Seed Capital From Angel Investors: Michael Gruber, Founder and Managing Director, Cornerstone Angels (Part 4)

By guest authors Irina Patterson and Candice Arnold

Irina: You get about 300 a year. How many deserve a closer look?

Michael: It all depends. What we have is a multi-step screening process. We have five screening meetings a year and five investment meetings a year. We basically stagger it. One month we’ll have a screening meeting, followed by an investment meeting the next month. We have one month off in the summer and one month off in December for the holidays.

But what we typically do is, out of the 20 to 30 companies that we receive at one period, we wind up whittling that down, and we have usually between five and eight companies that we then invite to participate in the screening meeting.

Then from those five to eight, we’ll select two, maybe three, that are invited to participate in the investment meeting where the members and other guests will evaluate whether those are companies they’re interested in pursuing through due diligence and possibly investing in.

Irina: How do you usually conduct your due diligence?

Michael: Our efforts are very much participatory in that we try to get the members and [other] folks involved. We and our team, we provide the framework for that.

But, typically, we have a number of different checklists and report mechanisms that we create for doing the due diligence. We look at a lot of key itens, usually the market and the product. We do an IP background [check], depending on the company. We try to contact and research the market more by looking at customers, suppliers, and even competitors.

We look again at financials, survey analysis, and some other items. Then we try to put [together] a synopsis of that. As a group, we don’t recommend an investment per se, but we say whether we think it’s a favorable opportunity.

Then, obviously, it’s up to each of the individuals to make a decision about investing. We have an entire framework and process of doing that. There may be gating factors or milestones that we want the entrepreneurs to achieve.

The goal is to come to a decision within two months after that investment meeting. If not, we try to communicate to the entrepreneurs that we just can’t make a decision then or say what we may be waiting for as we continue to let things pan out.

Irina: What factors do you give the most weight to when you’re debating whether to invest?

Michael: One is the product. Does it make sense? Is it going after a problem that’s big enough for the people who are going to purchase it? Does it have a compelling enough value proposition to them?

And then, too, is the market big enough? We’re not looking for lifestyle businesses, so the businesses need to be at least $50 million businesses. With that, we’re looking at the management team and their execution capabilities. That’s either a combination both of experience – past experience – in domain within that area or also proof about their ability to execute.

And then a critical factor, especially in today’s times, is looking at the valuation. Sometimes we some really interesting companies, but the valuation is out of whack, so the company needs to be evaluated and have investment terms that seem appropriate.

Sometimes, we will be involved putting together a term sheet, but I would say a lot of times, we may be looking at an opportunities that may have already gotten some investments, so we’re evaluating them from the deals that are on the table.

Our goal, typically, is to find exciting companies with all of that that are valued below $5 million. Hopefully, it’s between $1.5 million to $3 million. We’ve done a lot of deals that have been valued a lot more, but we have to see that the opportunity’s big enough, and there have to be investment term structures that have to be pretty favorable to investors.

This segment is part 4 in the series : Seed Capital From Angel Investors: Michael Gruber, Founder and Managing Director, Cornerstone Angels
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