Hey, angels: Are you investing in ideas, people or something else?

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For at least a couple of decades venture capital and private equity have become the buzzword investment avenues for young private companies in need of money to fund their growth. But for fledgling entrepreneurs who have worked through their own bootstrap resources and family and friends, angel investors have long occupied a crucial middle ground before they’re ready to graduate on to encounters with investment bankers. 

At one time angels with a few million dollars to gamble on young businesses operated in the shadows—to find them, you had to know the right people with connections to the country club set. Today angels are more likely to be organized into networks, some operating on regional and even national levels as so-called Super Angels willing to write checks of $3 million and more at a time. The lines between venture capital and angel investment have become blurred in the process. 

One of the stalwart local organizations is the Hyde Park Angels. Founded in 2007 with connections to the University of Chicago’s Polsky Center for Entrepreneurship & Innovation, it is now headquartered in the Merchandise Mart and has built relationships with Northwestern and DePaul and other universities in the area as well as a host of small business incubators.

The managing director is Pete Wilkins, 51, an entrepreneur himself who started up several businesses before assuming his current role six years ago. An edited conversation with Wilkins, whose book “Purpose First Entrepreneur” is slated for publication this fall, follows. 

Crain’s: Angel investors once did their investing as individuals in an ad hoc manner. But your group is highly organized. How many angels are part of Hyde Park?

Wilkins: We have over 100 investors. More than half of them were founders of their own companies at one time and most have been CEOs and occupied board seats at multiple companies. A member may be an individual who has sold a company and is taking time off and has some time to engage with younger entrepreneurs. Another angel may still be active in running a Fortune 500 company. We aren’t actively recruiting more investors right now. But when we are, we are typically looking for people who have scaled up their companies with significant success. We are also looking for a diversity of experience, ethnicity and gender. There are areas we want to build on, like health care. We are already strong in logistics. We have a member who is the chief procurement officer for one of the largest retailers in the world. We also have a former COO of a logistics company that was sold to UPS.

How much money are they expected to invest? 

There is no exact answer to that. Different people have different tolerances for risk. In most cases, you should not expect to have more than 5 or 10 percent of your investment capital dedicated to alternative investments like venture capital. This is a risky asset class. As an angel investor, you are backing business owners who believe they can disrupt industries with something that is new, and maybe shifting landscapes in the process. Some people who want to diversify their portfolios with younger companies while mitigating risk might be better advised to put their money into a basket of high growth stocks. 

You raise your money in separate funds? 

We track investments in buckets of capital spaced in three-year increments. For example, we aggregated $28 million for our Cohort 3, which ran from 2014 to 2016. The market value of that cohort today is $100 million, meaning that we’ve been able to quadruple our original investment already. Some 80 percent of that money has already been returned to our investors. We’re getting bigger all along: Cohort 1 backed just eight companies. In the first quarter of 2021 alone we invested in 10 companies. We currently are invested in 54 portfolio companies overall. 

Angels seem to invest in a wide range. What kinds of checks do you write?

True seed investors are typically writing checks of between $25,000 and 250,000. Although we do invest in seed rounds, Hyde Park is likely to be investing between $750,000 and $1.5 million for our first investment in an A round. The total A round including all investors will typically be between $5 and $8 million. Beyond the seed and A rounds you see B rounds being led by larger Chicago venture firms like Valor Equity and Jump Capital who are writing much larger checks. As we invest in either seed or A rounds, we are likely to be part of syndicates of multiple investors. In building a portfolio it can be more effective to invest $1 million and then have two other investors each put in $1 million each. That way you reach more companies and spread out your risk.

Business owners always want to know what percentage of a company they have to be prepared to give up in return for capital. 

In the early rounds the founder should retain the majority of ownership. And in fact, most venture capitalists want to invest in people who have a large ownership stake to align incentives with growth. But for an early-stage company it’s hard to set a valuation; one popular way to avoid a formal pricing is to set up a vehicle called SAFE, which is a Simple Agreement for Future Equity. It’s a promise for the investor to receive future shares, usually with a cap set. In negotiations like this, it’s important for the business owner to have an experienced lawyer at hand. The lesson the entrepreneur has to understand is that she can give up some ownership percentage in order for the company to grow much bigger, or hold on to 100 percent ownership of a company that, without capital, may remain much smaller. 

What kinds of categories of business are you investing in?

To begin, we invest only in the Midwest, with 85 percent of our companies in Illinois. We invest in logistics, direct-to-consumer and workflow software. We’re in healthcare and financial technology, personalized nutrition and cannabis. We cover a wide spectrum, though there are niches like healthful foods where we have clustered investments. In that grouping we are invested in Market Wagon, Farmer’s Fridge and Simple Mills. As a matter of fact, HelloFresh from Germany just acquired our ready-to-eat meal company, Factor, for $277 million last quarter. We are also invested right now in ShipBob, a Chicago firm that is emerging as a leader in e-commerce fulfillment. 

Are you investing in ideas or people or something else? 

The biggest thing we do is try to figure out a product/market fit. We are looking at traction for the core business, and revenue may be the best way to measure that, though it may be just as important to look at user engagement and other key performance indicators.

We are also looking at the vision of the owner and their ability to articulate how their product and service will capture market interest. What is their logic in coming to market? What resources to they need to make this an enterprise of scale? In the end, human capital helps maximize financial capital. We don’t need to see a 40-page business plan. But we do need to understand from you how you intend to introduce a product or service that will fundamentally change peoples’ behavior and make them want your product, and then keep on wanting it. It’s hard to change people: remember that when seat belts were introduced in cars they were a good idea, but nobody started using them until laws got passed.