Showering dollars from above

0910AngelInvestor

New North-based angel group investing in the growth of local businesses

Story by Sean Fitzgerald

WHEN HARD LUCK FALLS ON A BUSINESS in a stormy recessionary environment, it’s always a blessing to have an angel watching over your shoulder to see that your company has the financial support it needs to survive and thrive.

Angel investing certainly isn’t new in practice, but it is newer in concept – particularly in northeast Wisconsin – where angels are relatively few and relatively quiet. But in an environment where businesses are finding greater difficulty securing financing from traditional lending institutions, angel investors are sweeping in to save the day, helping make a go of a business that might not otherwise get off the ground, and building the local economy.

This past summer, a previously loosely-knit group of 15 high net-worth individuals in the Fox Valley launched Angel Investors Anonymous, a New North-based investment group looking to strictly invest in businesses in the 18-county New North region. Their goal: to connect Fox Valley investors with local business opportunities in the New North region.

The idea for Angel Investors Anonymous was hatched earlier this year when a variety of service providers to small businesses recognized their clients were challenged to receive the necessary financing to grow through traditional lending institutions, said Kevin Eismann, an Appleton attorney and business owner who helped organize the angel group. Clients of his own firm, Epiphany Law in Appleton, had healthy balance sheets and discovered new opportunities to grow. But because of a stricter regulatory environment in banking brought on through the industry’s calamities during the past 24 months, those clients just couldn’t access bank loans to buy new equipment, purchase competitors, or add new staff.

“The rules change, and you play by the new rules,” said Eismann, alluding to new models of businesses finding early-stage funding through private equity, government grants and traditional lending. “In general, this is for companies that are having difficulties funding their growth.”

Angel Investors Anonymous began accepting applications in July and reviewed nearly 30 submissions as of early August. Eismann said it’s been critically important to the investors to maintain a focus on northeast Wisconsin, even though more lucrative opportunities from outside the area might want to seek funding from the group.

“We’ve agreed that we’re not looking to do a Madison deal or a Milwaukee deal – that we want to invest in the economic strength and infrastructure of northeast Wisconsin,” he said. “We’re not going to go chase down Silicon Valley.”

One deal at a time

ANGEL INVESTORS ANONYMOUS consummated its first deal this past August, with six of the individual members stepping in to provide financing for Scott Schumacher of Service Team of Professionals, an Appleton-based franchise of a building restoration company. Schumacher launched the company in 2001. A few years later, he started another franchise down in the Madison area – which after five years of success in that market – he sold in 2009.

Now maintaining his focus just on the Appleton market without spreading his resources and time across two separate markets more than 100 miles apart from one another, Schumacher saw an opportunity to both grow the visibility of STOP within the market, as well as expand its Appleton-based territory further. He needed to re-capitalize the investment in his 13-employee company to take advantage of new technology. And though he’s had a longstanding relationship with traditional lending institutions in the region, he – like many others in the building contractor industry nationally – discovered financing requirements tighter than they’d ever been in the past 30 years.

“It caused me to say, ‘What other sources of financing – and perhaps what better sources of financing – are out there,’” Schumacher said.

Bring on the heavy amount of flooding that occurred this past July in northeast Wisconsin, which substantially increases the amount of work in the building restoration industry, and Schumacher’s opportunity to grow STOP had ripened.

An acquaintance with Eismann for the past few years, a chance discussion earlier this summer led Schumacher to apply to the group seeking consideration for an investment. Angel Investors Anonymous saw the opportunity to benefit the interests of both Schmacher and the group’s own return on investment, and six of its members bought in early last month.

“It allowed STOP to take advantage of a number of opportunities due to recent flooding that he probably wouldn’t have otherwise been able to capture,” Eismann said of the first deal.

Neither Angel Investors Anonymous or Schumacher disclosed the amount of the deal, though Eismann said most of the deals AIA will consider funding fall in the range of $50,000 to $1 million.

After just one month, it’s too early to tell the impact of the investment the angel group leveraged on Service Team of Professionals. But Schumacher said the timing of the deal couldn’t have been better.

“We’re lucky to be busy, so it’s a great time to have this opportunity to grow our business,” Schumacher said.

Shoring up VC funding

WISCONSIN HAS A SORDID HISTORY of being at the bottom of the barrel when it comes to venture capital and angel funding available for business growth compared with other states. In 2002, Wisconsin supported a paltry $18.53 of venture capital per worker, one measure of the state’s entrepreneurial vitality. By 2007 that amount had grown to $28.04 per worker – more than a 50 percent increase – but paled in comparison to most neighboring states and to the national average, which grew from $163.34 of venture capital per worker in 2002 to $223.98 per worker in 2007.

The venture capital environment in Wisconsin has been steadily improving in recent years through the 2004 passage of Act 255 – which allows investors a state tax credit of up to 25 percent for qualified investments – as well as the CORE jobs credit passed earlier in 2010 which increased the limit on the amount of venture capital investors could provide any one company, as well as changed the definitions of a qualified company.

Though the changes have been a step in the right direction for Wisconsin, a majority of venture capital financing has been centered on firms in the Madison and Milwaukee markets.

Nearly five years ago, a group of 75 local investors from across the New North region contributed a total of $10 million to launch NEW Capital Fund, a locally-based venture capital fund qualified under Wisconsin’s Act 255. During that time, the fund has injected critical financing into 10 separate start ups, and is now focused on growing and exiting its portfolio of companies.

NEW Capital Fund requires a board seat on the companies it funds, and because of the breadth of experience among its investors, provides top-notch expertise to help the companies in its portfolio develop greater market awareness, access government grants, and manage crucial strategic improvements in each firm, said Charlie Goff, the managing partner of NEW Capital.

“We tend to really look for opportunities where we can add value,” Goff said. “We tend to spend a lot of time with companies after the investment. The easy part is writing the check. The hard part is what comes after.”

NEW Capital typically assumes about a 10-year horizon on its investments. The fund’s portfolio is primarily made up of companies in three categories – bio-tech, specialty IT and corporate spin offs. One of those corporate spin offs – Aurizon Ultrasonics of Kimberly – received start-up funding from NEW Capital last year after a group of executives from Kimberly-Clark spun off to pursue bringing some of K-C’s intellectual property to market. K-C felt the ideas could grow better outside of its own company, Goff said, creating a new business development opportunity here in the Fox Valley.

Although the regulatory environment in traditional lending circles often loosens and tightens with the economy, firms such as STOP and Aurizon have found other opportunities for funding exist locally through angel investors and venture capitalists.

Sean Fitzgerald is the publisher of New North B2B.