Seed Capital From Angel Investors: Chenoa Farnsworth, Executive Director, Hawaii Angels (Part 2)

By guest authors Irina Patterson and Candice Arnold

Irina: How do you conduct your due diligence?

Chenoa: We are always pretty clear that due diligence is the responsibility of the individual members. We do not take it upon ourselves as a club to do due diligence for [them]. But we do facilitate the process.

So, in the weeks following the presentations, we have a standing meeting where we meet with the companies. The individuals who have expressed interest in a company will come to that meeting and ask more questions. We usually do a few group meetings for the deals for which there’s a lot of interest, and then individuals are encouraged to do a lot more homework on their own. Then the individual makes the decision about whether to invest.

Irina: How many investments have you made in the past 12 months?

Chenoa: Probably seven, I would say. Some of those would be follow-on investments, so not necessarily companies that came and pitched us in that month but companies that already had investment from the group and went back and received additional investment. So, in total, in 2010, we have [made] eight investments.

Irina: What is the average dollar amount that you usually invest in each company? What’s your range?

Chenoa: It changes from year to year. That’s probably from $150,000 up to $1 million, I’d say.

Irina: You don’t do anything lower than $150, 000?

Chenoa: Not likely. On an individual basis, obviously people do, but as a club, no.

Irina: How many companies do you have in your portfolio?

Chenoa: Fifty-four.

Irina: How many of them are doing great?

Chenoa: Fifty percent are doing well and 50% not as well.

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

Chenoa: All together, about two months from presentation to [funding].

Irina: What is the typical valuation of a company that you invest in?

Chenoa: $2 million to $5 million.

Irina: What percentage of equity do you usually take in a company?

Chenoa: Ten percent to 20%.

Irina: Do you think in terms of the return you’d like to receive?

Chenoa: I think 10x over five years would be hopeful, but I think more realistically, nowadays, people would be happy with a 5x over five to eight years.

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

Chenoa: Usually it’s seed level, seed stage, although we’ve done everything from seed to expansion capital – really a full range – but I’d say the majority tends to be at the seed level.

Irina: Does the business have to be validated with customers?

Chenoa: It depends on the sector that the company is in. Obviously, if they are producing a consumer-facing product or something like that, yes. But if they’re, for example, a biotech company, no, not necessarily.

Irina: Do you invest in companies that are just ideas on paper?

Chenoa: No. They have to either have a pilot project, market traction, or some other form of validation.

Irina: What about the total available market?

Chenoa: Again, it depends entirely on the sector. But we’d like to see at least hundreds of millions up to $1 billion.

Irina: Do you invest in any niche markets, like $20 million niche markets?

Chenoa: We haven’t really, but I think that the market is changing. I think that’s a possibility going forward.

Irina: What character traits do you look for in entrepreneurs?

Chenoa: A track record, ideally. You know, you can’t always get that but certainly somebody who combines a strong track record with strong passion for what he or she is doing. That’s the winning combination, in my opinion.

Irina: Do you invest in people who are just out of school?

Chenoa: Not typically, unless they have perhaps advisors or investors who are very well known to us and are well established.

Irina: What do you do with the companies that you don’t invest in?

Chenoa: We try to do some mentoring or perhaps refer them to a more appropriate resource. Some are small businesses, so we’ll refer them to the Small Business Administration programs. Depending on what the company is, we may refer them to another resource or we may mentor them, particularly an early stage deal that we think is promising. We will assign a mentor, and that mentor will stay connected to the company for a year or more as the company matures so [the team] can bring that deal back to the table when the company’s ready.

This segment is part 2 in the series : Seed Capital From Angel Investors: Chenoa Farnsworth, Executive Director, Hawaii Angels
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