When Monique Maddox decided to start investing in start-ups, she didn’t know where to turn. She sought advice from the few people she knew who had done the same on how to proceed.
What the CEO and founding director of Minneapolis-based Macrame Technologies discovered is that it takes a lot of time and research to develop a strategy and then find suitable companies.
Maddox is what is known as an angel investor – someone who invests in start-up companies, sometimes before they produce revenue. At this stage, there is little guarantee that a company will produce a return, which is why it is easier to find investors when a company is more advanced in its development.
“It’s like looking for a job,” Maddox said at the recent Angel Fest, a one-day angel investing conference hosted by Minneapolis startup investment firm Groove Capital. “If you want to work for a company based in London, there are very few people here who have contacts in that company in London.”
Maddox, who started investing in 2015, learned that she had to be intentional, and she advises those interested in angel investing to do the same. She immersed herself in the Twin Cities startup ecosystem, entering every pitch competition she could.
She then decided to make a concerted effort to invest in businesses owned by women and people of color. These companies represent at least 70% of his angel investment portfolio.
Other Angel Fest investors said the right connections are only part of the equation. They recommended hiring a financial advisor and learning about federal investment terminology and laws.
While it’s work – and there’s the promise of an eventual financial return – they also said there’s satisfaction in supporting new ideas that can potentially improve other people’s lives and to support entrepreneurs on their journey.
“The first $1,000 or $5,000 an entrepreneur gets is so important,” said Danielle Steer, managing partner of Minneapolis-based Tundra Ventures. “That’s how people start. That’s how people get in. That $1,000 [investment] can turn into $10,000, and you can write a check for $10,000 that can turn into $100,000.”
Find out if you can be accredited
A private company can raise capital in a number of ways, including selling stock, but some investment opportunities require a person to be an accredited investor, which requires a net worth of $1 million or more, plus a individual income over $200,000 or joint income. $300,000 over the past two years.
Non-accredited investors have fewer options.
Being an accredited investor also qualifies you to apply for the Minnesota Angel Tax Credit Program, which offers a 25% credit to investors or investment funds that invest in Minnesota start-up businesses. The maximum credit is $125,000 per person, per year ($250,000 if filed jointly).
However, there are only a certain number of credits available. As of May 27, the program had run out of money for the year, so the state stopped accepting applications. Legislation proposing $7 million in additional funding was in Minnesota’s omnibus tax bill, which did not pass until the 2022 legislative session adjourned.
Invest in what you know
Diane Rucker, a Twin Cities angel investor with extensive experience in healthcare, life sciences and technology, bases her investments on evaluating innovations.
“There are nonprofits I can and will invest in, but I wanted to do something even more tangible and really put some seed money where people who can do amazing things were starting. to make innovations that we need to salvage and rebuild,” Rucker said. .
Similarly, Morgan Evans, founder and chief executive of St. Paul-based healthcare company Agitated Solutions, is looking for deals that support medical technologies.
“Yes, you’re investing for financial return, but every dollar is actually going towards a meaningful cause,” Evans said. “You’re solving some kind of problem, you’re helping people, often saving lives. It’s not an impact investment per se, but at least from my perspective, it feels good to know you’re helping and also make a comeback.”
For Greg Hoyt, owner of Rustica Bakery in Minneapolis, food is his focus. It has completed 15 transactions since 1996.
The region’s booming food industry presents attractive opportunities for investors looking for significant returns, he said, pointing to the recent acquisition of North Dakota’s Dot’s Pretzels by Hershey Co. for $1.2 billion dollars.
“I want to be part of things that are moving forward and that are exciting,” Hoyt said. “Economically, food is super dynamic.”
Investor Paul Charchian, founder of Guillotine Leagues, operates in the fantasy sports and online gaming industry. For 12 years he was president of the 400-member Fantasy Sports & Gaming Association, plugging him into fantasy sports, gaming and betting. Its seven investment deals are in sports or payment-oriented ventures, he said.
“You had the opportunity to be immersed in the ecosystem,” said Charchian, who has closed seven deals in seven years.
Think about what you bring to the transaction
In the past year, Rachel Scherer, a former executive at Medtronic, has secured six investment deals, all in medtech companies or women-led businesses. While investments in previous businesses were strictly financial, she said that at this point in her career, she enjoys seeing entrepreneurs flourish.
This means that Scherer brings his knowledge of running a business to the table. She can be more of a mentor and use her network to help the business grow.
“That’s what makes it fun for me,” she said.
That network could include other investors, Evans said.
“Share your Rolodex from other investors to bring individuals together to make this business more successful,” she said.
Tundra Ventures’ Steer said investors can also help level the playing field in the startup world. Historically, women and entrepreneurs of color receive a small percentage of the billions of dollars in investment capital disbursed each year in the United States.
“There’s no shortage of entrepreneurs who look like America’s emerging majority,” Steer said.
Do your due diligence
Don’t be afraid to ask the tough questions. Hoyt said he wanted to know why the person started the company, which gives some insight into where the company is headed.
Assessing the communication styles and transparency of a company’s management team is also crucial, others told Angel Fest. This is how others see the Founder.
Basic research should include determining if there are any lawsuits against the company or founder and learning more about the market. For example, is there too much competition in the field? Is it big enough to get a good return for your dollar?
If you don’t know what to ask, go to your network and find out.
Remember the risk
There are no guarantees when it comes to investing, but investing at an early stage comes with greater risk than other options. Startup founders are still defining their business model.
Don’t give in to the pressure that a funding round is over. Instead, set goals and pace yourself to hit the milestones you’ve set, Maddox said.