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Angel Investors

When banks and traditional credit are not an option, you can still get your dream off the ground

By Jeff Zbar

STORY TOOLS

 

When Ricardo Cervantes and Alfredo Livas envisioned La Monarca Bakery in 2005, they knew they needed more than a dream to open their restaurant chain.  They needed money.

But the two freshly-minted Stanford University Business School grads also knew their education pedigree wouldn’t open any bank vaults.
So they sought an angel—a dozen of them, actually—among former employers, colleagues and a close network of allies who would fund their Los Angeles start-up.

“Bank financing wasn’t an option. We could have gone the traditional routes—max out the credit cards, get a second mortgage,” Cervantes says. “If you’re just starting out, if you don’t have a track record in your industry, banks aren’t interested. So you have to look elsewhere.”

It’s the paradox of small business. Entrepreneurs with a big dream and a business plan need financing to fuel their concepts. Yet while the economic recovery seems to be moving along in the banking sector, lending rules remain stringent and money can be scarce.

“Banks are more risk averse,” says Michael Lopez, president of Hispanic-Net.org, an association of high-end executives, investors and innovators. “The markets are tough and funding is tough.”

Fledgling entrepreneurs are left to seek alternative lenders. That’s where angel investors and venture capitalists come in. Angel investors are individuals or groups of affluent executives keen to fund business start-ups. Venture capitalists are firms or networks of wealthy investors who similarly fund small- to mid-sized businesses, usually at the start-up or early-growth stage. Each investor group typically seeks a stake in the enterprise, whether as ownership or convertible debt.

As with La Monarca, angels generally come along at an earlier stage, whether with “seed” funding to actually fuel the project’s launch, or at “Series A”—business-school speak for the next round of funding for a concept that’s more proven and farther along the growth chain.

Investor interest in the U.S. Hispanic space has surged as market numbers continue to grow, says Carlos Vassallo, founder and CEO of LatinVision Media Inc., a matchmaker of sorts that connects investors to Hispanic entrepreneurs, executives and others seeking funds.

The big news—Carlos Slim’s investment in The New York Times, or Brazilian Alexandre Behring’s role in the acquisition of Burger King in September—overshadows the role of the start-up, Vassallo says. But that does not mean it’s not out there.

“Investors are looking again. They are very picky about what and where to invest,” he says. “Hispanics firms can be small, but must be very profitable.”

Think your small business is venture ready? Follow these strategies to best align your financing needs with the expectations of the investment community.
 
[Look Far and Wide]

When Cervantes and Livas went seeking investors, they cast their net among their existing network of family, friends and acquaintances. Usually, the net must be cast much wider, says Yolanda Ruiz, vice president with Pacific Community Ventures. The San Francisco private equity fund invests growth equity in small to medium businesses—generally up to $4 million into companies with between $5 million and $20 million in sales.

Remember, investors are looking for solid business plans, skilled management and strong investment opportunities—regardless of the target market or ownership’s ethnicity, she says.

“Investors want to invest because it’s a good company, not because it’s Hispanic or not,” Ruiz says. In fact, Hispanic cultural thinking often keeps small businesses out of the investment loop. They’re family enterprises, with an owner thinking more about the legacy, and “not thinking about whether they should sell this company or give control to anyone.”

Looking for investors? Ruiz suggests talking to attorneys, accountants or financial advisors. And ask a banker; while many banks have withered as lenders, they may know angels or venture groups, she says.
“Investors often don’t want to advertise and often try to make it hard to be found—except by the exact folks they want to hear from,” says Mitchell Posada, founder and managing director of Grupo Entrada, a financing and venture capital match-maker.

[Present Your Case Authentically]

When James Gutierrez first presented his business plan for Progreso Financiero in 2005, it was more than some document penned by a business school grad. Gutierrez’s first venture—an electronic recruiting company—had failed when he was 22. “That gave me an MBA the hard way,” he says.

Socially aware, Gutierrez knew many Hispanics were living paycheck to paycheck. Some 25 million were “underbanked” and were the victims of check-cashing outlets’ high fees. So Gutierrez created a concept—part bank, part social experiment—to provide $1,000 microloans to those millions of people and help them establish their FICO scores.

His first $1.2 million in angel funding in 2006 fueled the concept. Four years and $52 million in venture capital later, the Mountainview, California, company has 250 employees and 75,000 loans spread across the under- and un-banked Hispanic market, Gutierrez says.

What made him fundable? James Gutierrez knows his target market and is passionate about his business. When he visited with potential investors Texas Pacific Group, Greylock Partners, Charles River Ventures, DAG Ventures, and Madrone Capital Partners (part of the Walton family’s portfolio), he was prepared to answer their questions: What’s the problem, and how will your concept address it? Who’s on your team? How will the concept grow? What are the risks, and how have you planned to mitigate them? And, ultimately, how will I—the investor—exit?

“Business school helped me get the meetings. But after that, I’m just like anyone else,” Gutierrez says. “Once you’re in the meeting, you have to sell. Tell that narrative in 30 minutes. Be authentic. Have a level of humility.”
 
[Match Your Model to Investor Psyche & Expertise]

What’s your potential investor’s profile? Are they looking for short-term cash flow or a longer-term, capital gains? What’s their risk profile? Cervantes and Livas met with a variety of investors. Some, they knew, would turn down the risk of an early-stage start-up. Others—the dozen who eventually bought in—were investors who weren’t “investing their life savings,” and who met the profile for a start-up whose plan called for aggressive but stable growth.

“We looked for the right people we knew would invest in that stage of the business,” Cervantes says. “Start-ups are higher risk. It couldn’t be money they would miss. Even with the best plans, you don’t know how things will work out.”

Also, how involved do your investors hope to be in the business? Passive partners hand over the money and hope for their returns. Active investors expect to be involved in the business, if not as decision-makers, then advising the entrepreneur along the way.

This actually goes both ways, says Pilar Avila, Executive Director at New America Alliance. With the Hispanic market, investors may find entrepreneurs facing their first experience in securing an investor.

Investors must communicate more clearly, manage the learning curve, and “perhaps approach and communicate differently for an entrepreneur who’s doing this for the first time,” she says.

Moreover, valuable investment partners bring more than money. Some bring research capabilities. Others have unique market knowledge—especially for the Hispanic market, Avila says. “In securing an investor, they have an opportunity to avail themselves to expert advice to implement the business plans.”

“Nobody expects you to know everything, otherwise they have no value to add,” Gutierrez says. “Welcome their experience.”
 
[Be Prepared for the Long Haul]

Cervantes and Livas knew through experience and lore that investment relationships take time to nurture. After spending upward of 18 months learning the ropes of the bakery business (neither Monterrey, Mexico, native grew up in the restaurant industry), they prepared their plans and sought their investors.

Four years and two angel rounds since its debut, La Monarca has met the founders’ projections. It was slated to open its third L.A. location in Q4 2010, with a fourth on the books for 2011. Along the way, Cervantes learned the value of a bullet-proof plan, the willingness to field questions from potential investors, and why it’s important to make sure dreamers’ and investors’ intentions align.

“Hispanic markets are lined with adversity, yet the businesses seem to prosper,” says Lopez with Hispanic-Net.org.

“The Hispanic market still is growing, but is misunderstood by the mainstream,” Lopez says. “There are opportunities for those who invest the time learning about the market.”
 
 
THE LIST
 
NEED FUNDS?

FIND INVESTOR ANGELS—VENTURE CAPITALISTS, PRIVATE EQUITY FIRMS—PREPARED TO TAKE A CHANCE ON A STRONG TEAM WITH A WELL-HONED BUSINESS PLAN. BELOW ARE VARIOUS INVESTORS AND OTHER RESOURCES THAT CAN HELP
 
1. PALLADIUM EQUITY INVESTORS -  A leading PE firm for later-stage businesses. www.palladiumequity.com
 
2. HISPANIA CAPITAL PARTNERS - Since 2003, Hispania has raised $215 million in institutional capital for small-to-medium sized businesses in the U.S. and Puerto Rico.  www.hispaniapartners.com

3. ANGEL CAPITAL ASSOCIATION - A top professional alliance of angel groups from across the U.S. and Canada.
www.angelcapitalassociation.org
 
4. NATIONAL VENTURE CAPITAL ASSOCIATION - The group of 400 member firms fosters economic growth, entrepreneurial activity and innovation. www.NVCA.org
 

5. LATINVISION FINANCE - Connects investors to Hispanic entrepreneurs, executives and others seeking funds.  www.latinvision.com


6.  THE ANGELS’ FORUM - The forum of high-net worth individuals invests in, mentors and advises Silicon Valley startups from seed through exit. 
www. angelsforum.com
 
7. TECH COAST ANGELS - The group provides bold, early-stage startups with capital, connections, knowledge, mentoring and operational assistance. 
www.techcoastangels.com
 
8. SYNCOM FUNDS - The VC firm funds emerging and underserved segments of the media and communications industry, including V-me Media LLC, the Spanish language TV network. www.syncomfunds.com
 
9. RUSTIC CANYON / FONTIS PARTNERS - The California-focused firm invests in western consumer goods, media and service companies and has expertise in companies targeting ethnic markets. www.rcfontis.com
 
10. PINTO AMERICA GROWTH FUND - The private equity fund focuses on grocery, food and consumer financial services businesses targeting Hispanic markets. www.pintoamerica.com
 

11. NEXOS CAPITAL PARTNERS - The Hispanic-controlled PE company links smaller Hispanic businesses with institutional capital. www.nexoscapital.com
 
12. EDM CAPITAL - The investment advisor helps institutions and high net worth investors tap the U.S. emerging domestic markets and global economies of diversity and color. www.edmcapitalpartners.com

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