Seed money | A chat with Charles Sidman, the founder of Maine Angels, about how individuals can back emerging companies

Charles Sidman's background reads more like the C.V. of a research scientist who might be looking to fund a biotech startup than that of an investor who's writing checks to entrepreneurs. He's a former Jackson Laboratory employee with a doctorate in immunology who's also been a professor at the University of Cincinnati. Along the way, though, he also received an MBA and became involved in state biotechnology boards, consulting and grant reviews that helped him realize what it takes to move a scientific breakthrough into the marketplace.

So in October 2003, Sidman, a Bar Harbor resident, helped create Maine Angels, an early-stage investment group that helps companies here and elsewhere find the funding and expertise they need to develop businesses around their intellectual capital. His inspiration, he says, was a gap he saw in Maine's funding landscape: While there were organizations like the Maine Technology Institute that helped entrepreneurs explore potential markets for their inventions, and venture capital firms that invest in companies that had found some success in the commercial markets, there wasn't a well-organized group to help entrepreneurs somewhere in between ˆ— those with a seemingly viable concept that still needed a boost to create an operating company and begin generating sales.

By the end of this year, Sidman says Maine Angels will have 30 paid members, mostly experienced business people willing to invest their own money in such opportunities. In the past three years, he says Maine Angels has invested about $1 million in nine companies. Unlike a venture firm which makes its investment from a pool of investors' money, Maine Angels is a consortium of individual investors who are free to choose which opportunities they want to fund, based on their own criteria and interests.

With Maine Angels just past it's three-year mark, Mainebiz checked in with Sidman to discuss how his group has settled into the startup funding landscape, what he's learned about the market, and just what entrepreneurs can expect from their angel partners. An edited transcript of the conversation follows.

Mainebiz: Looking back over the three years since you founded Maine Angels, has the market for potential investments lived up to your expectations?

Charles Sidman: I anticipated [the market] would be there. I didn't know it in specific detail, but it's turned out pretty much as we had hoped. Maine has smart and energetic people so there's always a ferment of entrepreneurial activity. About half of our investments have been in the state of Maine and about half have been outside, as far away as New York. In principle, we'll look at something in Hong Kong if it rings the right bells.
In terms of the activity within Maine, it's developing just fine. One of the things I didn't appreciate three or four years ago ˆ— which nobody could have ˆ— was the fact that consortiums of angel groups are becoming much more active. In the last year or two, a lot of our best opportunities and consummated deals have come from or been shared with other angel groups.

So in those cases, Maine Angels is investing in a round of funding that includes other groups that have identified the same company?
They might have identified it on their own or taken notice because we bring it to their attention. There's also a sphere of economic activity of consultants or brokers who don't make their own investments but help nurture and prepare companies through this process.

Does Maine Angels focus on certain types of companies or industries, or are you wide open to investment opportunities?

As a group we're open to all kinds of opportunities. Individuals within the group might have either a comfort level or actual preferences. I personally enjoy learning about things and I will look at anything. The investments that I have participated in have been all across the map in terms of industry and company stage. But certain individuals have a definite profile of interest: They want this industry, they won't do that industry; they want a certain size or age of company; they have geographic criteria.

One of the interesting and exciting things about angel work is that most angel groups are much broader in their possible activities than most venture firms. At a venture firm, a company will get one thumbs up or thumbs down. When someone comes before Maine Angels, there are 30 thumbs, and they never move in the same direction. Our most broadly participated-in deal was a company that got about half the members participating. The lowest one was a single member, and there has been everything in between.

Have you noticed any trends in the types of companies coming to you for investments, or areas of the Maine economy that seem to be producing the most activity?

Remember, a lot of the things we look at are due to syndication or consortium efforts, so they are not within the state borders. Within the state and outside, there are certain hot areas of the moment, always. The funny thing is that states and government groups expend a lot of energy to prioritize and focus, and after a lot of heartache and effort they all come up with pretty much the same thing. It doesn't matter if it's Maine or South Dakota or California, the chosen emphasis areas are pretty similar

What are some of those emphasis areas right now?

Well, you've always got the IT world; you've always got the biotech world. Within the state ˆ— some things that South Dakota or California wouldn't have ˆ— we certainly have a natural resource area that's partly tourism, partly just our sea and our forests and that sort of thing. There's a little bit of a boomlet, or at least a couple of in-state companies in that area, that are seeking to capitalize on the image of Maine as a tourist Mecca and wholesome environment, whether they're in foods or something associated with the Maine image.

What criteria must a company meet to receive an investment?
Go back to our earlier conversation about the 30 sets of thumbs. Some of our members operate by similar criteria to the venture firms: They're not looking for as many years of as much sales and profits, but they are looking for things that are out there and that the market has at least begun to validate. On the other extreme, you've got people who have their enthusiasms and they want to foster an area, and they're okay with [an investment] being 10 or more years to fruition. There's no venture firm that's like that. So the angels cover a very wide spectrum.

You talk about angel investors filling a gap in the funding landscape between grants and venture capital investors. Did you find there was a similar gap in entrepreneurs' knowledge about what exactly angel investing is?

Yes, there's always a lack of understanding, and it's not unique to Maine. Before Maine Angels, there wasn't a total lack of angels, it was just the informal or individual kind. Maine has plenty of wealthy individuals who write checks. So angel activity was going on before Maine Angels came together, it's just that it's a lot better organized and more effective now. And it's more obvious ˆ— the shingle is out there.

In terms of what entrepreneurs don't understand ˆ— and Maine companies are not any different from the Ohio or South Dakota companies ˆ— is what the partners and the investors are looking for in return. A huge number of people say, "I have an opportunity, I'm excited, give me money." And they haven't thought about when the return will reverse and what goes on while the investment has been made and before it's paid off.

People often start a business because they have enthusiasm and an idea. If they haven't been around this track multiple times, they don't know what starting a business means. They don't know how to run and develop a company. That's actually more valuable to them: To have an angel network or a group of experienced business people who happen to invest money but also can provide something more valuable, which is experience.

What about the financial returns, though? What do angel investors typically expect to receive for their investment?

Again, there's a diversity of angels, so some are willing to act like family members and give a bunch of money and hope they do well. But that's not the usual. Most angels are looking for exactly what venture firms are looking for, the same kind of return. Thus, the ballpark aim is a 10X return in five years. It never works like that, of course, but you look for opportunities that could do that.

So somebody who wants to open a hot dog stand on the corner ˆ— it might be a good business, might be a stable business, might be great for the hot dog chef, but it's not going to expand or be scalable that way. Things that are scalable and growable are what angels and VCs are looking for. Intellectual property you can license is infinitely growable ˆ— that's the type of opportunity that potentially could be a 10X return in five years.

Now, having said that, you've got to have a plan to do it. You've got to have people who are of like minds and want after five years, or seven years or whatever, to be able to sell the firm or take it public or something like that. The person who says, "I want to have a fine furniture shop and I want to retire from doing it," even if they could generate the returns, they don't want to ever sell it ˆ— that's not going to be an appropriate investment either.

So that's the expectation. If you do 10 deals, a couple of them will exceed that, a couple of them will approach it, and most of them will be fizzles. That's just the way the world is, because we can't understand and anticipate everything. If you've done your homework ˆ— and if they're the right people and you have the seat at the table and all those things are lined up ˆ— the experience is that you will get a very healthy return for the whole portfolio, and most of that will be generated by the few home run deals.

Angel investment is supposed to be the platform that helps the company make it to the next level, where it might attract even more funding. Is that what you're seeing with the companies Maine Angels have funded?

Absolutely. We're investing in companies that might have a value of $1 million or $5 million or $10 million. Our investment might be a majority or significant minority stake in the company. We're hoping that all these enterprises are going to grow to 10 times or 100 times that value, so we're participating in the very early stages.

What the company then needs to keep growing and fulfill everybody's hopes varies by company. Some companies go through several rounds of external investment. Others get to the point where they can use traditional bank-type financing. Some businesses are sufficient to throw off enough profit to fuel further growth.

So things diverge after the angel stage, but in every case our investment of money ˆ— and more important, participation and wisdom ˆ— should be the platform for launching the growth of the company.

What about the growth of Maine Angels itself. Do you anticipate the group will continue to increase its membership and the number of deals it makes?

Both of those will certainly happen. My guess is we will continue our growth curve because we're always finding lots of people who make investments of this nature who aren't our members yet. We'd like everybody to know we're there and join us if they care to.

This whole syndication effort is a big issue for me. If you ask the 300 angel groups or their associated members in the country today, "Do you like to syndicate or do you want to deal close to home," 95% of them would still say they want to deal close to home. But the five percent or 10% who are willing to participate is growing, and they're being more active. And that's important for several reasons. The investors within our state will have more opportunities, better opportunities by syndicating outside Maine. For the entrepreneurs in our state, it's a double-edged sword. On the one hand, they're competing with the best opportunities everywhere, so just because they're down the road from a person who can write a check is not sufficient to make that sale. But on the other hand, by participating in the larger world, they're going to have opportunities and market contacts and access to technology. And this is part of our whole state education and development efforts. If our vision is limited to our state border, it's going to be a huge roadblock.