On July 8, 2010, Pat Romboletti and Meredith Moore and Family Business Radio welcomed Michael Blake, co-founder of Start-Up Lounge and Director of Valuation Services at Habif, Arogeti & Wynne, LLP, and Karen Robinson, a serial entrepreneur, philanthropist and angel investor in family-owned businesses.
The day’s discussion centered on angel investing and its role in family-owned businesses from two perspectives: 1. The option of a family business investing in a start-up as a way to diversify and transfer wealth. 2. The role an angel investment can play in these tight money markets.
To begin with, it was noted that family businesses have that critical something that investors love—skin in the game. Also, it has been Karen’s experience that angel investors like the sense that they’re having a direct impact. They enjoy watching a company grow and prosper.
Michael pointed out a tax aspect for family business owners who are considering becoming angel investors. Buying equity in another company as an angel is a tax efficient way to transfer wealth to your children—versus a gift, which is taxable. Plus you get (sometimes much needed) diversification. It’s an advantage available to family businesses especially in dealing with sharing your wealth with subsequent generations. A key point now that it looks like the estate tax is coming roaring back and the amount you can transfer tax free is being lowered significantly.
When Michael was asked to envision the ideal angel investor and their role, he replied, “One in which the check doesn’t bounce.” A statement that has the advantage of being funny and true. He went on to say that an ideal angel identifies a specific role within the company—if any. “Smart money sometimes means doing nothing,” he said. He also likes those angels who develop a personal relationship within the business.
So, how to start? Of course, begin with your circle of friends who filter things for you, your trusted advisors. “Let people know you’re open for business,” Michael urged. Also, set specific criteria. For instance, decide whether you’re willing or not to go to, say, Chattanooga where the angel is headquartered.
Karen chimed in with the advice to make sure expectations are in sync. “Expectations need to be clearly stated,” she said. “Who has control?” You will want to recognize that perhaps a new formality will be introduced into your business—a business plan or a fully-developed management team, for example. “There will be a trade-off of control,” she advised, “A new shareholder will want some rights.” She also pointed out that, as the business owner, you need to ascertain how you will return money to the angel investors to compensate them for the risk they assumed.
Regarding angel investors versus banks. According to Michael, angels swoop in when the banks say no. “Banks are generally cheaper, so try there first. If you can get money from a bank, take it,” he encouraged. He also made the distinction between venture capital and private equity. “Venture capital historically is about building value by encouraging innovation and growth. Private equity is about financial engineering, that is, lowering the cost of capital to create value,” he said.
In pulling together your trusted advisors in an angel investment scenario, Karen advised, “It is very important to have a board made up of more than your attorney and CPA—people who work for you who may have their own agenda.” She suggested looking for veterans in industries that are complementary to yours. Michael agreed—seek out people who have been in that seat before, he said. Successful entrepreneurs, for example. His Start-Up Lounge, for instance, has a free monthly luncheon for angel investors where you can listen to some war stories.
In the imaginary plus and minus column exercise, angel investing came out a clear winner. Among the pluses:
- The money. “It’s green!” Karen laughed. And Michael continued, “Family-owned businesses turn to strangers—banks, angels—when the three Fs have been exhausted: friends, family, and fools.”
- Expertise. According to Karen, when expectations are aligned, it works to tap into the business acumen of the angels. But you do need to be clear on what each party wants—just the money or also the expertise? Michael said, “You need come-to-Jesus meetings, early and often.”
- The demand for an outside board. When you have a downturn like we’re in now, a great board will help you step back and take in the big picture. As Karen said, “They may not have the answers, but they can ask the tough questions.”
Please download this lively discussion to hear the minus column and all of the other great insights including details of all of the great resources available in the Atlanta community.
Michael S. Blake, CFA, Director of Valuation Services, Habif, Arogeti & Wynne, LLP, http://www.hawcpa.com , 404-892-9651