Banking & Finance and Investing and Angel Investors and Small Business

Indianapolis set for next wave of angel investors

April 3, 2010

Meet Brent Claymon, aspiring angel investor.

At age 41, Claymon is young. He’s also savvy, having ramrodded PacVan Inc., a company that leases portable buildings, onto the Inc. 500 list of fastest-growing private companies and then selling it four years ago.

Claymon and one of his two brothers who also owned Pac-Van bought Park Place Motors, a Carmel used-car lot specializing in European luxury brands, and now Claymon is shifting gears again by looking to invest in startups.

“There’s still the entrepreneurial itch to be involved with growing companies and looking for opportunities,” he said. “At the end of the day, it’s about the reward, trying to take something and make something more.”
 

Claymon is part of a wave of up-and-coming angel investors in the Indianapolis area who are quietly accumulating the expertise and thick wallets necessary to back startups that are at once risky and rich with potential for lucrative returns.

If they follow through, they could fuel an unprecedented investment surge and accelerate Indianapolis’ shift away from a historic reliance on smokestack industries and big corporations and toward serial entrepreneurship—a subculture that thrives on a cycle of starting, growing and selling companies, then plowing the proceeds back into new companies.

“We are at an interesting tipping point,” said Bruce Kidd, who has held a number of government and private-sector positions supporting entrepreneurship, and now is a senior vice president at Walker Information, an Indianapolis customer-relations firm. “We truly have an entrepreneurial culture now.”

Plugging a funding gap

Angel investors have been around at least since a group backed Alexander Graham Bell’s telephone company in the 1870s, but the rise of such angel-backed ventures as Apple Inc. and Amazon.com has brought greater interest in recent years.

Angels plug the critical gap between startup funding from friends and family, and the more risk-averse venture capitalists. The U.S. Securities and Exchange Commission requires angels to have a net worth of at least $1 million or an annual income of at least $200,000.

Counting angels is notoriously tricky. Many lie low to preserve their privacy. Others don’t want their identities widely known for fear of being deluged with unsophisticated business plans and contacts from entrepreneurs in industries the angels aren’t familiar with—then being pilloried for the inevitable rejection.

Kidd estimates more than 100 are consistently active locally. However, the area has many more: A state program offering income tax credits for angel investments has certified nearly 1,400 individual investors, and Kidd, who directed the program until a year ago, says the vast majority live in the Indianapolis area. Most, however, have made only one investment.

Women and minority angel investors are relatively scarce. Local observers attribute the shortage to the fact that few women and minorities so far have built companies that demand big money when it comes time to cash out. In addition, many in top-paying corporate jobs landed their posts only within the last few years, leaving them little time to amass vast wealth.

Angels increasingly are stepping into public view.

In a series of interviews, IBJ learned of at least 40 individuals who are mastering the ropes of entrepreneurship, and who are piling up significant assets or expecting windfalls in the next few years.

At least 20 could easily edge into angel investing. And many say they plan to do just that.

Some of these would-be angels are baby boomers who realize a garage needs cleaning only so many times in retirement and decide to keep a foot in the business world.

Claymon’s generation is younger but already indefatigably entrepreneurial at heart. They stand squarely in the spirit of the 30-somethings who launched the Gravity Ventures LLC angel fund in Indianapolis last year.

Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, isn’t familiar with details of the Indianapolis market, but said the number of people with financial resources to become angels is generally thought to be more than three times the number of actual angels.

“There are a lot of these people around,” Sohl said. “But will they stick their toes in the water and write the check?”

Small beginnings

Indianapolis hasn’t always had people lining up to invest in startups.

Before dying in 1999, civic leader and Indiana National Bank Chairman Tom Binford—himself an angel investor—noted a lack of appetite in the conservative city for spotting “gambling money” on unproven companies.

Indeed, a couple of decades ago, the consistently active angel investors could have fit around a large conference table. The few who stepped onto the high wire often knew little about the industries entrepreneurs brought to them, so they buried themselves in due diligence. Former Conseco Inc. Chief Financial Officer Rollin Dick was perhaps the best known of that small circle.

Many of the local pioneering angels are still active.

The Indianapolis area added a layer of angels when Software Artistry Inc. went public in 1998 for $200 million and instantly enriched co-founder Don Brown and such investors as Bob Compton, both of whom went on to invest in other startups.

The software developer’s success imprinted a tech flavor on local angel investing, but tech also remains popular for the same reasons angels elsewhere like the sector: The companies tend to be built on proprietary technology and can be grown and sold within a few years, meaning investors stand to reap profits quickly.

Attempts to organize the independent-minded angels gained traction to the point where many now band together in such groups as Gravity Ventures or the more prominent Hoosier Angels Looking for Opportunities, or HALO, to share expertise and spread risk.

Their wings were clipped by the recession and resulting plunge in stock values. The total value of investments under the state venture tax credit program collapsed to $2.8 million last year from $6.6 million in 2008.

But interest in angel investing remains high. Sohl, the university venture center director, noted that the number of angel deals held steady through the recession nationally despite a drop in investment sizes.

It is into this increasingly open, welcoming and sophisticated environment that up-and-coming angels aspire to take their places in Indianapolis, said Jean Wojtowicz, president of Cambridge Capital Management Corp., which offers several forms of alternative financing.

“As we see more people doing it, it seems less odd,” Wojtowicz said. “It will continue to gain momentum.”

Boomers, busters

Thompson Thompson

John Thompson watched one of the most prolific African-American angel investors in the Indianapolis area, Bill Mays, while working for Mays’ namesake chemical distributorship. Now, Thompson foresees testing his own wings.

Thompson came to Indianapolis after a consulting stint at McKinsey & Co. and earning an engineering degree from Cornell University and an MBA from Columbia University. After running Mays’ day-to-day operations, he left the company and has acquired or started several businesses in fields ranging from pipe distribution to countertop construction.

Now 55, Thompson plans to sell at least some of the companies and his real estate holdings and shift part of the money into startups, though probably not for another five years.

Software, life sciences and even advanced manufacturing—anything with new technology—beckon.

“It’s interesting to me to kind of sort through different ideas and thoughts and try to filter out the ones that will work the best,” Thompson said. “I’m always interested in creating jobs and careers in meaningful ways.”

Thompson is typical of boomers edging into angel investing.

They’ve started and sold businesses, inherited companies or wealth, or have retired from high-level posts at large corporations like Eli Lilly and Co.

In addition to staying active in business, they also yearn to teach entrepreneurs what they’ve learned—experience that can be as valuable as any of the money.

Boomer angels have been less likely than their parents to stamp their names on their businesses and pass the businesses to children, and boomers’ children are even less interested in a build-and-hold strategy.

Generation X entrepreneurs tend to start companies with a clear goal of selling them and then doing it again, a model taken straight out of Silicon Valley and other hot spots.

Take Jeff Ready. The Indiana native, now 35, graduated from Rose-Hulman Institute of Technology, built and sold an Internet advertising company called Radiate in Indianapolis, then moved to California and launched a venture-capital-backed company that offered e-mail spam filtering.

After selling Corvigo Inc. for $42 million, he moved back to Indianapolis and, with the same partners, started Scale Computing, which already has landed $12 million in venture capital.

Musing about the future is a luxury Ready has little time for now. But he leaves the door to angel investing wide open.

“Will I do that in the future? Probably,” he said. “I certainly very much enjoy startups. It’s been my whole life.”

Looming impact

The anticipated influx of angel money into the Indianapolis economy isn’t likely to go unnoticed.

Most of the new businesses will not be lawn maintenance or other services. Because the businesses are pushing into new markets or markets dominated by other companies, they’ll emphasize technology, speed and doing things better. They’ll need top employees and will pay them accordingly.

The Indianapolis economy will deepen as a result, predicted Wojtowicz, the financier. Two-hundred companies with 20 employees apiece spread across several industries are inherently more stable than one company with 4,000 employees.

Despite the looming influx of angels, however, the Indianapolis area has a long way to go before enough of the capital is available.

Wojtowicz thinks that for every $70 in angel capital flowing to startups, another $30 goes unfilled. Most of the unfilled need is in niches requiring specialized knowledge, she added.

Nevertheless, the area has swung into an upward spiral with angels funding ever-more-sophisticated entrepreneurs who become angels themselves, she said.

Kidd predicted angels will write bigger checks as the economy improves, and that some of those checks will come from newcomers to the milieu.

Momentum will pick up where it left off before the recession, and the Indianapolis area can expect a new level of entrepreneurship.

“The intent is still there. People still have the philosophy and the desire, the planning to get re-engaged,” Kidd said. “It will come back.”•

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