By Chris Tomlinson
WWR Article Summary (tl;dr) The HAN network in Houston (Houston Angel Network), is a critical part of boosting entrepreneurship in the region. The group of angel investors sifts through more than 100 business plans a year, providing critical early stage funding that adds new business to Houston’s economy. For women in business in Houston, here is is link to the website for more info http://houstonangelnetwork.org/
Tucked away in the rear corner of a luxury hotel near the Galleria, some of Houston’s most adventurous investors gather once a month in a nondescript beige conference room for a live version of the television show “Shark Tank.”
Four entrepreneurs take turns in front of about 40 investors, paging through their best PowerPoint slides and explaining why their startup has the potential to generate a 1,000 percent return. But unlike the television show, the so-called angels are dressed for casual Friday, the room is plain, and the gentle questioning belies the hopes, dreams and cash at stake.
“From our perception, we’re not like ‘Shark Tank’ at all,” argues Rob Tucci, owner of a chemical export business. “Shark Tank has a fast, rather brutal quality. We’re not like that.”
Tucci exemplifies why the startup community calls early stage investors angels. He’s a successful CEO with the time and cash to invest in young entrepreneurs who want to solve society’s problems and make a lot of money doing it.
He’s also a former president of the Houston Angel Network, a group that allows investors like him to flock together and share their expertise in deciding which companies are worthy of pushing forward. Angels are often the earliest investors, getting involved ahead of venture capitalists and long before investment bankers think about an initial public offering.
The network, better known in the startup community as HAN, is a critical part of boosting entrepreneurship in the region, sifting through more than 100 business plans a year and providing the critical early stage funding that adds new business to Houston’s economy. The group is one of nine networks in Texas, and with 102 members was the most active network in the country in 2015.
HAN members have invested $73.9 million in 238 deals since 2004, and they are looking for a few good investors to join them.
The minimum requirement to join HAN is to meet the Security and Exchange Commission’s definition of an accredited investor, which is having $1 million in assets in addition to a home or routinely earning more than $200,000 a year if the person is single, $300,000 a year if they are married.
The investments are also smaller than those on television. Most companies ask for a minimum investment of $25,000, though the average is about $40,000, according to the Center for Venture Research.
That’s not much different from a stake in an oil well, but just as you don’t bet on one well, the key to success in angel investing is to make between 10 and 20 investments.
In a portfolio of 10 companies, three will almost certainly fail. The next three will be subpar, two will produce a reasonable return, and two might be home runs. Four independent studies looked at 4,897 investments by angel groups and found that only 2,094 companies were successful. But those realized a 27 percent internal rate of return, a calculation that factors in time as well as the financial return. A typical IRR on a real estate investment is less than 20 percent.
HAN members invested $700,000 in Sweet Leaf Tea, an Austin startup purchased by Nestle in 2008, which returned $9.40 for every $1 invested. But whether to invest is always the member’s decision. HAN is only the matchmaker.
“It takes an individual who is comfortable thinking on their feet, outside of the box and capable of making their own decisions,” Tucci said.
A portfolio of 25 companies developed over several years is what Tucci recommends. An alternative is investing in an angel fund.
HAN members pool their money into the Texas HALO fund, which is managed by the group’s most experienced investors. The fund managers develop a portfolio of companies hoping to generate a large return before the fund begins to cash out in five to 10 years.
At the monthly meeting, curious investors approach the entrepreneurs after their pitches and ask the hard questions. Is the potential market as big as the company claims? Are the milestones to success too close together?
Inexperienced angels ask veterans about what they heard. Did the entrepreneur’s numbers add up? Was he or she too cocky?
Angel investing is hard work. Sorting through business plans, listening to pitches, performing due diligence and developing a relationship with the entrepreneur takes time and patience. But after meeting many HAN members and attending several meetings, I realized that’s the part they love the most.
Many in the group are retirees or senior executives at corporations who miss the thrill of starting a new company, growing it and watching it flourish. They don’t simply want to invest — they want to coach.
For investors in technology, there is the hope of diversifying Houston’s economy so that fewer software developers leave the city for Austin or Silicon Valley. For science fans like Tucci, it’s curing a disease or mitigating human suffering. For the energy folks, it’s solving a problem like drilling more efficient wells or better managing a building’s electricity demand.
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For all of them, it’s the dream of being in the room when the founder of the next Facebook is offering his first $1 million of equity in the company.
The financial risks may be high, but they are truly what dreams are made of.