The First Funding is the Basis for All Future Growth

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.

The path to venture financing is lengthy and all-consuming for the start-up management team. Relying on boot-strapping, or self-financing alone for a startup is not a viable option for most entrepreneurs. The early funds from angel investors provide the ability for founders to make sufficient technical progress and to build the other indicators of a viable venture investment – putting together a first rate team, starting patent protection for important intellectual property developed, securing early customer engagement. Though it’s not possible for a company to gain success simply by spending money, it is entirely possible for a company to fail simply because it is cash-starved. Without early stage investors, few startups will progress to venture or customer-based financing.

Angel investment is about more than money. Angels commit real time and energy to a company’s growth. Entrepreneurs have brilliant technical ideas, but it takes more than technology to build a successful company. Angels bring pragmatism and balance based on their years of experience, both operationally and as investors. In a startup environment, the availability of someone to play devil’s advocate and to view the company, the product, and the market without bias is invaluable. Angels also bring networks of contacts that extend far into organizations, in many cases to key operating and decision-making executives. An angel Board member at a company where I worked previously made the introduction to the right person at Cisco that ultimately resulted in the sale of the company to Cisco. Another angel has saved us countless hours by connecting with former colleagues and business partners as diverse as sales networks in the Middle East to local valuation experts.

At TRX, we’ve to date created 19 well-paying and long-lasting jobs - and our sales growth will drive creation of many more jobs over the next several years. These jobs would not have existed without our angel investors. We have developed an exciting location and mapping technology that delivers 3D indoor location for first responders and warfighters in environments where GPS cannot function. This potentially life-saving technology would not exist if it were not for our first investors. The technology TRX algorithms use is now being embedded in cellular and industrial devices, enabling delivery of indoor location for an even broad range of applications. These applications will be possible only because of our angel investors. ACA has provided extensive analysis on the impact of this redefinition to their base, but there is no need to engage in extended analysis on the impact to entrepreneurs. The first funding is the basis for all future growth and without that first funding jobs and innovation will be lost.