ANGEL INVESTING IN SMALLTOWN AMERICA

Angels in flyover country.

By Marianne Hudson

Many have the impression that most angel investing happens in Silicon Valley, Boston and New York. I’m here to tell you that angel investing is thriving in many other places across the country. Case in point: angels in so called “flyover states” without a tradition of venture capital or cities with populations of 100,000. These locations are creative angel epicenters that are doing special things to be successful.

Over the years, I’ve met many highly successful angels and entrepreneurs from places that may surprise you – Whitefish, MT, College Station, TX and Greenville, SC, among others. These angels are having a great run, with financial returns to covet and the rewarding feeling of helping to create companies that are meaningful in their communities and states.

Are there challenges of investing in “underserved markets?” Sure. These angels can rifle off a good list:

* Deal flow is initially more difficult to find
* More education of potential investors is needed
* Follow-on Venture Capital is not available locally and/or companies often need to move to where VCs are
* Lack of a support “ecosystem” of experienced startup mentors and programs that prepare entrepreneurs for equity investment and successful growth

Even with these challenges, the real story is about their success and what they’re doing to be so effective.

Take Matt Dunbar, Managing Director of the Upstate Carolina Angel Network (UCAN) in Greenville, SC. UCAN has had multiple successful exits since it was created in 2008, investing about 80 percent of the network’s money in South Carolina-based startups.

Dunbar describes UCAN’s work as part education, part investing and part “market making.” Since there hasn’t historically been a strong startup culture in the state, UCAN has worked with other emerging ecosystem partners to build an infrastructure for success. “We needed to be a market maker, bringing investors together with entrepreneurs, increasing the viability and longevity of startups in our community and across the state,” he says.

This infrastructure includes considerable education so that angel investors have a basic understanding of good investing practices. As UCAN attracted new angel investors, they leveraged best practices and networking from the Angel Capital Association and brought angel investor courses of the Angel Resource Institute to South Carolina, continuing their education in regular monthly member meetings.

The market-making effort also involved working with state and local government leaders, universities and economic development professionals to develop effective resources and policies that support exciting entrepreneurs and innovation. The effort has expanded over seven years, and has been helped by a growing national awareness that high-growth startups are important to the economy. This recognition helped increase local resources and in part helped in the proliferation of business accelerators in South Carolina (as they have in many parts of the world).

Another important piece of the story is how the Internet has opened up markets and knowledge from other more advanced markets. For example, angels can access blogs from knowledgeable venture capitalists and angels anywhere in the world to learn the finer points of investment strategy. Likewise, entrepreneurs have access to great “how-to” resources and data from Silicon Valley and the Kauffman Foundation.

Interestingly, the worldwide information access to Silicon Valley practices creates some dynamics for investors in these locations. Many angels are approached by startup CEOs promoting much higher pre-money valuations than fit the economics of the community they are raising capital in, where early stage capital is far more scarce than in venture hot spots. Even though the average pre-money valuation for angel deals in the U.S. was $3 million last year, it is becoming more common for entrepreneurs to start their negotiations at $5 million or higher. That is a non-starter for many sophisticated angel investors.

Dunbar and UCAN are now taking the infrastructure they started in Greenville and expanding it through the South Carolina Angel Network. This is creating economies of scale across the state by sharing deal flow, staff and expertise while pooling more of the vital capital needed by the state’s promising entrepreneurs. Syndication among multiple angel groups in the state combined with a new angel fund will grow investments from about $250,000 to $750,000 per deal and allow for multiple rounds of investment in the most successful companies to support them through exit, often without the need for outside venture capital.

From an angel’s standpoint, a significant part of the investment growth in underserved markets comes from the experience of a good pipeline of deals and great exits. For example, UCAN sees 200 to 250 deals per year now and invests in five or six new deals every year, in addition to follow-on investments in existing portfolio companies. When UCAN’s next exit closes in March, it will have enjoyed two early exits that generated rates of return over 2000 percent, which combined with its other exits and investments are bringing wealth and significant growth companies to the community.

If you are based in a smaller community or flyover state, know that you can be part of a robust entrepreneurial and angel community. You may need to roll up your sleeves a little more to build or support the local entrepreneurial infrastructure, but there are opportunities, resources, and angel groups to connect with. The tides are changing. You may not be Silicon Valley, but you have a chance to make returns and make a difference in the community you care about.

Marianne Hudson is executive director of the Angel Capital Association. This article originally appeared on Forbes.com

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