Star-Tribune

Start-ups get a new lifeline

By THOMAS LEE, Star Tribune January 31, 2009

Start-ups get a new lifeline

For Twin Cities Angels, one is definitely not enough.

Despite a tough economy that's severely curtailed venture investment across the country, the Minneapolis-based angel investor group is raising money for a second fund, having already dispersed at least $2 million to 10 start-ups that make everything from robots and medical devices to reusable envelopes and beer.

Organizers of the new fund expect to attract 30 to 70 people willing to contribute $50,000 each to the overall pool. While members are normally required to attend meetings, the new fund will offer investment opportunities to outstate Minnesotans as well as venture capital firms.

Angel investors are affluent individuals who typically invest anywhere from $5,000 to $250,000 in new companies. They provide a crucial initial source of funding to start-ups that the larger venture capital firms tend to ignore.

Because of their bigger size, venture capital firms tend to invest larger sums -- typically $1 million or more.

But by pooling the money and expertise of its members into a group-managed fund, TC Angels hopes to diversify its risk and actively advise its companies, in the process filling the financing gap for promising start-ups. "There is going to be a lot of people with money who can offer something more than cash," said John Alexander, president and co-founder of TC Angels.

Good thing, too, as that cash is starting to run out. A deepening recession and frozen credit markets forced venture capital investors to pull back. They invested $28.3 billion in 2008, an 8.4 percent drop from 2007 and the first decline since 2003, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters.

Falling home values and shrinking stock portfolios have also hurt angels, who are less likely to invest if they feel less wealthy. Given such conditions, launching a second fund seems just as risky as the start-ups that dot TC Angels' portfolio.

But with investors large and small flocking to safety, the need for someone willing to pluck down thousands of dollars on technology that may never see the light of day is Start-ups get a new lifeline Page 1 of 3 http://www.startribune.com/templates/Print_This_Story?sid=38713832 2/2/2009 arguably greater than ever. Economic cycles come and go, but great ideas remain constant, experts say.

"In my experience, nothing deters innovation," said Mike Berman, a prominent medical device entrepreneur. "Financing start-up companies, on the other hand, are heavily impacted by economic times. It is pretty tough out there right now."

Bad times can be good

Yet a successful bet can pay off handsomely. Some of the country's most prominent companies were born in tough economic times -- Hewlett-Packard during the Great Depression, Microsoft in the mid-1970s. Perhaps that's why investments in ''seed," or newly formed, companies jumped 19 percent, to $1.5 billion last year from $1.3 billion in 2007, even while overall venture capital investments declined, according to the MoneyTree Report. The figure represents the most money for seed companies since 2000.

"It's a great time to be a start-up," said Dan Mallin, a tech entrepreneur and member of TC Angels. "We have the best opportunity to create jobs."

Founded in 2006, TC Angels' inaugural fund drew about 40 people. Members screen opportunities, conduct due diligence and then vote on whether to invest in a start-up. In addition to the $50,000 they put into the pot, members can also make additional investments, known as "side-by-sides." Each company in the fund's portfolio has drawn side-by-sides, including some that have exceeded the size of the entire fund.

"This is real; you've got much more skin in the game," said Brent Shelton, co-founder of TC Angels. "We're really keeping score here." The funds draw on members who have special knowledge in areas such as medical devices, software and intellectual property law.

"It's such a diverse group in regards to the knowledge of each person," said Kim Shelquist, a TC Angels member and president of Mediquist, which owns assisted-living facilities. "The first meeting, I was in awe of [people's] expertise. It was amazing."

For some start-ups, that expertise can be just as valuable as the money. John Erb, CEO of Cardia Access, said he still regularly consults with two TC Angels members because of their experience and connections to big medical device makers. Cardia Access makes leads, or wires, for pacemakers and defibrillators designed to be smaller and more reliable.

TC Angels' investment portfolio runs the gamut: Bard's Tale Beer Co., a maker of glutenfree beer; Alvarri, a start-up that is developing technology to compress data; and Vixar, which uses lasers to boost the performance of sensors. Because the fund is just two years old, it's too early to tell whether TC Angels' bets will pay off. But so far, only one of the fund's 10 companies -- Ovation Science -- has gone belly-up, not a bad record given the poor economy, organizers say. (Ovation Science had a technology that could increase the level of dissolved oxygen in water.)

Alexander's not sure how many people will ultimately sign up for the second fund. "2009 is going to be a lean year" for venture capitalists, he said. "That makes angel investing very important. If we're not here, there won't be any new companies [for venture capital firms] to invest in" once the economy recovers.