and healthcare industries, Bolick
most recently sold Selah Genomics to EKF Diagnostics, fifteen months after leading a management buyout of Lab21 Ltd’s US-based operations. Prior to co-founding Selah Genomics, Michael served as President of Lab21 Inc., which was formed following Lab21 Ltd’s acquisition of his prior company, Selah Technologies LLC in 2009. Bolick founded Selah Technologies LLC in 2006 to commercialize healthcare focused nanotechnologies licensed from Clemson University.  Investors include ACA member Upstate Caolina Angel Network.

How did angel investment affect Selah Genomics?
Angel investment was instrumental to our success. We completed a management buyout in December 2012 and our angels invested in the summer of 2013. We were blessed with the opportunity to leverage those funds and rapidly move our business into fast growth mode and profitability, which led to the acquisition.

By: Matt Dunbar, ACA Board and Upstate Carolina Angel Network

In recent weeks in the Upstate Business Journal, several exciting local startups have made the news for their significant national and international successes: The Iron Yard expanding its code school to cities across the Southeast; KIYATEC winning a rare grant from the National Cancer Institute and being featured at the upcoming BIO International Convention; and Selah Genomics realizing a highly lucrative acquisition by a European diagnostics company.

All three of these companies have relied on local angel investors (including the Upstate Carolina Angel Network) to help provide the risky, early-stage capital required to fund their achievements. They are not alone – across the country last year, more than 70,000 companies raised more than $24 billion from 300,000 angel investors.
But many of those angel investors may be endangered.

By David Verrill, ACA Chairman and Managing Director, Hub Investment Group

The US Securities and Exchange Commission has been tasked (every four years by virtue of the Dodd-Frank Act) to review the thresholds of wealth and income that determine whether or not an individual is accredited “for the protection of investors, in the public interest, and in light of the economy”. The definition of accredited investor hasn’t changed a lot in several decades – a point of fact that has motivated many to say that by virtue of the cost of living increases alone over that time the levels should be roughly doubled to $450,000 in income and $2.5 million in net worth (not including your primary residence). While the logic of math is plausible, these increases address none of the reasons why accreditation should be changed – to protect investors, in the public interest, and in light of the economy. Let’s take a look at each of these.

  • To protect investors. There is almost no fraud in the angel and early stage investment space, so increasing the levels of wealth and income more than likely won’t reduce fraud. I get it that the SEC needs to focus on fraud. They are looking at a broad array of investment types in contemplating accreditation, including VC and PE funds, REITs, hedge funds, etc. Unfortunately there have been some devastating fraud cases in some of those worlds. However, let’s not throw the baby out with the bath water. Let’s address fraud where it exists, not where it doesn’t.