Deals Made in Heaven
A new era of investors
As New Orleans garners increasing praise for the number of businesses that are starting up in the local area, some of the people who are giving those enterprises a leg up are getting more support as well.
Every new business shares a need for money, and the most common source of capital for startups throughout the world is a category of financiers known as “friends and family.” More often than not, entrepreneurs who have no funds of their own or have already exhausted their savings trying to launch a business will turn to people they know best to ask for help.
By some estimates, friends and family members contribute as much as $100 billion a year to business start-up attempts. And in most cases these truly are investments based on love, as the vast majority of the enterprises fail within a relatively short time.
But some fledglings have staying power, and a few among them could even become the next “it” businesses – companies built on hot new ideas that develop so fast and attract so much money that their investors become quick millionaires.
The dream of the latter scenario is what turns otherwise ordinary business investors into “angels.”
Angel investors are individuals who commit their own money – often to total strangers – in the interest of turning good ideas into wealth-creating businesses, preferably along the lines of a Google, Amazon, Starbucks or Costco.
Such investors put around $20 billion a year at risk on thousands of new concepts, according to the Angel Capital Association.
The total dollars committed annually by investors has been rising steadily over the past decade, and one reason is that angels are finding more support for their activities through organizations that bring together like-minded people. More than 170 angel groups, including some 8,000 investors, operate around the country today, including a handful of groups in New Orleans.
Chastian “Choose” Taurman, an entrepreneur and veteran of the oil and real estate industries, recalls that in the years after he finished graduate school at Tulane University, people who helped fund local startups didn’t meet in groups and certainly weren’t widely known as financiers. They were simply individuals who either had “family money” or had amassed considerable resources through their own enterprises, and when they got wind of a promising startup in need of cash, they might fork over funds ranging from $100,000 to a few million dollars.
“There was no structure to it as there is today,” Taurman says.
In 2009, Taurman and businessman Clayton White founded one of the first angel groups in New Orleans, called South Coast Angel Fund LLC, with a mission of making equity investments in entrepreneurial, early-stage companies in Louisiana and along the Gulf Coast.
“I’ve seen businesses in this region that had phenomenal technology, and I wanted to encourage them,” Taurman says. “Banks are not going to take that sort of investment.”
Despite having to do some educating of local investors about the hows and whys of angel investing, South Coast fairly quickly raised $3 million from some 40 investors and began scouting the ranks of startups for good investing prospects.
Today, the fund holds an ownership interest in several companies, including an education-related social networking platform called Omnicademy, and a local maker of drone technology called Crescent Unmanned Systems LLC.
South Coast currently is in the process of raising about $4 million for a second round of investing, and in the years since its launch, other groups have followed suit.
Last year businessman and digital media entrepreneur Mike Eckert relocated from Atlanta to New Orleans and founded NO/LA Angel Network, which now has several dozen investors who meet regularly to review business ideas and hear pitches from aspiring entrepreneurs.
In addition, the city now is home to the New Orleans Startup Fund, a nonprofit venture fund whose portfolio includes a half-dozen growing companies.
Angel groups typically invest between $150,000 and $500,000 in an enterprise they select to support. Groups often band together across state lines to syndicate larger deals that run into the millions.
Individual investments in angel funds or angel-backed companies generally begin at about $15,000 or $25,000.
When angels invest in an enterprise, they take an ownership interest in the company, and their goal is to see the company through to a buyout – preferably one that will return their investment several times over. Sometimes the company may end up going public through an initial offering of stock on a major trading exchange.
But getting to that stage of raising capital is far from a slam-dunk for a hopeful entrepreneur. By some estimates, for every 100 enterprises an angel group examines, it may invest in two. And for every 10 deals that gain angel backing, a few may generate only minimal returns and as many as six could fail completely, hitting the angels with a loss.
Still, the hope that one of those deals will turn into a company whose growth makes headlines is enough to keep angels coming back. That, and the opportunity to help build new local job generators; Taurman says, “We’re doing it because we care about the community.”
Given the high-risk nature of angel investing, it’s suitable only for wealthy individuals who can withstand financial losses. To that end, the Securities and Exchange Commission requires that individuals seeking to invest in start-ups through angel organizations become accredited to do so.
To meet the SEC’s accreditation requirements, an investor must have a net worth, or joint net worth with a spouse, that exceeds $1 million and annual income exceeding $200,000, or joint income above $300,000.
For more information visit AngelCapitalAssociation.org.