Angel investors are a godsend in filling funding gap for small companies

“Development is a do-it-yourself proposition. … It’s really up to us,” says Steve Mercil with the fervor of an evangelist. Talking about angels — secular, not celestial — the CEO of St. Paul-based RAIN Source Capital describes the role angel investors play in helping small companies grow in communities across the country.

“Our job is to get capital and expertise to people with great ideas … to grow good companies, grow good jobs, and have good thriving communities,” he told a crowd of investors, entrepreneurs and advisers at last week’s seventh annual RAIN Source Capital conference in Bloomington.

Angel investors traditionally have filled a funding gap for start-ups and small businesses that have grown beyond “friends and family” but were too small for venture capitalists and too risky for traditional bank financing.

Made up of “qualified investors — high-net-worth individuals, who pool their capital and help entrepreneurs in their region with both capital and advice — angels focus primarily on manufacturing and technology companies with under $10 million in revenue, Mercil explained.

With the market turmoil of the past few years, initial public offerings are down and the traditional venture capital model is “broken,” according to Mercil. In addition, the credit squeeze has been particularly hard on small-business lending, so angel investors need to step into that gap, Mercil said. “If we don’t do that, everything is just going to go away.”

Recounting his days as economic development director in Crookston, Minn., more than 30 years ago, he recalled a community approach to investing. “In a town of 8,600, we could put 30 people in a room and they each could write a $2,000 check. … That was my introduction to angel investing. That’s not what we called it, but that’s what we were doing.”

The world has changed since then, and smaller communities, particularly away from the large money centers on the coasts, have suffered, Mercil contends. “We ship our money out in our 401Ks … to New York, California … and Boston.” But in smaller communities, “you can’t get a small deal done,” he said.

RAIN Source “is a counterbalance to that … creating local institutions to bring back some of that equity capital,” Mercil said.

California and Massachusetts far outpace all other states in per-capita investment in early-stage and seed funding ($106.42 and $89.69, respectively, in 2007), according to Price Waterhouse Coopers. Minnesota, at $22.11 per capita, ranked seventh overall and just above the national average of $21.82.

Mercil has spent the past 30 years trying to replicate his experience in Crookston by building a network of angel investment funds around the region.

The genesis for RAIN Source Capital goes back to 1998, when Mercil spun off and privatized the financing arm of Minnesota Technology, a state-funded economic development organization. Starting with three people and $5 million from the state, he was able to raise $14 million from private individuals.

Today, RAIN Source is a network of 21 funds spread across six states, with $16 million in capital invested in nearly 150 small businesses. Now he is launching an ambitious plan to expand the network over the next five years. His goal is to “organize” $500 million in total investment capital through professionally managed funds and an additional 121 angel groups around the country and build “a national community-based system of investors, capital and expertise to grow private companies.”

As part of that plan, he hopes to recruit and train “certified rainmakers” to help launch new angel funds. One of those rainmakers, Tim Weelborg, based in Brookings, S.D., offers potential investors the wisdom gained from all the mistakes he made in five years of angel investing. “We’ve paid that ‘dumb tax’ already,” he tells potential investors.

Fellow rainmaker Denise Dunlap-Taylor from Boise, Idaho, describes her role as “making connections” to bring the right people together as she aims to launch five angel funds over the next two years.

RAIN Source offers start-up expertise, legal advice and ongoing operating support for new angel funds. Each fund is targeted to have 20 qualified investor members raising $1 million in investment capital. RAIN Source charges $30,000 for the start-up, which is taken out of members’ capital, as well as a $100 monthly fee per member or a minimum of $2,000 per fund.

Nationwide, more than 57,000 ventures received angel funding in 2009, and there were a quarter of a million active investors with a total of $17.6 billion in angel funds invested, according to the Center for Venture Research at the University of New Hampshire.

The amount invested by angel funds has dropped over the past two years from an average $1.9 million in 2007 to $1.4 million last year, according to Kansas-based Angel Capital Association.

Job Creation From Startups

Source: C. Schramm, Kauffman Foundation, Obama Jobs Summit, Dec.09 Courtesy RAIN Source Capital

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