By BILL WARNER, special to LTW

Editor’s note: Bill Warner writes “The Angel Connection” which is a regular feature in Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the , an angel investor network with members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. – As you know, the entrepreneur’s “Valley of Death” is getting wider as the pressures on our economy force many private investors to lower risk venture investments.

As they did early this decade, both VC’s and formal angel organizations are moving toward more mature companies, widening the valley between entrepreneurs and funding options to get their businesses launched.

The Valley Widens

In the late 90’s, funding from venture capital organizations for start-ups was widely available. However, that produced a bubble of companies with business models that were not economically sustainable and most of them failed when the bubble burst in 2001 and 2002. Consequently, VC’s and formal angel organizations moved from providing seed funding to launch funding, focusing instead on startup companies that were nearly ready to go to market. This created a large funding void for companies that were just getting started, which resulted in what I call “grant land.” This is where the primary source of funding becomes public and private grants used for feasibility assessment, research and development.

Well, it appears to be happening again. Venture capital firms are struggling for their very existence, as their model is changing to look more like investment bankers, loan operations, or small private equity funds, all driven by a valuation bubble and the near disappearance of the IPO. Private investors within formal angel organizations have also become much more cautious as their managing partners move their investment preferences to companies that are approaching profitability. This further widens the Valley of Death, all but eliminating the funding options for entrepreneurs struggling to survive with an even greater period of time between their company’s inception and the point when they might be considered by angel organizations.

The Reemergence of Seed Financing

The reemergence of the seed fund may be coming to the rescue. Over the last couple of years, the project, sponsored by the and the , has been fostering the creation of a network of micro-funds throughout North Carolina, including one in the Research Triangle Park area called the

IMAF-RTP and the other IMAF funds are trying to narrow the Valley of Death by forming new private equity funds that invest in startup companies at the seed level of maturity. This is when companies are still completing their proof of concept and formulating their marketing and sales plans; while being able to explain and verify a strong business model.

The Narrowing Focus

As with the original IMAF fund in Winston Salem, and the other IMAF funds that are emerging in Charlotte, Asheville, Greenville and Wilmington, IMAF-RTP is trying to narrow the focus on the kinds of companies it will invest in. Since these funds are much smaller than formal angel funds, they will typically be the first investors in a company, thereby capitalizing on lower valuations. They are looking for companies that will not need a lot of capital to become sustainable growth businesses and will favor companies that have the possibility of exiting in less than five years.

Since these funds usually do not make subsequent investments in their portfolio companies, they are looking for the potential of substantial returns when they evaluate the companies in which they might invest.

Attracting New Investors

Many of the IMAF funds are still raising capital and are also looking for new investors. Angel investors are finding this may be a way to continue their interest in angel investing at a much lower investment cost, even though it is at higher risk. For new investors, it is significantly less expensive than formal angel groups while providing a broadly diversified investment portfolio and opportunity for add-on investments. Each of these micro-funds is also a Qualified Business Venture, providing the added benefit of the North Carolina tax credit.

About the author: Bill Warner is the Managing Partner of , a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the , an angel investor network with members throughout the southeast.

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