From Seattle to Fargo to New York City, angel groups across the US are finding that involving students is a great way to help grow the entrepreneurial ecosystem and to get real work accomplished at the same time.
UND students learn about entrepreneurship and angel investing by running their own fund
Students at the University of North Dakota don’t have to wait until they graduate and become VCs or cashed out entrepreneurs to participate in early-stage equity investing.
They can participate as intern/members in the region’s angel funds shoulder-to-shoulder with active angels and can apply to join the Dakota Venture Group (DVG), one of the few student-managed venture capital funds in the US. DVG (www.dakotaventuregroup.com) is unique in that students complete all due diligence, make the final investment decision, and negotiate the deal's term structure.
Established in 2006 through a donation from the Dakota Foundation, DVG is the brainchild of Bart and Lynn Holaday and is an entity of the Center for Innovation at the University of North Dakota in Grand Forks (www.innovators.net).
“Lynn and I were talking one day about how the most important things we learned in life from were real experience rather than in the classroom; how we learned more from our mistakes than from our successes, and how because of that, the sooner people get to make mistakes, the faster they will learn,” says DVG Founder Holaday, a member of the angel funds in Grand Forks, Fargo and Bismarck in North Dakota. All three funds are affiliated with RAIN Source Capital of St Paul, MN (www.rainsourcecapital.com).
Holaday, a North Dakota native who spent most of his career in private equity businesses, worked with Bruce Gjovig, Entrepreneur Coach and CEO of the UND Center for Innovation, to set up Dakota Venture Fund. ”Hands-on is absolutely the best way to learn angel investing. You can study it in the classroom, but nothing beats the messiness of doing the deal,” says Gjovig, who is the advisor to DVG.
“The students organized themselves, assigned roles, structured their own due diligence process, generated business cards, and came up with the name and logo,” says Holaday. “They’ve done a very thorough, careful, collegial job of coming to good decisions throughout. I’ve just been delighted with what these young people have done.”
He continues, “They work on Saturdays, Sundays, and weeknights. They set diversification goals and have about $50,000 invested so far. Last year they attended a conference in Utah where they were the only fund in which the students had the full authority to organize, manage operations, and make investments. They were so pleased and excited by that.”
Holaday is available for questions and mentoring, but he encourages the students to operate independently. “That’s the way they are going to learn the most,” he says.
DVG began with an evergreen fund of $200,000 and now has $300,000 in the fund. Fifty percent of the fund is ear-marked for student-run businesses; the balance can be invested in other deals within a few hundred miles, which takes in the Dakotas, Minnesota, and to some extent Canada.
“We have a limited amount of money so the students have to figure out how to syndicate,” Gjovig says. “They have to learn how to do business with other angels, be entrepreneur advocates, and add value.”
That’s where the students’ participation with area angel groups comes in.
Angel groups provide membership for students through UND Center for Innovation
Through the Center for Innovation Foundation, the Dakota Foundation provides two memberships in the Grand Forks and Fargo angel funds where students participate as interns/members.This program began with the Valley Angel Investment Fund in Grand Forks and Fargo, and now DVG students are serving as internsin Bismarck as well as with angel funds in Alexandria, MN and St Cloud, MN.
“The students are very good about doing their homework and have been just as sophisticated and smart as the members of the angel funds. They don’t have all the seasoning, but they are smart and savvy,” Gjovig says. “The angels have embraced this, too. It has increased the quality of their work, and they are performing at a higher level, knowing they are setting an example for the interns.”
The students take part in most aspects of group activities, with a focus on company valuation and due diligence. They add a strong perspective, especially in technology.
“We have students sit in and provide feedback when we are prepping entrepreneurs to give presentations,” Gjovig says. “By helping teach the entrepreneurs to give a venture pitch instead of a product pitch, the students learn how to do it themselves. When they sit in a discussion to strategize on how proceeds will be used or what the exit strategy is, they catch on quickly.”
Gjovig says that angels often view the students as being more familiar and comfortable with advanced technology and very qualified marketing-wise to comment on emerging technologies.
“The interesting thing to me—and it could be quality of the students or the nature of the work ethic at the Center for Innovation, or both,” Holaday says, “is that the students come to these angel meetings very well prepared. They have reviewed the material in advance; they are as well or better prepared as participants who put their own money in. They and the angels both benefit.”
Golden Seeds engages MBA interns for project-based responsibilities
Golden Seeds (www.goldenseeds.com) has hires one intern from a local MBA program to work with each of the organization’s regional forums. “We have an intern from Wharton in Philadelphia, one from Harvard in Boston, and will hire one from Columbia for the New York City forum,” says Erica Duignan Minnihan, Golden Seeds executive director.
Minnihan says that in looking for interns an angel group is well-served to find students who have strong financial backgrounds. “They have to be able to hit the ground running,” she says. “Angel investing is such a decentralized process, that you aren’t going to be around all the time to answer the students’ questions. That’s why we prefer MBAs who have completed courses that made them familiar with the analysis methods angels use to evaluate investments.”
Angel groups who decide to involve interns need to remember that the interns are also carrying a full course load. “You have to find project-based work that they can do at night or on Fridays when many business school students don’t have classes,” Minnihan says. “The other thing is to remember that you are there to give them something also, so make sure the intern has a good learning experience.”
She suggests recruiting interns through the Private Equity, Entrepreneurship, or Venture Capital clubs at local MBA programs.
MBA fellowship program delivers efficiency for AoA and coaching for entrepreneurs
Since 1999, Seattle-based Alliance of Angels (AoA) (www.allianceofangels.com) has engaged 16 MBA candidates in a unique, year-long opportunity to fulfill a primary role in the interface between AoA and entrepreneurs through the Alliance of Angels Fellowship.
“The MBA students who participate in AoA bring an amazing level of talent and commitment to the organization,” says Susannah Malarkey, executive director of the Technology Alliance, a statewide organization of business and research leaders that administers the AoA. “The fellowship program, which has been strong from day one, has been so successful that we recently expanded our staff to include a full-time program director who was actually an AoA fellow herself.”
Program Director Rebecca Lovell and the fellows (who each work 20 hours per week) interview 20 to 30 companies per 10 interview cycles per year. In each cycle, six promising companies are selected to move forward to the AoA screening committee. The committee, which comprises the AoA’s most experienced and active investors, narrows the field to three, and those companies present at the AoA monthly membership meeting.
Fellows work to influence deal terms that are acceptable to AoA membership
“We are very careful to say that we don’t give valuation or financing advice, but we do share what a typical AoA deal looks like,” Lovell says. “This has the potential to save the AoA members and the entrepreneur considerable time down the road. Our goal is to bring the best deals to our membership and get them funded. Providing entrepreneurs with insight on investment trends can only help the cause.”
In the last two years, 50 percent of the companies that present to the membership have received funding. This is less than 10 percent of the total who apply to the process. Without the fellowship program, Malarkey says that it would be challenging to provide this level of coaching and pre-screening.
“The AoA looks for MBAs with functional expertise, intellectual curiosity, and confidence,” Lovell says. “Technical or industry expertise is helpful, but even if you are software expert, you have to be a critical thinker to apply those skills to analyzing a tremendous variety of business plans. An AoA fellow must coach in a respectful and engaging manner and work to establish rapport and credibility with our entrepreneurs.”
K&L Gates LLP, AoA’s premier sponsor, provides funding for one of the fellowships. The second position is covered by a University of Washington endowment fund that honors William H. Gates, Sr., the Technology Alliance’s founding chair and a driving force behind creation of the AoA program 10 years ago. Thus far, fellows have been MBAs from the University of Washington, although any graduate student who has completed half their program of study is eligible to apply.
“The opportunity to learn from and network with experienced investors and entrepreneurs is a great stepping stone for these fellows, whether they go on to start their own business, join a venture capital firm, or take a position with either a start-up or a more established company like Amazon or Microsoft,” says Malarkey.
Lessons learned over the last 10 years
“It is important to create smooth transitions when one fellow leaves and a new one begins,” Lovell says. “Now we’ve timed things so that terms overlap, leading to better knowledge and skills transfer.”
Another important aspect is to ensure consistency of communication and quality of experience for each entrepreneur. “We work hard through the coaching process and workshops to position ourselves as the entrepreneur-friendly angel organization,” she says. “We are incredibly high-touch and recognize that the higher the frequency of contact, the greater the risk for inconsistency, so we work very hard to stay on point and true to our mission.”
The fellows program has opened the door to other opportunities to be closely involved with the University of Washington.
“AoA enjoys a close working relationship with the University of Washington, which enables us to recruit highly qualified candidates from an academic program known for its focus on entrepreneurship,” Lovell says. “We are able to offer the students an opportunity to enrich their education with hands-on experience. We also partner with the university in other ways, including working with students in the business plan and venture capital investment competitions. We truly appreciate our continual connection with the UW. Every fellow who comes through brings something new.”
