Next step for Twin Cities startups: Finding more wealthy Minnesotans to be angel investors

Reed Robinson, an investor and entrepreneur who helped launch Twin Cities Startup Week, understands the region's startup ecosystem needs enough investors willing to take a chance on funding new business ideas.

He launched Groove Capital during the pandemic last year in a drive to close the gap of early-stage investment deals in the Twin Cities. The company has already maxed out its first fund through more than a dozen investment deals.

Now, as the 2021 version of Startup Week is underway, Robinson and Groove Capital's Mickayla Rosard are assembling a legion of angel investors to continue writing first checks to Minnesota founders.

"All of these amazing companies we have today, they all started as this," Robinson said. "If we don't continue to replant those seeds, the things we experience many years later are a lack of abundance. We're hedging that problem by insuring we're investing in that next wave and making it possible to have a vibrant business ecosystem."

In the Groove angel network, individuals write checks varying from $5,000 to $25,000 into a startup, Rosard said. The network consists of just over 100 angels and limited partners in Groove's network.

Robinson's plan is to triple that number over the next couple of years. The network will be a mixture of Minnesota-based investors and others who want to invest in Minnesota companies.

He estimates there could be as many 70,000 people in Minnesota who meet federal guidelines to be an accredited angel investor. For that, a person needs net worth of $1 million or more, and individual income of over $200,000, or joint income of $300,000, for the the last two consecutive years, according to the U.S. Securities and Exchange Commission.

Robinson's estimates are on par with census data. Just over 14% of the state's population has a household income exceeding $150,000, according to the Minnesota Department of Employment and Economic Development (DEED). That's a pool of nearly 80,000 people.

Of those thousands, though, only 370 are certified as angel investors in Minnesota.

"The biggest issue you run into is people not knowing where to begin, or how to get started," Robinson said. "That's what we're trying to target, is that next part of the conversation."

To groom more investors, Groove Capital this summer launched a series called Angel Fest, where people interested in becoming angels could learn about the process and network with other angels. More than 165 registered to attend four events within the series, two of them being in person.

Created by Rosard, the concept of the series was focused on developing more female investors in Minnesota, though men were able to attend.

Rosard and Robinson are considering making Angel Fest a cohort-based, semiannual or quarterly series beginning in 2022. During Startup Week, Groove will host Angel Investor Rally, where Robinson and Rosard will show attendees how they are connecting investors with startups. Following their event, they'll lead the group to the BETA Showcase at Huntington Bank Stadium, where nearly 40 entrepreneurs will pitch their ideas and products.

"It's important for me to build some programming around that to make sure people don't get wrapped up in tag lines or get-rich-quick schemes," Rosard said.

Local investors and executives Monique Maddox and Rachael Scherer are limited partners in Groove Capital and will participate in Groove's angel network. They participated in Angel Fest as panelists, where they spoke with attendees about diversifying their investment portfolio and how to determine which businesses to support based on their interests.

"There's a lot of money sitting on the sidelines" in Minnesota, Maddox said, because potential investors aren't sure where to find businesses that can grow. Networks like Groove's would also help investors make deals with entrepreneurs they may otherwise not have noticed, she said.

"You tend to go people that look like you and people in your circles and you give that money to them," she said.

Scherer, a former executive at Medtronic, is now a senior adviser with Epiq Partners, a Minneapolis investment and portfolio management firm. She began seed-stage investing in the late 1990s and a third of her investments are in angel networks. She focuses some of her investments in female-led companies and companies within medical technology.

"The largest companies in the Twin Cities today, they all started small," Scherer said. "Somebody needed to believe in them, both from sweat equity, passion, entrepreneurs, but also the funders."

Maddox owns a consulting business in the Twin Cities. An investor since 2015, she said investments in underrepresented entrepreneurs make up about 80% of her investment deals, not including her investments with Groove.

"My focus is on underrepresented and underserved communities," she said. "I want to make sure those founders that look like me and founders that most represent me are actually getting they money. You don't see a lot of VC's that are supporting women early-stage founders, especially Black and brown early-stage founders."

A solid angel network includes mentors and advisers that help startups reach their full potential, said Samuel Herzog, an angel investor with Groove and owner of Unique Opportunities, a property development company in Alexandria, Minn.

"Everybody is bringing something to the table besides money," he said. "They're bringing a perspective and they're bringing experience and all of that brings value."

Early-stage investing in Minnesota is thriving in 2021, more than any year over the past five years. Through the first eight months of 2021, startups in Minnesota raised more than $124 million from angel and seed-stage investors, almost twice that of 2019 ($69.8 million). Of that $124 million, however, $117 million went to startups in the Twin Cities metro.

To boost angel investing, the Legislature created the Minnesota Angel Tax Credit program, which provides a 25% credit to investors or investment funds that make equity investments in Minnesota startup companies.

Across the state, 125 business are certified to participate in the program. In 2021, $27.3 million has been invested into 73 businesses that are certified through the program, said Neela Mollgaard, executive director of Launch Minnesota, an initiative within DEED created in 2019 to support Minnesota startups.

Lawmakers allocated $10 million for the tax credit program in 2021. In 2022, another $5 million is expected to be allocated to the program, Mollgaard said.

Of the 125 businesses certified through the state's angel tax program, only 10% are located outside the metro area.

"We're trying to create more opportunities for companies that don't fit the traditional startup model perfectly to succeed," Herzog said. "A lot of companies in outstate Minnesota miss opportunities to be looked at."

For entrepreneurs, those initial dollars are invaluable, said Sean Higgins, and investor with Groove and founder of St. Paul tech startup BetterYou, who has started companies in the Twin Cities, some with angel investment. Entrepreneurs need seed capital to buy computer equipment, rent office or manufacturing space, build a staff, develop a product, test the product in the market, and if they're lucky, cash a paycheck for themselves.

"Without it, it's still two people in a garage, more often than not," Higgins said.

If the Twin Cities doesn't maintain an good environment where investment dollars are flowing, "people will leave," Higgins said.

"They'll leave for San Francisco or Boston and we'll never see them again," he said.

By keeping innovative companies in Minnesota, job opportunities are made available for Minnesota's college grads looking to apply their knowledge in artificial intelligence, virtual reality, cloud computing and other kinds of emerging technologies, Gregg Forsberg, another limited partner in Groove, said.

"People are learning that right here in our universities and then having to leave the Twin Cities to find someplace else to work," he said. "With this environment, they can stay here."