Great Lakes Angels Vet Deals, Try Not To Be A–holes

5/6/11Follow @xconomy

What’s the secret to a successful angel investor group?

“No assholes,” John May, chairman emeritus of the Angel Capital Association, told the Great Lakes Angels Thursday.

People laughed, but May was perfectly serious.

“The group has to treat entrepreneurs well,” says May, the co-founder and managing director of New Vantage Group in Vienna, VA. “You can’t afford to have one member with the group that messes up the chemistry.”

I looked around the room. I didn’t see any assholes, but rather somewhat wealthy, white men–lawyers, distributors, former executives–gathered on a 23rd floor conference room in downtown Detroit, hoping to vet some deals and brush up their investing skills.

Angel investing has traditionally been a low key affair: well-to-do, often anonymous individuals investing $25,000 to $250,000 in early stage startups. Some do it for money. Some do it for fun. Some do it for some sense of civic duty.

“We need psychic reward while we wait for financial reward,” May says.

But as many venture capital firms pull back from early stage/seed deals, angels are being asked to fill the void. That’s a tall order for group of investors that’s not really a group at all but rather of bunch of part-time investors doing their own thing.

Of those, May says, only five percent really know what they’re doing. The remaining 95 percent are “just winging it,” he says.

One solution is to, well, organize. Formed in 2002, the Great Lakes Angels, the first such angel group in Michigan, hopes to provide structure and training to would-be investors, says chairman David Weaver. An organized group allows investors to pool their money and expertise and spread the risk.

On Thursday afternoon, a group of experts took the angels through a “due dilligence checklist,” the factors angels must consider when evaluating a deal.

For example, entrepreneurs tend to downplay the competition, so angels must either question them more closely and/or do their own research. On the flip side, investors tend to fall in love with the technology when it’s the management team that will really make or break the company.

“I’ve never made a dime off technology,” says Jack Ahrens, general partner with TGap Ventures, a venture firm in Kalamazoo, MI.

Investors must also make up their minds rather quickly.

“Every minute you spend on a deal that you’re not interested in is wasted time,” says angel Yan Ness, who’s also CEO of Online Technologies in Ann Arbor, MI.

The Great Lake angels had a chance to use some of these skills. Two startups, InfoReady and iRule, presented to the group. Below are quick and dirty summaries of their pitches and the angels’ reactions.

InfoReady

Pitch: The startup has developed cloud-based software that does three things: search and aggregate information on grants, clinical trials, and intellectual property; allow users to collaborate on that information using social media tools; and track the group’s work. InfoReady already has 32 customers, including the University of Michigan, Eastern Michigan University, and Washtenaw Intermediate School District.

Reaction:

Pros-Angels were impressed with strength of the management team. Founder/CEO Bhushan Kulkarni previously founded four startups, including Quantum, InTouch, and GDI InfoTech, an Inc. 500 company.

“He does it, he knows it, he gets it,” says one angel.

Cons-Angels questioned InfoReady’s annual subscription pricing model, which might prevent the company from scaling up sales of their software. Others wondered if InfoReady can land business customers, not just universities and non-profit groups.

iRule

Pitch: The company has developed an application that allows a user’s smart phone or tablet to control a household’s audio-visual equipment, essentially turning it into a universal remote for televisions, DVD players, computers, video game players, and stereos. iRule is also developing technology that allows it to record and collect customer information, including favorite shows or music, and send relevant advertising to their mobile devices.

Reaction:

Pros-Angels liked the company’s vision.

“They think big,” one angel says. “It’s good. It’s healthy. They know where they’re going.”

Cons-Some thought iRule president Itai Ben-Gai gave short thrift to potential competitors.

“It’s a huge market need but it’s a crowded market,” an angel says. “He didn’t really talk about it.”

Another angel was also uncomfortable with the company collecting so much information on their customers. Some consumers may have privacy concerns.

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