Can MSPs Attract Angel Investment Money?: Part ICan MSPs Attract Angel Investment Money?: Part I
What makes angel investors tick, and why might they invest in managed services providers (MSPs)? Here's a look at the landscape.
January 29, 2014
As some managed services providers (MSPs) strive to shift from lifestyle businesses to true growth, high-value businesses, sometimes the journey involves angel investors. Angels are individuals who are willing to pump some money into your company in return for some control as well as a (potentially) rich financial return/exit. Angels also know they could lose their entire investment. So, is your company truly worthy of angel money?
That question has floated around my mind ever since we launched MSPmentor in 2008. Now I'm finally devoting some time to find the answers. Sam Gutmann, formerly CEO of Intronis, provided the spark for this blog entry and discussion. About a year ago, Gutmann mentioned that he's working with an angel investment network, which includes about 290 members across the U.S. I was intrigued and decided to learn more.
What Is An Angel Investor?
Before I explore whether your company can attract angel money, let's look at the situation from where the angel sits. An angel investor, as defined by the SEC, needs to have a net worth of at least $1 million (excluding the value of his/her primary residence). Or the angel needs to have a minimum annual income of at least $200,000 in each of the two most recent years.
Generally speaking: Angels are high net worth individuals who are willing to pump $25,000 or more into a company in return for some equity, perhaps a board seat — or more. Also, angel networks pool their money to buy a bigger "group" stake in an early stage company.
It sounds exciting. But it's also risky business. With a minimum portfolio of 10-20 investments, angels typically generate the following results:
30-40 percent of investments experience a total investment loss.
30-40 percent break even.
20-30 percent generate a positive return.
Source: Returns to the Angels in Groups, published by Roberg Wiltbank and Warren Boeker.
Angels typically invest in companies for one or more reasons:
Diversify into other verticals or markets
To fund acquisitions
On the flip side, entrepreneurs — the MSP — can consider various sources of capital:
Personal funds, friends and family
Grants: institutons, funds, non-profits
Loans: banks, SBA
Equity: Angel investors, venture capitalists and private equity firms.
On the equity side, angels take the biggest risk because they are pumping money in during a very early stage. Venture capitalists pursue slightly less risk, and private equity firms typically invest in companies that need some polish and/or a turnaround strategy.
A company can have multiple investment stages our rounds:
Seed: common /founders stock from founders, friends, family.
Early stage: Common, preferred or bridge from angels
Series A or B: Preferred convertible note from venture capitalist
Series C or D: Preferred, mezzanine debt, from private equity or IB
Public Market: Listed equity involving investment managers, hedge funds, etc.
Now let's assume you want to attract money from an angel. The steps can vary but they often involve:
Structuring the deal
I will be a back later with more thoughts and insights. If you have questions about the angel market in the meantime, feel free to private tweet me (@joepanettieri) or post a comment.
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