High Risk with Due Diligence
Following the recession, venture capital retreated up the ladder, making angel investing a necessity for startups. A new group has tightened Alabama’s band of loosely organized, localized angels into a disciplined, statewide opportunity.
Jim Corman (left) and Bo Megginson (right), head of AIM’s Mobile chapter, meet with Pete Durand, CEO of RivalHealth at the Country Club of Mobile.
Facebook was smaller than MySpace, with fewer than 10 employees, before angel investors swooped in. Without angel investing Google might not be among the world’s largest companies, making $56 billion in revenue its last fiscal year.
Discovering the next Facebook or Google — companies destined to become household names and transform everyday life — is like winning the lottery. But with a keen eye and due diligence, angel investors spread their wings around many early-stage companies with potential to earn high profits.
The Angel Investor Management Group is doing just that as one of the top early-stage funding sources in the region and Alabama’s only statewide angel investor group.
Jim Corman — a self-described “serial entrepreneur” who teaches entrepreneurship at Auburn University — had an impressive track record starting his own companies and investing in 46 early stage companies as an individual angel investor before founding the AIM Group in 2011.
In just three years, AIM has grown into six angel networks in Auburn/Opelika, Birmingham, Huntsville, Montgomery, Mobile and Dothan.
“Wish I could say [AIM’s rapid growth] was due to my charm and charisma,” Corman says. Instead, he attributes its success to the growing popularity of entrepreneurship and the void venture capitalists have created by moving up the food chain to fund later-stage companies.
“Also, there was no sustainable angel presence in Alabama prior to AIM,” he adds. “People are hearing about the good job we do finding high quality companies, our well-defined process and that we’re entrepreneurial friendly. Once a nicety, angel investing is now an absolute necessity.”
And it is a type of funding not for the fainthearted.
“Angel investing has the highest level of risk of any equity investing,” notes Corman, who says that for every 10 angel deals, only three make money. “So you need those three to be home runs.”
Though early-stage investing is high risk, investors can make 10 times their initial investment on home runs.
In 2013 and early 2014, AIM looked at about 25 applications a month and, out of those, picked one company for due diligence consideration. It now receives about 50 applications monthly and still selects one company among those 50 startups. Of the dozen selected for due diligence each year, 10 or so actually get funded, Corman says.
AIM’s investment size ranges from $250,000 to $1 million, with an average investment of $500,000 per round. Typically, AIM provides the first outside money a company raises, usually helping to cover expansion costs.
Both high- and low-tech companies are considered, with a preference for companies that tackle major problems for large target markets and possess highly scalable business models with the potential for the business to multiply. Real estate, storefront retail, franchises and bars and restaurants are excluded.
AIM looks for new ideas rather than enhancements to common products and services. The concept behind the technology must be proven, with a clear path to commercialization. Any breakthrough innovation must be accompanied by a strong business plan.
Among the companies AIM funded in 2014:
- Variable, which works wirelessly with smartphones to rapidly deploy sensors to match applications
- SecondChance Technologies, whose browser delivers the best price at the time of purchase to consumers
- OBMedical, an advanced electronic fetal monitoring device
- Predikto, which provides predictive analytic services to large manufacturing and transportation companies.
AIM has invested in 20 companies and this year plans to invest $6 million in an additional nine or 10 companies. The six networks total 220 dues-paying members. Rather than create additional networks, the plan is to increase membership in the existing networks.
Presentations featuring startups for funding consideration are held regularly at the six network locations. Called road shows, members attend to learn about the startups but are not obligated to invest.
Corman started AIM Group with his son, Clay, who is also a managing partner and serves as executive director of the Auburn Angel Network.
“It is absolutely a blast to enable entrepreneurs to pursue their dreams,” Clay says. “They have to have passion, because it’s a hard road, and they’re at the point where they need lots of capital to realize their dream. These are people worth betting on.”
Jennifer Skjellum, executive director of AIM’s Birmingham chapter, echoes Clay’s sentiment that angel funding is about more than finding high-return investment opportunities.
Skjellum calls it “philanthropy with a return” — a way to support entrepreneurs, increase the number of startups and learn about new technologies and business ideas. Skjellum says the Birmingham network includes business owners, bankers, attorneys, financial planners, doctors, professors and other professionals.
Jeff Irons, executive director of the Huntsville chapter, finds it rewarding to guide small businesses in Huntsville to a possible resource for investment money. “In the past, Huntsville companies looking for angel money had limited groups to approach for capital. AIM opened up another channel to fund these early stage companies.”
Auburn University business graduate Clay McInnis, who was in Corman’s class and remembers him talking about starting an angel network, is now executive director of the Montgomery chapter.
Angel investing is risky, McInnis admits, but necessary in today’s economy. And because the network is statewide, the burden of risk is distributed across a broader and more sustainable pool of investors. “The network’s due diligence process is incredible and holds the key to a stable angel network.”
Davis Picklesimer, executive director of the Dothan chapter, points out that a lack of procedures in vetting companies and the “lone wolf” approach to angel investing have drawbacks. He credits Corman for organizing “the unorganized investment segment of angel investing.”
He says members value the opportunity to invest throughout the Southeast and become part of a network, which reduces risk in their overall portfolio.
Investing in any company, even proven companies, carries risk, observes Bo Megginson, executive director of AIM’s Mobile chapter. “Who thought Lehman Brothers would ever fail?” he asks. Early stage companies are unknown commodities, but, when burgeoning companies prosper, everyone who gambled on their dream prospers, Megginson says.
Private equity and venture capitalist specialist Richard Marsden, an attorney with Lanier Ford in Huntsville, believes angel investing will become more widespread in Alabama.
“I believe that as more professional management, organization and procedural discipline of the investment and diligence process is made available to investors by such organizations as AIM, more dollars will become available,” says Marsden.
Equally important, Marsden says, is that we may see follow-on funding, meaning several rounds of funding, in the same deals by the same groups of investors, which “is something that has been missing in the past.”
David Ketchen, professor of management and executive director of the Lowder Center for Family Business and Entrepreneurship at Auburn University, points out that a good business model involves figuring out how to solve a problem and then getting paid to solve it.
“That’s exactly what the AIM Group did. They honed in on a limitation in the traditional approach to angel networks and they are overcoming that limitation.”
Jessica Armstrong and Chad Riley are freelancers for Business Alabama. Armstrong is based in Auburn and Riley in Mobile.