The Royalty Model
August 9th, 2010 | 
Author: Is it time to expand the concept of structured angel investing beyond me too pre-VC equity investing in sub $2.0 million pre-money high impact opportunities? Should we instead think of any and all ways for high net worth individuals to use their resources and talents to grow concepts, products, and services whether they fit the 30-1 risk adjusted return profile?
Shouldn’t we support angels to maximize each part of their portfolio needs – current cash flow, liquidity, illiquid private equity, and high yield debt – even within their early stage pre-profitable segment? Since most made their fortune in the small business or professional practice fields, knowing from personal experience the need for cash flow each rugged step of the way toward success, they can judge the practicality and benefit –cost of leasing deals, growth equity deals, receivables financing, and on.
Thus, it behooves us to give best practices and techniques and tools for financial investments along the entire early stage continuum. Therefore, New Vantage is exploring current techniques to tried and true investment approaches - including royalty based vehicles for growing companies instead of layer upon layer of dilutive equity into companies that they know well because of prior relationship or sitting on the board of directors. The availability of better cash flow revenue sharing instruments seems to be meaningful for a portfolio company in growth mode and we will continue research and design of this instrument in the coming weeks and months. We welcome feedback and advice from others on the pros, and cons and context for use of this appropriate tool for high growth companies. These tough economic times demand revisiting all tools in our arsenal for equipping companies to stay afloat and survive today’s economic headwinds and this may well be a technique for structured angels and active angels to try. Stay tuned.
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Goodbye American Dream
A sobering piece in the weekend edition (July 31-Aug. 1) of the Financial Times by Edward Luce, “Goodbye American Dream” reinforced my thinking about the future of entrepreneurial endeavors here and the historic role of entrepreneurial finance for innovation. I have recently been speaking around the globe about the apparent decline of venture capital for high growth start ups outside of Silicon Valley and Boston and that article about our stagnant economy only drove a stake in anyone’s idyllic fantasy that a cyclical rebound would soon take hold in the land of Ozzie and Harriet’s economic dreams. The article starkly laid out the flattening of our American growth curve for our life style and economic well being especially for the American middle class and the skewing of wealth to the upper 1% over the last generation.
Unless we find more personal energy and resources to drive a renewed sense of economic resurgence and enthusiasm, we are destined to follow our predecessors in the British Empire and the Roman Empire before them in decline and diminishing of our children’s legacy. The need to focus on savings and optimism and to govern with clarity toward an upsurge for our economy, to reverse our fortunes to a renewed upswing, and not to rely on reliving our past glory and deeds and to end our internal bickering and in-fighting, should be a clarion call for us in leadership positions. We must shed dependence on decade’s old economic models and fictions that the middle class is guaranteed to grow generation by generation as of the old days.
The statistics are sobering – the 70% middle of the economic ladder has been stuck in neutral for over a decade while we have allowed the non-producing financial elite – the 1% of the top earners (wealthy) in the US – to triple their net wealth far beyond their productivity gains. We will have to honestly face our debts, our entitlements and out political mis-alignment or be devoured by our emerging economy partners who only have drive and energy toward progress, not looking back. For our part, the growing non—institutional entrepreneurial financing segment of the economy must pull together and provide time and resource to fledgling high impact opportunities in a once in a generation rekindling of energy. We must regain our momentum or we will face a slippery downward slope toward second rate economic status. Some news articles light a fire under us and are powerful beacons of light on our stark options – let’s see how the angel community and American entrepreneurs can respond to this challenge.
National Award Recognizes Individual Contributions to Angel Investing
San Francisco, CA, May 6, 2010 – The Angel Capital Association (ACA) and Angel Capital Education Foundation (ACEF) have named John May—managing partner of the New Vantage Group, ACA co-founder and chair-emeritus, and active participant in five angel groups—as the recipient of the 2010 Hans Severiens Award.
The organizations presented May with the award at the 2010 ACA Summit in San Francisco. The Hans Severiens Award was established in 2005 by ACEF and ACA to honor individuals whose actions demonstrate leadership in advancing the role of angel investing, in expanding entrepreneurship, and whose accomplishments influence and benefit the angel investment industry as a whole.
“John May, a huge world-wide advocate of angel investing, is the most appropriate recipient in 2010,” said Bill Payne, 2009 Hans Severiens recipient. “John’s tireless commitment to our collective passion has made a huge difference to angel investors and entrepreneurs the world over.”
From a background of business consulting and early stage venture capital, May developed a keen interest in innovations in seed and early stage investing that has kept him at the forefront of the angel investing movement for twenty years. He founded angel groups, developed investment models, and has taught best practices to hundreds of angel investors and entrepreneurs from nearly all fifty states and more than 20 foreign countries.
“John epitomizes the spirit of the Hans Severiens Award,” said Marianne Hudson, ACA executive director. “From the pioneering days of the angel investing movement, through the days of dot-com to representing the ACA in policy discussions with the federal government, John has done it all. He has been a tireless and enthusiastic leader in expanding interest and participation in angel investing in his region, across the United States, and around the world.”
May is a member of Active Angel Investors Network, The Dinner Club, E-Media Club, Washington Dinner Club, and D’Arch Angels, all groups he helped found.
“I thank the ACA and ACEF for this recognition,” May said. “Hans Severiens set the direction for the angel movement and the prior recipients of this award have expanded on his vision. I have the greatest respect for them as angels and human beings and am honored to be in their company.”
Before there was an angel movement, in1991 May co-founded the Investor’s Circle, a national non-profit group of family and individual angels working to grow the social venture capital industry. “That experience whetted my appetitive and impressed me as a fun and productive way to organize capital,” May said. “It has been my vocation and avocation ever since.”
In the late nineties, May institutionalized the manager-led LLC model of angel investing and co-founded with Cal Simmons The Dinner Club with sixty investors, then in 1999 the eMedia Club of seventy-five members, and The Washington Dinner Club in 2000 with seventy-five investors. In 2003, May created Active Angel Investors, which follows a pledge fund model.
“In 2006, I became a general partner in Seraphim Capital, an angel-led venture fund based in the United Kingdom. Operating the US branch of that fund, I began realizing that cross-border angel investing was going to be a significant trend,” May said.
In 2007, representing the ACA, he helped to create the World Business Angels Association (WBAA), a non-profit organization to stimulate the knowledge and practices of angel investing across the world.
The co-author of two books, Every Business Needs an Angel (Crown Business 2001) and State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing (Darden Publishing 2003), May developed content and is a lead instructor for the “Power of Angel Investing” series, an educational program on angel investing distributed by the ACEF for the Ewing Marion Kauffman Foundation of Kansas City, MO.
“Angel investing is the quintessential American entrepreneurial capital opportunity—high risk for high reward,” said May. “The angel movement creates real businesses; it is not financial engineering. My only question is why aren’t there more angels? It’s amazing that only 5 percent of the people in this country who could qualify as accredited angel investors actually participate. There should be more. Think how much power we could unleash if we could even get even a small percentage more.”
The Hans Severiens Award is named after a founder of angel investment movement and Band of Angels of Menlo Park, CA, the oldest and one of the most active investment groups in the United States. Dr. Severiens was also a founder of the Angel Capital Association.
“John May is a leader who builds consensus with a relentless attention to listening and a generous giving of his time and attention. In this way he mirrors the namesake of this award,” said Ian Patrick Sobieski, the managing director and coordinator of Band of Angels and vice chair of the ACA, who was Dr. Severiens friend and partner in running the Band. “Hans and John worked contemporaneously to build the organized angel industry, and John has carried on and continues to carry on that work.”
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The Angel Capital Association (ACA) is a trade association that supports angel investment groups in North America. ACA was founded by angel investment groups located in the United States and Canada to help maximize the success of group based angel investors. (http://www.angelcapitalassociation.org)
The Angel Capital Education Foundation (ACEF) is a charitable organization devoted to education and research in the field of angel investing, a growing driver of our entrepreneurial economy. ACEF was founded by the Ewing Marion Kauffman Foundation and leaders of angel groups in the US and Canada. (http://www.angelcapitaleducation.org)