Investors coming out of hibernation

Filed under: Focus |

Depending on any particular newspaper account or news broadcast, the economy is either still in a slump or on the road to recovery. The truth is with the moneylenders.

Many investors took it in the shorts when the high-tech boom bottomed a few years ago, and they have been lying low since. Many moneylenders, rather than investing in startups, fed the companies that survived.

However, as investors recoup their losses and reconcile their finances, there is hope for startup companies and the visionaries who need capital to plant the seeds of their ideas. Jim Wittenburg, the president of Peak Venture Group, a local organization that connects the moneylenders with the entrepreneurs, said investors are cautious and looking for the right investment – one that will bring in long-term streams of revenue.

A startup company might get its seed money from an angel investor; however, initial financing is usually secured through the business owner, friends and family, or a lending institution, Wittenburg said. Angel investors are usually brought in when an established company needs another round of cash to push it to a higher level.

Wittenburg said there are two types of angel investors: accredited and non-accredited. When the stock market crashed in the 1930s, there was nothing in place to protect investors. In response, the Securities Exchange Commission set up investor guidelines. An accredited investor must have a net worth in excess of $1 million or a minimum salary of $250, 000, according to SEC standards.

Jeff Cooper, an angel investor with New Venture Resources, said the SEC also sets “firm limitations” on non-accredited investors. “There are extra hoops to go through if the company is selling stocks to a non-accredited investor,” said Cooper, who has worked with the U.S. Small Business Administration’s small-business development program and many entrepreneurial startups.

Angel investors keep a close watch on venture capital money before they financially commit, Cooper said. They need to know the big money will be available to the company when a third round of financing is necessary, he said.

Cooper believes, after a long investment drought, especially for startups, that investors – angel investors and venture capital firms – are beginning to feel more secure about lending money.

Venture capital firms, as quoted by angel investor Loren Lancaster in a July 11, 2003, article in The Colorado Springs Business Journal are “business entities that invest monies from funds acquired through private individuals, insurance companies or pension funds. By the time a venture capitalist comes in, a company is normally operating with 10 to 40 employees.”

When the risks become substantially higher, venture capital firms enter the picture and expect a high return on the investments, Wittenburg said. High returns are indicative of the high-tech industry; thus, the reason software companies have received a lot of attention from both angel investors and venture capital firms. Although some people, especially former high-tech employees who are still reeling from layoffs with no jobs in sight, would argue the stability of the industry, new Internet technology is here to stay, and fresh, solidly based technological ideas are still getting the most bang for the buck.

Wittenburg said medical research and defense-related technology are hot investments, and minimum-sized circuitry continues to be a favorite among investors. The smaller that carry-around devices become the easier our lives become, Wittenburg said. Cooper agreed, adding biotechnology, biomedical technology and information technology to the investors’ Top-10 list.

However, Jim McElroy said investing does not totally revolve around the high-tech industry. McElroy left the corporate world when Ingersoll Rand decided to relocate him. Neither he nor his wife wanted to leave Colorado Springs, so McElroy started his own company, MC 4 Investments. McElroy is an angel investor and an entrepreneur. Shortly after leaving the Schlage Lock division of Ingersoll Rand, McElroy purchased what he refers to as a low-tech company, A Better Windshield Co. “This was a 100 percent asset purchase – I wanted a controlling interest,” McElroy said.

He became interested in angel investing when he struck out with angel investors on an earlier business deal. Today, however, McElroy believes the Springs has more resources in place for investors and entrepreneurs because of organizations like the Peak Venture Group, the Colorado Springs Technology Incubator program and the Greater Colorado Springs Chamber of Commerce.

McElroy also has invested in another low-tech company, Edgeguard International, a Castle Rock-based company that makes a clear, plastic form for automobile windshields that helps protect the windshields from cracking. As an angel investor in the company, McElroy is the exclusive glass distributor for the Edgeguard patented product in this area. “What I am doing now is taking a high-tech approach to low-tech companies.”

McElroy said the Springs is on the cusp of seeing an upsurge in investing. Many qualified high-tech people left their jobs to start their own businesses because they were tired of corporate America, but the money has not been there to invest, he said. “People are more optimistic that things have started to turn,” McElroy said. “I am seeing a lot more startups, and angel investors are coming back as their pocketbooks have recovered.”

McElroy said the venture capital side has “stepped up” as well. “It dried up over the last few years,” he said, “but there are glimmers now it will open up.”

McElroy is active with the Peak Venture Group and is a business advisor for the Springs’ technology incubator. He is working to bring other companies in front of angel investors, while helping those companies define business plans and financial needs.

“Overall, my take on this area is there has been a lot of focus in the past on big companies,” McElroy said. He said the small-business person will pave the way to economic recovery: “I think we’ll now see a focus on investing in smaller companies with a desire to have a lot of them.”