April 15 (Bloomberg) -- Sarah Endline asked Golden Seeds, a group of mostly women angel investors, to help contribute $1.5 million to expand her candy company. She sweetened her pitch with samples of dark cacao pieces, about 1 calorie each.
Endline, who got her MBA from Harvard Business School and worked at Yahoo! Inc. in marketing before launching sweetriot in 2005, already received about $1.5 million from the group, and other investors, in 2007. Turning to Golden Seeds again yesterday was a natural choice, said Endline, 39, because “we’re a women-powered, women-certified company whose core consumer is women.”
Golden Seeds, based in New York, is one of the largest angel groups in the country and is focused on supporting companies led by women. The group is helping to add more women to the ranks of investors in startups. That’s key to helping female entrepreneurs since six years of survey data on angel investing found that women entrepreneurs were more likely to seek funding from groups with a higher number of female investors, said Jeffrey Sohl, professor of entrepreneurship and director of the Center for Venture Research at the University of New Hampshire in Durham.
Thirteen percent of women entrepreneurs who asked for money from angel investors received it in 2010 compared with an overall rate of 18.4 percent, based on data from the Center for Venture Research.
“Many women entrepreneurs trying to get financing from a small number of women angels results in a lower success rate,” said Sohl, referring to funding. “One of the goals is to get more women angels.”
There are nine U.S. women-focused groups of angel investors, who generally invest their own money in early stage companies, said Marianne Hudson, executive director of the Overland Park, Kansas-based Angel Capital Association, an industry trade organization with 162 member groups. Angels are different from venture capitalists, who tend to manage a pool of investors’ money and give larger amounts to more established companies, Hudson said.
There were 265,400 angel investors in 2010 and they put $20.1 billion in 61,900 entrepreneurial ventures in the U.S., the Center for Venture Research said. Women represented about 13 percent of angel investors and female entrepreneurs accounted for 21 percent of those seeking angel capital.
Some of the companies that Golden Seeds backs offer products that target and understand women, which is a prudent investment strategy, said Deborah Jackson, who worked at Goldman Sachs Group Inc. from 1980 to 1990 as a vice president and joined Golden Seeds in 2009. Sweetriot, Endline’s company, creates fair trade, organic chocolates in bite-sized portions.
Lack of Access
Another company seeking funding at yesterday’s forum, held in midtown Manhattan, is a platform for personal clothing stylists, fronted by Stacy London, who co-hosts the television show, “What Not to Wear” on the TLC network.
Women control 73 percent of household spending, according to a Joint Economic Committee report released in December by Representative Carolyn Maloney, a New York Democrat. Women’s earnings will recover faster than men’s as the economy rebounds, which means companies that market to females may perform well, said a Bank of America Corp. December research note to clients.
One of the major barriers for women CEOs of startups is a lack of access to the networks that lead to funding, said Amy Millman, cofounder and president of Washington-based Springboard Enterprises, which has helped 445 female-led companies connect with angel, venture and corporate investors to raise about $5.5 billion in equity financing over the last 11 years.
“It’s very difficult for any entrepreneur to get capital and it’s even harder for women,” said Stephanie Hanbury-Brown, 54, who worked at JPMorgan Chase & Co. for 15 years most recently as head of e-commerce before starting Golden Seeds in 2004. Serving on JPMorgan’s diversity steering committee made Hanbury-Brown realize that the culture of large companies wasn’t going to change and having more companies run by women is what would help lead to more gender equality in the workplace, she said.
Golden Seeds has about 180 active members who invest directly in startups that have at least one woman in a top executive-level position with equity in the company. Active members may also assist the startup company by mentoring the CEO or serving on the company’s board. Since 2005, the group has invested more than $22 million in 36 different firms. There were also about 50 passive investors who put money in a fund created in 2008 that invested in 16 companies.
Second Fund Starting
A second fund is currently raising up to $25 million and is open to accredited investors through the end of the year. Investors must be accredited to participate in Golden Seeds, which means they must have a net worth of at least $1 million excluding primary residence or $200,000 in annual income. Members are required to invest at least $25,000 in one deal a year. Passive investors must put at least $250,000 in the fund and active investors must invest at least $100,000, Hanbury-Brown said.
The lack of well-known, successful women investors coupled with the fact that she had never been approached to be an angel investor helped prompt Peggy Wallace, 54, to join the group in 2005 after more than 20 years on Wall Street with jobs in structured finance at JPMorgan and Citigroup Inc.
“Where’s the female Warren Buffett?” said Wallace, a managing director of Golden Seeds.
Endline, whose candy company is based in New York, said her connections with Golden Seeds led her to a spot on television’s HSN. Other companies pitching at yesterday’s two-hour-long event, such as a website for custom-made home furnishings and a developer of medical retraction devices, are hoping they’ll be able to tap those same connections.
“The top three things we look for are a great entrepreneur, a great entrepreneur and a great entrepreneur,” said Hanbury-Brown. “We back the jockey over the horse, unlike some venture capitalists who are OK backing the idea or the technology.”
Golden Seeds makes investments in multiple industries rather than just focusing on technology. About 30 percent has gone to startups in consumer goods, 30 percent to life sciences, 30 percent to technology and the remainder to media and hardware. The group has locations in New York, Boston, Philadelphia and San Francisco, unlike many angel groups, which tend to be more regionally focused.
Jim Estill, who started a technology distribution business from the trunk of his car that had sales of $350 million before he sold it, has been a Golden Seeds member for 18 months and is part of the group’s 15 percent male contingent. Estill, who’s made more than 100 angel investments, said he was attracted to the group because it allowed him to diversify beyond technology investments since he felt comfortable with the group’s due diligence process.
“Golden Seeds is a filter, I know if they make it through the process, they have a gold star,” said Jacki Zehner, a former partner and managing director of Goldman Sachs and co-chair of Women Moving Millions, a group of women who have made $1 million gifts to nongovernmental organizations. Zehner has invested in both Golden Seeds funds.
Potential investors in startups should be aware that it’s risky and early-stage companies can fail, said Estill, who was on the board of Research In Motion Ltd., maker of the BlackBerry smartphone, from 1998 to 2011. Bankruptcies accounted for 27 percent of the exits from the angel investment market in 2010, according to the Center for Venture Research.
Hanbury-Brown said her personal return on investing in women-led companies since 2005 is 28 percent a year in realized and unrealized gains. The Standard & Poor’s 500 Index has returned 24 percent from 2005 through the end of March. Annual returns for angel investors whose companies were either part of a merger, acquisition or IPO range from 24 percent to 36 percent, the Center for Venture Research said.
Another reason for joining an angel group like Golden Seeds is because of the ability to better control risk, said Jo Ann Corkran, 56, a managing director of the organization. “The ability to manage my risk in the public equity market is harder and harder, so I want to put more of that risk into people risk, where I feel like I have more control.”
Leveling the Field
Cognition Therapeutics Inc., a Pittsburgh-based Alzheimer’s disease research company that began in 2007, received part of its $2.5 million in the second round of funding from Golden Seeds, said Susan Catalano, chief science officer and founder. In addition to the money, Golden Seeds connected Catalano to other angel investor groups as well as a Golden Seeds member, Nada Jain, who’s on the board and whose background as a scientist and patent attorney helped the firm.
“We’re trying to support women entrepreneurs by expanding the pool of resources,” said Zehner of Women Moving Millions. “We’re trying to level the playing field, and one playing field is access to capital.”
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