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In a small group, each person will have gone about developing his or her
own deal flow. Regional focus, the angels™ propensity for privacy, the small
number of people involved”all these account for the limited number of
deals. One of the reasons that these informal groups have traditionally re-
mained small is that, once again, individual investors prize their privacy. As
soon as the word gets out that angels are active, they become inundated with
deals, few of which meet their investment criteria. Their privacy is suddenly
forfeited, which contributes significantly to the difficulty in finding them.
But the intense desire to broaden the scope and quality of the available
investment offerings has resulted in increasing formalization of the private
equity market. It is true that several secondary elements have contributed to
increasing organization, complexity, and formalization in angel groups: for
example, the attraction of the venture capital alternative asset class for gen-
erating higher portfolio returns; the movement of institutional venture capi-
tal to later-stage, larger investments, creating a capital gap that only pooled,
angel capital could address; and a large increase in the number of newly af-
fluent, a group that has dramatically changed the face of U.S. wealth, and the
trend in this wealth culture toward actively investing more so than the afflu-
ent individuals of old. The desire for an increase in deal flow has motivated
these organizations and individuals to organize and invest in their communi-
ties or in their regions, motivation traditionally reserved by universities, non-
profit organizations, and government agencies in their commitment to
regional economic development and job creation.
This interest in community investment and the desire of small, informal
networks of investors to increase their deal flow has nurtured growth in
more formal mechanisms to facilitate the process of linking ventures with
capital, while creating structures to safeguard investors™ privacy. And as
these more formal networks have been able to cluster separate informal
groups of investors, significant pools of capital have blossomed, as we will
demonstrate.
Over the previous 17 years, ICR has tested and evaluated every one of
the alternative investor development methods described in this chapter.
Although some are clearly more effective than others, all have contributed to
the creation of a database of 1,359 active, accredited investors, a small sam-
ple of which were found to have invested more than $90 million in the past
five years.


OVERVIEW OF ALTERNATIVE FUNDING RESOURCES

An overview of the different types of more formal alternative funding re-
sources that have evolved over the past 20 years are listed below:
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Alternative Funding Resources in Accessing Angel Capital


– Directories, printed and software-based
– Incubators
– Entrepreneurial finance conferences
– Investor education meetings and conferences
– Venture forums
– Venture capital clubs
– Offline investor networks
– Online matching and search services
– Financial intermediaries

The only tools entrepreneurs and inventors used 20 years ago were di-
rectories, the granddaddy of which is Pratt™s Guide to Venture Capital. Then
came the upstart, VanKirk™s Venture Capital Directory, which listed many of
the smaller, “storefront” venture capital firms, and more recently Galante™s
Venture Capital and Private Equity Directory. Typically, these resources list
from 650 resources (in Pratt), up to about 1,600, the majority of which are
institutional resources, not private investors. These directories, and others,
such as Private Fortunes (Gales Research), the National Venture Capital
Association Directory, and directories published by regional venture capital
associations and government economic development agencies, were the only
formal tools available to entrepreneurs 20 years ago.
How useful are these directories? The first indication is that many are
no longer published. Importantly, the printed directories were riddled with
inaccuracies, for example, incorrect addresses or telephone numbers, listing
principals no longer with the firm, and wrong or vague investment criteria
crippling the directory™s usefulness for matching your deal with investor
parameters.
And, most importantly, public listings of investors invited tens of thou-
sands of entrepreneurs starving for capital and unschooled in raising private
equity to inundate published listings with over-the-transom, uninvited solici-
tations. Besides being illegal, this strategy has proven to be largely ineffective.
The two original big players in the investor software database field are
now out of business. One had concentrated too much on lending sources, in-
appropriate for early-stage deals. The other merely put into software the
information already printed in venture capital directories and available at
a fraction of the cost because of public domain. Regardless, these soft-
ware resources inherited all the problems associated with printed directories.
The only searchable software database still accessible is InfonVC
(www.infon.com). Its list of 1,700 professional venture capital firms and
small business investment companies is within reach by purchasing a license.
With the proliferation of desktop computers and advances in develop-
ment of relational database software, some firms developed these interactive
188 RESOURCES FOR ENTREPRENEURS RAISING CAPITAL


databases. Such software databases permitted users to query the database for
certain criteria that describe their deals, such as how much capital they need,
their industry, and the location of the venture. Using this relational database
software supposedly generated a list of firms that invest in a particular area.
But institutional investors and lenders form the primary resources of these
databases, since information about the informal investor is largely unavail-
able in the public domain. Once again, institutional investors must invest;
angels do not have to. Thus, these database developers could easily gather
data about more traditional, institutional resources and arrange them in a
database format. In addition, many financial intermediaries, investment
bankers, and consultants misrepresented themselves as “investors” in these
databases, further compromising the software™s usefulness in fund-raising.
Another trend to address the venture capital gap was the emergence of
incubators to assist seed and early-stage start-ups by providing space, busi-
ness expertise, and “funding.” These business accelerators are established by
corporations, business development groups, universities, venture funds, con-
sulting groups, and high-net-worth individuals. Currently, 950 incubators
operate in the United States, according to the National Business Incubation
Association, up from 587 in 1998.
Business incubation is more about business enterprise development than
specifically raising capital. Incubators can provide management assistance
and provide business and technical support services. But for the most part,
incubators have provided access to capital rather than serving as a direct
source of capital itself. That incubators help companies improve their chance
of surviving is borne out statistically. However, 84 percent of incubators are
nonprofit”whose common sponsors are academic institutions, government,
and economic development agencies (56 percent)”and, as can be expected,
their primary goals are creating jobs, creating a positive climate for entre-
preneurs, keeping businesses in their communities for tax purposes, and ac-
celerating local economic growth. And while incubators themselves create
jobs and generate annual earnings, the incubators prime motive is not to help
the entrepreneurs raise capital.
Many incubators count on capital from venture capital firms for the
companies they incubate. People who direct incubators have realized that
those early-stage development companies coming to them for guidance also
need to raise capital. To get launched, the incubator movement has had to
develop connections with capital. Early on, incubator directors realized that
to serve their clients, they had to set up liaisons with the financial commu-
nity to help investment in these companies so that they, in turn, could grow
their incubators.
For entrepreneurs fixed on incubator involvement, their best bet is to in-
quire if angels are participating in the incubator™s advisory board. Since in-
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Alternative Funding Resources in Accessing Angel Capital


cubators provide access to funding, the incubator may be able to facilitate in-
troductions to appropriate investors within its own circle of contacts. Angels
do tend to congregate around professionally sponsored incubators in indus-
tries of interest to them. It happens to be an efficient and inexpensive way to
find deal flow in industries, stages of development, and local or regional
areas of interest to the investor.
In our listing of the different, more formal alternative funding resources,
we differentiated between entrepreneurial finance conferences and venture
forums. Contrary to the belief of many naive, less-experienced entrepre-
neurs, entrepreneurial finance conferences are typically limited to educa-
tional activities as compared with venture forums, whose mission is more
focused on introductions between investors and entrepreneurs. These semi-
nars, workshops, and conferences fill the educational gap left by academic
entrepreneurship programs and can help with information on preparing and
presenting business plans, pro forma financials, and valuation. But their
value is very limited in finding investors. It is not constructive for entrepre-
neurs to look for guidance in raising capital from academics, not-for-profit
seminar organizations, government economic development agency bureau-
crats, or self-serving consultants using educative strategies for professional
service business development.
It is true, as conference promoters will surely tell you, that you will have
the opportunity for networking between educational sessions and at mixers
sponsored by the event. And a few entrepreneurs have met investors who ul-
timately invested in their deal in this way. But networking”that ever-present
buzzword of the 1980s”was and remains highly overrated. The indirect ap-
proach, such as attending entrepreneurial education events, is not the most
effective alternative investor development strategy available. If you are in-
terested in such events, we suggest that you consult calendars of business
events in your local newspaper or business journal.
The next alternative funding source is a creative strategy used frequently
by ICR to locate, identify, meet with, and speak directly to early-stage, pri-
vate equity investors. Times have changed, and as capital markets have tight-
ened, new strategies become essential to find the available money. Where
might we find those investors aggressively making investments in these diffi-
cult economic times? This different source of investor prospects that might
be appropriate for your deal is unconventional, but effective.
We have identified the premier educational events in the United States
attended by early-stage investors, including venture capitalists, institutional
limited partners of venture funds, angel private equity investors, family of-
fice advisers, money managers, newly affluent active investors, and CFOs of
corporate investors. Thousands of currently active investors attend educa-
tional events each year for numerous professional development reasons: to
190 RESOURCES FOR ENTREPRENEURS RAISING CAPITAL


improve fund administration; to identify where the returns are in their mar-
ket; to get tips on raising their own funds; to improve their appreciation of
the wealthy investor market; to identify the best practices for accessing
private equity deals; to learn how to better structure their deal portfolios;
to learn to improve total return on their portfolios; and to examine the lat-
est developments, trends, and strategies for success in the private placement
market. This is a mere sampling of the many important topics covered
by successful experts, advisers, peers, and other principals in their pre-
sentations at these events. If investors are to hunt successfully for the
best deals, they need to be armed with the latest, most intelligent informa-
tion. Entrepreneurs can take advantage of these events to locate, approach,
and meet investors from among presenters, as well as from among audi-
ences attendees.
We refer the reader to our directory in Chapter 9 for contact informa-
tion; however, in summary, only a few organizations have for years success-
fully hosted the most prestigious, prominent, relevant, and respected events
that consistently have attracted hundreds of investors: the International
Business Forum has hosted its Venture Capital Investing Conference for 15
years. Here one can meet hundreds of venture capitalists, institutional in-
vestors, limited partners, angel investors, and corporate investors. The
Institute for International Research presents the Annual Private Placement
Industry Conference and Private Equity Markets Summit for private and in-
stitutional investors. Asset Alternatives hosts the VentureOne Exchange and
Private Equity Limited Partner Summit for venture capitalists and institu-
tional and private investors interested in investing in early-stage ventures.
The Strategic Research Institute holds its Annual Venture Capital
Conference and Exposition in New York City and also offers its Private
Equity Round Up for the private equity industry players.
An “accredited investor,” as defined by the SEC set forth in Rule 501 of
Regulation D (17 CFR 230.501), includes “Any natural person whose indi-
vidual net worth, or joint net worth with that person™s spouse, exceeds
$1,000,000; of any natural person who had an individual income in excess
of $200,000 in each of the two most recent years or joint income with that
person™s spouse in excess of $300,000 in each of those years and has a rea-
sonable expectation of reaching the same income level in the current year.”
While the entrepreneur can expect the financial cost of attending these events
to be dear, the real probability for meeting investors who conform with the
rigorous definition of “accredited investor” is high indeed.
One rewarding way to meet investors is through their advisers. Investors
can learn the art of early-stage, private equity investing by trial and error”a
potentially costly proposition”or, much better, actively learn from other in-
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Alternative Funding Resources in Accessing Angel Capital


vestors and their advisers about how to invest successfully. Like the entre-
preneur struggling with how to learn to raise capital, investors must also
learn about the art of investing in high-risk/high-return transactions.
The next alternative for building your pool of investor contacts involves
attending and presenting at venture forums. The concept of forums operates
on the premise that principal players be brought together, using formal
mechanisms to link those who need capital with those who have it. Venture
forums are sponsored by nonprofit 501(c)3 organizations, universities, incu-
bators, government economic development organizations, angel groups, en-
trepreneurial and technology organizations, and for-profit groups involved
in funding and investment banking, among others.
Many venture forums have closed their doors since the economic down-
turn beginning in 2000, as a result of state, federal, and academic funding
cutbacks and reduced charitable giving to some nonprofits. However, ven-
ture forums remain one tool that entrepreneurs should consider and add to
their mix of prospecting strategies”and for good reason. An informal study
of only 14 venture forums and introductory networks in the United States in
operation for 4 to 15 years each indicates that these groups were responsible
for $3,593,800,000 in financings. The forums included in this study are
listed below, and those still operating can be found in the attached directory,
along with many other resources that did not report their results.

Date Founded $ Amount
Organization (if available) Invested
California Venture Forum 1994 105,000,000
Central Coast Venture Forum 1996 110,000,000
Springboard Venture Forum 2000 1,000,000,000
NYNMA Venture Downtown 1995 1,000,000,000
New Jersey Venture Fair 1997 382,000,000
Arizona Venture
Capital Conference 2001 200,000,000
Florida Venture Forum 558,800,000
Southern California
Technology Venture Forum 13,000,000
Northwest Entrepreneurs Network
Early-Stage Investment Forum 10,000,000
MidAtlantic Venture Forum 1998 2,000,000
Minnesota Seed Capital
Network 1999 20,000,000
Technology Capital Market“MIT 100,000,000
Common Angels 25,000,000

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