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Angel Fund sets out to give budding entrepreneurs a hand

  • Author: Nathaniel Herz
  • Updated: September 27, 2016
  • Published August 7, 2013

Anchorage has a new, deep-pocketed venture capitalist in town, looking to put money into small businesses and startups.

It's not Sean Parker, the tech mogul who co-founded the music sharing program Napster, then became the president of Facebook. Nor is it anyone else with ties to Silicon Valley or New York City, two hotbeds of venture capital.

Instead, it's the city itself, which last year set up the 49th State Angel Fund with $13.2 million in federal money from President Barack Obama's Small Business Jobs Act.

Anchorage applied for the funding at the last minute, after the state decided it couldn't meet the U.S. Treasury Department's application deadline, according to Lucinda Mahoney, the city's chief fiscal officer.

Mahoney then hired Joe Morrison, an Anchorage native who had worked at Credit Union 1 before getting a Masters of Business Administration from a school in Madrid.

Morrison, the fund's program manager, spoke with the Daily News on Tuesday about the city's goals for the money, and how the loans are being parceled out.

The city announced its first commitments in March: $2.1 million to a pair of businesses. One is a mobile medical app, while the other is a separate investment fund that will turn the city's money into more loans for local businesses looking to expand. So far, the separate investment fund has put $250,000 of the city's cash into a recycling company.

The fund's criteria are strict: Of the 28 applications received for the fund's first round, only seven made it past initial screening, and just two ended up getting money. But Morrison said he is still taking applications through the end of October.

Here's a recent Daily News interview with Morrison. The questions and answers were edited for length.

Anchorage Daily News: What's Anchorage's start-up scene like now?

Joe Morrison: I think there's a lot of potential for energy-related startups. We have a lot of talented people who came here in the '70s to build the pipeline who are still around. Quite frankly, they're really intelligent, they have means, and they can still create products that make the world a better place. So, I see a lot of energy deals. We do have a burgeoning software sector, mobile sector, so I see people creating products in that vein. But I see traditional things too.

ADN: But Anchorage doesn't seem like a Silicon Valley-type area with a lot of existing startups clamoring for funding. So why do we need this money? Why don't we put it toward fixing roads, or homeless shelters?

JM: There are a lot of needs in our community, but that doesn't diminish the need, necessarily, for venture capital, or establishing businesses.

I think any city that is trying to be Silicon Valley should not try to be Silicon Valley. I firmly, firmly believe that. You should do what your city's good at, and you should fund whatever has potential. Is the team right? Do they have the right skill set? You shouldn't try to copy Silicon Valley -- Silicon Valley is doing a great job. It's not going to be unseated any time soon, and it's got an ecosystem that stretches up the West Coast corridor. That's not us. We'll be different.

ADN: You're saying there's a different niche here, then, than in tech hotspots like California, New York, Texas and Massachusetts?

JM: Do we really think that there's no innovation or growth, talented entrepreneurs or business potential in the other 46 states? Probably not. There is blue ocean there.

ADN: Is the goal to end up with a company like Nike or Facebook? Or more like half-a-dozen companies of different sizes?

JM: It would be great to have a giant, home-run hit -- that's what everybody dreams about. But one thing that's nice about this program: Anchorage is a city of around 300,000 people and it really doesn't take a lot to move that needle. Anything you add has a really large impact because there's a smaller population here. Just having 10 halfway decent startups in our city would make a fairly big impact.

ADN: What existed in Anchorage as far as support for startups and small businesses before the Angel Fund started?

JM: If you wanted to start a company, you either had to take the risk yourself and put your personal credit or your assets at risk, or you had to really find high-net-worth individuals and convince them to take a chance on you.

ADN: How does this money help?

JM: One thing we've been able to do that's useful is we've provided a platform for people to come in, pitch their ideas, think about their business planning, meet other potential co-founders, and get advice from seasoned professionals -- our advisory committee -- who can help guide the next step in the process.

The real value that we will provide is a spark, and is less about the capital.

ADN: What are the odds that these investments will succeed?

JM: The Angel Capital Association's odds are that 30 percent of all your investments fail. Fifty percent pay back less than their investment principal. And 7 percent of your investments are responsible for 75 percent of the revenues. That's a volatile business model, and I can't change the business model.

ADN: So far, you guys have invested in one company, and one fund of funds. Tell me about the company.

JM: The company is called callDR., and they're a mobile medical application that basically makes it easier for doctors to converse with each other using rich technology, rather than using just the phone. God forbid I get into a car accident and I have a major eye issue. It's 1 a.m., and an ocular surgeon has to be called. The surgeon's at home in bed -- it's more efficient to show them, ''Here's what the eye looks like,'' to use pictures, to use video.

ADN: And then, why give money to funds that invest the money themselves, rather than investing directly?

JM: When we set up the program, we intended to have a two-year investment period, where you're trying to put the money out there and commit it. It's just as exhausting to do a $90,000 investment in one company as it is to set up the $2 million fund, with (developer) Jon (Rubini) and (Native corporation executive) Mark (Kroloff). And we also think that the private sector has efficiencies. They're going to be investing those dollars looking for the return, and that can create some more value.

ADN: Because it's their money?

JM: Right. None of us look at this as a government giveaway. But to put it in the hands of a private investor is a very different message.

ADN: What would your response be to people who ask: "How do we know this money isn't just going to politically connected people?" One of the partners in the funds you guys invested in donated $500 to the mayor's re-election campaign.

JM: This money is risk capital, and that means it only goes out the door when private investment dollars are at risk that matches the risk of the public dollar. We have a really high barrier. Those two gentlemen aren't just running the fund for other investors. They've put their own dollars at risk, and I don't think it's really worth it for them to do that unless they care about the project, and the Anchorage economy.

ADN: To be clear, this is not a grant, right? This is money you have to pay back, with interest, if you're getting it?

JM: Oh yeah. I've had people walk away. I've had people uncomfortable with the expectation of venture returns. We're taking an immense amount of risk. If we're taking the risk, and we're trying to be responsible investors with public funds, then you need to earn the right return to make the portfolio pay for itself.

It's 8 percentage interest that can convert to equity ownership of a business. That's really where you make your money -- you don't make your money on the 8 percent.

ADN: So, if one of these companies starts a Facebook or a Google, could Anchorage end up with part ownership of that?

JM: Exactly. There are examples of funds that have done this.

There is a really small chance that there could be huge upside, and we invest trying to get the upside. But, the realistic expectation should be to make progress on the network and ecosystem. Don't we win if there's no angel network, and after they're done, there is angel investment in Anchorage? Don't we win if there are three startups in Anchorage, and before, there were zero technology startups? I think that whatever we do really contributes a lot.

Reach Nathaniel Herz at nherz@adn.com or 257-4311.

By NATHANIEL HERZ

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