Seed Capital From Angel Investors: Michael Gruber, Founder and Managing Director, Cornerstone Angels (Part 5)

By guest authors Irina Patterson and Candice Arnold

Irina: In the past 12 months, how many investments have you made?

Michael: In 2009, we made seven investments. So far, in 2010, we’ve made three. Two of those three were in companies that were in our portfolio. They came back sort of as an extension of a round, and we had some additional people make investments in those companies.

Irina: What is your typical investment range?

Michael: As I said, it’s ranged from $20,000 to close to $1 million. Our target is to try to get to $100,000 to $500,000. I would say, if you look across the board, it averages probably $200,000 to $250,000 per company.

I would say, more recently, a common range would be somewhere between $100,000 and $250,000. That’s a combined investment across a number of people who decided to invest. The typical amount that’s invest per person is $20,000, $25,000 tops.

Irina: How long does it take for a company to receive funding from your group?

Michael: The target is two months after the investment meeting.

Irina: What is the typical valuation that you would like to see?

Michael: We’d like to see something around $3 million to $3.5 million.

Irina: How much of a company’s equity do you usually seek?

Michael: It all depends on how much we’re investing. We’re typically looking at the round in which they’re raising, but it would be anywhere from 20% and 25% of the company based on the round by which we’re looking at the company.

Irina: Do you think in terms of returns, like 10x over a certain number of years or something like that?

Michael: Yeah, that’s what the target is.  We’re not likely to get 10x in every deal, but in order to get the return [we want], we need to shoot for those that are 10x within a five-year time frame.

No one’s really looking for a short-term exit, so everyone’s within the mindset that these are three- to seven-year horizons.

Irina: At what stage of a company’s development do you prefer to invest?

Michael: It’s companies that have already built up the product or service, and they’re really focused on their marketing and sales execution. We will not really fund R&D or product development. They need to have at least product development, and we’re looking for some type of customer validation.

Revenue is good. It’s not required, so the company could be pre-revenue. But the product should be developed and there should be some way to judge about the quality of that product or at least potential customers’ interest in that product or validating its need.

Irina: You already talked briefly about the size of the market. What is your preferred market size?

Michael: We don’t necessarily focus so much on the size of the market as what we believe the company could achieve. So, it’s more about whether we believe the company could get to $50 million. That also then determines what is the percentage of the entire market that they may be focused on. The hope is that the total addressable market that they’re going after should be at least $250 million.

Irina: Do you invest in small, niche markets?

Michael: Maybe on an opportunistic basis. If the total amount, at the most, is $20 million and the company’s not able to achieve potential for $50 million, then possibly not.

The way we possibly would is if we saw that the company was incredibly cash efficient, where it was able to generate a lot of money and where we maybe would see that it could achieve a large percentage of that market in a short time and in which there may be a separate exit plan.

Typically, the exits we’re looking at are an M&A, getting bought out by someone. If it could be that there could be distributions back to investors based on the cash that we’ve generated in a niche market; that may be something we’d look at. But, I would say that’s a harder criterion to go against.

Irina: What kind of experience are you looking for in the entrepreneurs?

Michael: It’s either one of two things: domain expertise within their particular market segment or the ability to showcase that they’ve executed within a startup environment in the past. Without one of those two, it gets harder.

Management is key, so one of the things we’ll look at is the ability for sales and marketing execution. The more that we know that they have a plan and a strategy to attack those markets and the more that they have the relationships to find the right people, the more we can be satisfied in supporting them.

This segment is part 5 in the series : Seed Capital From Angel Investors: Michael Gruber, Founder and Managing Director, Cornerstone Angels
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