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Listen up. Chris Wasden, CEO of hearing diagnostics device company Tympany Inc., is no stranger to raising money. Before co-founding Tympany, Wasden, 44, spent nine years as an investment banker at JP Morgan. He knows that to raise money, you've got to make some noise.
Out on the fund-raising trail in fall 2001, Wasden made a lot of noise: He gave more than 90 investor presentations in his hometown of Houston. But his pitch fell on deaf ears until he focused his efforts on those who knew his industry best-ear doctors and their patients. "The majority of our investors have been touched by hearing loss in one way or another," says Wasden. "We found that most other investors didn't understand our business."
In fact, by focusing on hearing-loss patients, their families and their physicians, Tympany has raised $4.3 million from about 60 investors. Three of those investors put up $500,000 each after seeing the company's new hearing-test equipment in action. One has long struggled with diminished hearing. Another-a partner at a VC fund-wasn't even aware that his hearing was in jeopardy until taking the test himself. With third-year revenues headed toward $6 million, Tympany is already rewarding them handsomely.
"Angels prefer to invest in industries that are close to their hearts," says John Garcia, managing partner of Angel Strategies LLC in Tustin, California. "There's no doubt that if you strike the chord of a particular life experience of an angel, you'll do well," he says. "If you're building a chain of grocery stores and can find an angel that worked in his family's grocery store as a child, you'll have a much better chance of getting an investment from him."
At Angel Strategies, Garcia coaches entrepreneurs to look for these "affinity investors" from the get-go. "We teach entrepreneurs how to raise money from friends of friends-but to never go into a pitch without knowing the person's whole background." Whether it's their past careers, where they grew up or what schools they attended, finding a common thread is critical. The more you know about their backgrounds, Garcia posits, the more likely you are to succeed.
Turn the Tables
Mark Miskie, 39, didn't start out looking for affinity investors for his company, Arcus Medical LLC, in Charlotte, North Carolina. Miskie started Arcus Medical in 2003 to commercialize a device that helps incontinent men manage their condition.
Although incontinence is not uncommon, Miskie found that the typical investment group did not understand the true potential of his new product. His pitch to angels and VCs in his local area turned up nothing. "Everyone loved the idea, but no one would invest," he says.
Miskie began to re-evaluate his funding strategy. "I had to ask myself, Who should I target?" he says. "Finding urologists to invest was the one thing that could most increase my chances of making it in the market." His new direction soon bore fruit. Urologists not only understood the product, but were also eager to invest in something that could improve their patients' quality of life.
"They see the product through a different set of eyes than a typical angel," says Miskie. "They're selling 60 million units a year of competing products that nobody likes, so they understand how easily people will adopt this product." From one presentation at a prominent urology clinic, Miskie found 10 urologists who put up enough seed capital to get a prototype of the product made and to complete some initial market testing.
It didn't take long before word spread among the other urologists and their colleagues. By the time Arcus Medical was ready for a second round of funding, the investors were waiting. "Within 48 hours of opening our second round, all the equity was earmarked. I made the pitch in the middle of an evening meeting. There were a couple of people who walked up to me and handed me a slip of paper-with dollar figures written on it. They were even calling me on the drive home."
Although Arcus Medical had not yet begun distributing its product at press time, orders were already flowing in. Revenues in 2005 are expected to easily break through the $1 million mark.
More Than Money
Credit for the runaway success of the products from Arcus Medical and Tympany goes in large part to the companies' investors. All investors bring cash, but affinity investors like Miskie's urologists and Wasden's otologists bring deep industry knowledge that creates an aura of credibility around a young company. Most of the early investors in Arcus, for example, are from Virginia Urology, a well-respected institution famous for treating incontinence. "These guys bring more value than money," says Miskie. "They bring connections and credibility. Every time I got a check from a urologist, it was an endorsement for the product."
Wasden agrees. "I think we've gotten something beyond money from them," he says of the physicians in his investor group. "Plus, it's interesting to see their perspectives as potential customers."
Wasden's affection for his investors comes with one caveat. Affinity investors could become a liability if the company's early sales appear to be artificially propped up by company insiders. "There's the misconception that early sales success comes from selling to investors only," laughs Wasden. "Fortunately, that's not [true in] our case. We've sold 200-plus units, but only 15 to [our] investors."
As industry experts and company advocates, of course, affinity investors can provide valuable feedback and guidance, especially during the early stages of product development. Both Arcus Medical and Tympany make use of the expertise of their investors. Miskie considers himself lucky: "How many companies have the luxury of tapping 20 professionals for assistance, guidance and opinions?"
An Angle for Every Angel
Medical companies are not the only likely candidates for affinity investments, says Garcia. No matter what industry you're in, it's simply a matter of identifying the nonfinancial rewards. "Every angel I've ever met wants to get into movies," he says. "They want to be able to sit at the theater and see their name scroll by as an executive producer." Of course, Garcia warns angels against investments that are outside their expertise, but the lesson for entrepreneurs is clear: Angels invest for many reasons, and finding a compelling motive-whether financial or not-can be the key to an angel's heart . . . and his or her checkbook.
Before you get an offer from an investor (generally called a "term sheet"), consult Advanced Private Equity Term Sheets and Series A Documents (Law Journal Press, $195). This is a thick, technical manual written primarily for lawyers, but it also contains definitions, templates for term sheets, and clear discussions about the pros and cons of various investor demands.
If a legal tome seems like too much to digest, go for the more straightforward Term Sheets & Valuations: A Line by Line Look at the Intricacies of Term Sheets & Valuations by Alex Wilmerding (Aspatore Books, $14.95). This starts you off with the basics and walks you through the most common terms line by line.
Still too complex? Then check out Raising Capital for Dummies by Joseph W. Bartlett and Peter Economy (Wiley, $24.99). Bartlett is an adjunct professor at New York University and one of the editors of the Law Journal Press book mentioned above. This book will help you ask the tough questions during negotiations.
David Worrell is an investment banker and author of the e-book Finding Funding. Contact him at .