Angel Investing: Year One

August 2020: I read a story about a new angel investment fund with interest. Yet, doubt plagued me. “Is this really for me?” After a detailed conversation with the fund’s founder, Reed Robinson, I joined his Groove Capital fund as an angel investor in in early 2021. Why did I do this and how is it going?

Land of 1,000 Non-Profits

Even though my state is very generous, often ranking 1,2 or 3 in the nation as “most charitable”, something is off here. After moving to Minnesota in late 2019, I’ve experienced the results of economic inequity as not only riots, but also a shocking rise in violent crime. Meanwhile, Minneapolis still has the dubious distinction of having the greatest disparity between black and white home ownership in the nation. Home ownership is key to generational wealth and often provides entrepreneurs “friends and family” money to start small businesses.

Despite being a donor to many charities along with the rest of my fellow Minnesotans, in 2020 I found myself asking:

“Yes, we are all charitable here, but, is it working?

Given the challenges in the Twin Cities, I wanted to try doing something different. So in 2021 I started by planning to use some of my previously earmarked donation money to fund local entrepreneurs via angel investments. I was also quite interested in providing seed funding for MN-based businesses run by women or people of color, but I wasn’t at all sure how to begin…

Recently, while discussing the investments we made this year (and how this impacted of our non-profit giving), my friend and fellow “Groover”, Diane, quipped ‘well, we are the land of 10,000 non-profits’.

Angel investing is about writing checks, so how did my first year at this go?

Write a (Small) Check

I won’t lie, it’s nerve wracking to write a check to new business owner. Despite the fact that the success rate of new businesses at the 5 year mark for MN-based businesses is the best in the US, investing in startups anywhere is very risky. Most new businesses fail.

Also, I do not have generational wealth or proceeds from selling a business.
I am choosing to invest my own hard-earned money, knowing fully well that angel investing is a buy-and-hold investment that will occasionally provide strong returns. However, often it won’t result in any return at all.

So did I write any checks this year? I did, but I was very conservative. First, I set up an upper limit for the entire year and stuck to it. I decided to start with micro-investments. To that end, my first angel investment(s) in early 2021 were through the Republic.co crowdfunding platform as a non-accredited investor. At this level a person can invest a total of $2,200 per year, starting with as little as $10. Republic.co is a great place to learn, as they include lots of plain English explanations of what you are buying, in most cases a Crowd SAFE (Simple Agreement for Future Equity).

Although I was able to find companies in the some of the sectors that I want to invest in, (health care, education, climate action, etc…), I was hard-pressed to find MN-based companies on Republic.co. As mentioned, I had also joined Groove Capital (‘Minnesota’s first check fund’) and I was starting to look at deals there as well. It took some time before I did anything other than lurk in the Groove Slack channel — imposter syndrome was kicking in hard. But I persevered. I kept showing up for the (then) Zoom meetings, took notes, looked up stuff and generally tried to soak in as much as I could.

I even took part (representing the n00b investor) in Groove’s AngelFest, a four-part series on early-stage angel investing designed for women, by women (image shown below).

Accredited Investing

Unlike Republic.co, which allows for both non-accredited and accredited investors, most angel funds require accreditation. What does that mean? In a nutshell, it means that you have to have enough money saved so that you can risk investing some of it. There are specific limits. In MN, you have to file and pay a small fee to the state to get your accreditation number. To be an angel investor with Groove Capital, accreditation is required.

MN Angel Tax Credit

Upon accreditation and payment of membership fee, you can write your first investment check to any startup of interest. At Groove, the minimum angel investment is 5k. Another advantage of being accredited, is that this year in MN, there is an ‘angel tax credit’ which provides a 25% credit to investors or investment funds that make equity investments in startup companies focused on high technology, new proprietary technology, or a new proprietary product, process or service in specified fields. 50% of the credit is reserved for startups which are minority- and women­-owned businesses. The maximum credit is $125,000 per person, per year.

In 2022 (per the MN state website) the angel tax credit will have “$5 million in credits…, $2.5 million of which is reserved for minority- and women­-owned businesses.“

Seeing Deals

So how do I see potential deals? Mostly via the Groove team. They present a number of vetted investment opportunities via a convenient portal each month. Additionally, when I added ‘angel investor’ to my twitter and LinkedIn profiles, I started getting unsolicited requests to listen to startup pitches (~ 1 per week). Interestingly, none of the unsolicited requests were from MN startups. In total, I would estimate that I reviewed 4–6 deals each month, or ~ 60 deals this year.

One of the things I learned by reviewing both vetted (from Groove) and unvetted (from LinkedIn mostly) deals, is that the vetting process of a fund is very valuable in terms of saving me time. It is now quite rare for me to take an unsolicited meeting, because I didn’t find value in this approach this year. The vetting process at Groove prepares the startups to communicate effectively with potential investors. The information is presented in a uniform way (via a portal) for review. Initially Groove startups were presented over Zoom.

Eventually Groove added in-person pitch events. Shown below is an example. Me and a room full of men, well, not much different from being a women in tech for 15 years. #sigh

Advising vs Investing

Learning to invest, like learning anything, is a process. Initially I felt very intimidated. The taxonomy of angel investing is non-trivial: “pre-money valuation”, “convertible note”, “cap table”, etc…Just like anything else, when I wasn’t sure I googled, researched or asked someone I trusted. It’s very important to understand what you are potentially purchasing before you invest.

Also the types of startups varies widely by geography. Suffice it to say we build real stuff here — no Snapchat clones. Minnesota is known for medical startups and I can honestly say I’ve learned more about medical devices (for people and for animals — VR for cows!) in 2021 than I thought possible. And yes, the pig cartilage photo on the slide for the knee treatment startup did gross me out.

Because, at this stage of the game, I have more experience and knowledge (due to 15+ years working as a software architect and developer) than money to invest, I found that sometimes the most impactful thing I could do for certain startups was to advise them, rather than to write a check.

To that end, I’ve spent a non-trivial amount of time providing value to startups by doing one or more of the following:

  • Connecting them to cloud startup programs, such as Google for Startups. This provides cloud credits and sometimes also direct advisory.
  • Guiding software architecture choices, particularly around cloud machine learning services. Too many startups write the ML models themselves, rather than using higher-level services (which perform better and are ultimately much cheaper, configure and use, rather than code, test, train, manage and deploy).
  • Providing feedback on their pitch. Some teams benefit from clarifying their product pitch. Women founders in particular are often not direct enough in their asks. This impacts their ability to get funded.

Writing Checks

So, did I write any checks this year? I did — but just two. My companies are TurnSignl and Proserva. So, why, out of 60 companies reviewed did I choose these two?

First, both matched my investment thesis. It is: “Invest in MN-based companies which impact public safety, health, education or climate.”

But it’s more than that.

How did I weed out the others? For me, it starts with a verification on my thesis vs. the company product or service — it is a match? Also, how do I feel about the company? Do I understand the product or service and business model? Shown below is the clear product description for TurnSignl.

Next, can I ‘do good, be good and get good’? Of note here, was that my investment in Proserva qualified for the 2021 MN Angel Tax credit mentioned previously.

Then, the next part of the selection process is one that is particularly challenging for me. It’s around what I think the team can do. At minimum for team I look to see if there is a builder and a seller, which should be two different people. Being an entrepreneur myself (having run my own company for 11 years), I have a soft spot for passionate business people who want to build a better world. Several times this year, I was mightily close to writing more checks, because so much of what was presented was a fit for what I want to see grow here in MN.

Last, I review the business plan and financial projections. Does it make sense?

However, I am a pragmatic business owner myself, with a moderate tolerance for risk, so my most important guiding principal for investing year one was staying within my investment budget.

One of the reasons I am writing this post is that based on state statistics, the number of Minnesotans who participate in angel investing is minuscule compared to the number who could qualify as accredited angels.

Many Minnesotans donate, but only a few of us write angel checks — why?

My thought is simply lack of knowledge around what is possible.

What’s Next

I am in the fortunate position in my career where I have more work requests than I need to sustain myself. So I am planning to take a bit more work in 2022 for the purpose of increasing my investment budget. I want to write more checks and make more of an impact.

Going forward, I value learning from my growing network of investor colleagues. I am interested in gaining confidence about investing in areas for which I have less domain knowledge, particularly medical device startups, which are so pervasive here in Minnesota.

As an aside, I am also trying to learn about the world of crypto now. My initial foray into coin investing has been uninspiring. As with many new industries, so much of the software around this vertical is just plain awful.

Additionally, I welcome you to join in. Whether you want to participate at the crowdfunded SAFE level via a platform like Republic.co, or whether you have interest in joining a fund, such as Groove Capital, there is a place to make your mark (and hopefully make some money in the process).

In particular, I’d like to see more women join me at the investment table. All too often, I am still the only women in the room.

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