This past Wednesday, our current due diligence effort was terminated when the company under due diligence announced that they had accepted funding from another source. This makes the third such effort this year that has been terminated and the twelfth time it has happened since AIM Group was started 4 ½ years ago. That may seem like a lot, but when you consider AIM Group has initiated 54 such efforts, that comes out to a termination rate of 22%.
So, why are some due diligence efforts unsuccessful? First, let’s remember that AIM Group receives 30 to 50 applications per month. When one of those applicants is selected each month, Clay and I have committed about four or five hours to reviewing the application and interacting with the management team. Once selected for due diligence, we currently average about 140-150 hours of research by the due diligence team. We find out a lot about the applicant during that 150 hours that you just can’t discover in 4 or 5 hours during application processing.
Reasons for terminating a due diligence vary all over the place. The most common, and definitely the most frustrating, is when the company under due diligence finds funding from another source. This has happened to AIM Group four times out of our twelve terminated due diligence efforts. In every case, the new funding source was a wealthy individual angel investor. These investors are usually not familiar with the current market and often are willing to pay much more than current market value.
Other AIM Group due diligence terminations were the result of a bad technology review by a subject matter expert; too small of target market; disagreements over the term sheet; and the failure of the company to raise the minimum level of funding required to close. Probably the most interesting termination was the result of due diligence team getting concerned about the “volatility of the CEO” and his/her ability to get along with other management team members.
At the end of every due diligence effort, the due diligence team votes whether to allow the company to present to the network. A simple majority vote is required to approve for presentation. The most unusual vote ended in a tie. Since a majority vote of the due diligence team is required to approve for presentation, the company was not approved. Interestingly enough, Clay and I vote differently —- and I was on the losing end of the vote! While it almost always saddens and frustrates me to see a company fail due diligence and not be approved for presentation, I also think it is a healthy sign that our process has structure and discipline. Yes, we may not have a presentation two or three months out of the year, but in the long run, I believe our investment portfolio is better off. We do not want to invest in bad technology, small markets, volatile CEOs, or over pay.
Assume that Point A is the value at which we, as angel investors, originally invest in a company. Point B is the value at which we exit from the investment. In a perfect world, if we were to graph our investment over its lifetime, we would proceed along a straight line from our original investment value to the exit value.
If we make money, the line is sloping upward until we exit. See Diagram A below. If we lose money, it is sloping downward. Regardless of whether we make money or lose money, both are a straight line. In terms of our scorecard ratings, ratings for a winner would go from “C”, to “C+”, to “B-“ to “B” to “A-“ etc. Losers would go from “C” to “C-“ to “D+” to “D” to “D-“ etc.
But we do not live in a perfect world. Almost every investment that we make seems to have a series of significant events. Some of those events are positives and some are negatives. And the value of the company rises and falls with each of those events. A graph of the company value over a period of time resembles a roller coaster rather than a straight line and looks something like Diagram B.
To show how drastically circumstances can change over a short period of time, let’s examine Kredible and Predikto since the Spring. In late Spring of this year, Kredible was in due diligence to sell to a large public company for 2½ times our investment value one year earlier. It was one of our highest rated companies in the 1Q scorecard. The deal falls through, Kredible misses on two large contracts, and almost runs out of money in early 3Q. The ratings scorecard ratings take huge hit in 2Q. In the Spring, Predikto was a major disappointment. The company had failed to produce any significant level of revenue and the 1Q scorecard ratings reflected the disappointing performance. The company signs three huge contracts in July and the ratings skyrocket in 2Q.
MemberSuite, our largest investment, has probably had more swings in valuation that any other portfolio company. After we make our original investment, the company actually exceeds its revenue projections and the scorecard ratings go up for two or three quarters. Then sales dry up and ratings go down. The company raises more money to implement a new sales program. The program initially is a disappointment and ratings fall further. Then the program kicks in big time and revenues along with scorecard rating, increases. Then the company has a disappointing 2Q when it is raising its Series B round of funding in 3Q of this year. The Series B gets completed, but at a lower valuation than anticipation. Our scorecard rating goes down as a result of the dilution. The company is now taking the proceeds from Series B and pumping money into marketing. The sales pipeline is growing and the outlook for 4Q may be the best sales quarter ever. If that happens, scorecard ratings will enter their third period of time where significant increases were happening. But the company has already two periods of time when the ratings were going down. That is five major swings in valuation in less than four years. So what is the conclusion of all this? Going from Point A to Point B is not a predictable constant straight line. It is more like a roller coaster with all sorts of ups and downs.
AIM Group’s newest chapter is Selous Venture Society in Nashville, TN. This opening marks the first of our established chapters outside of Alabama and makes us the largest network in the Southeast.
This week we will host our first meeting in Nashville with a special presentation of MemberSuite. MemberSuite is our single largest investment and currently has the highest scorecard rating issued by the AIM staff. MemberSuite, located in Atlanta, has developed a software platform that allows associations and non-profits to manage their back office processes and allows their members online access to manage their relationship via an online portal. The company provides over 20 modules to support associations’ processes, including membership, billing, certifications, events, committees, communication, and fundraising.
New Nashville members will be presented with an introduction and overview of AIM Group, and an opportunity to invest in MemberSuite. We look forward to the new season ahead with Selous Venture Society.
Last week, AIM Group welcomed two new staff members to our number. We are excited to announce the hiring of Anderson Hicklen as our Birmingham and Huntsville Executive Director and Lowery Thomas as our Nashville Executive Director.
Anderson graduated from Samford University with Business Management and Marketing majors, and has been in a business development role calling since graduation. He came from an IT recruiting company where he recruited software developers for Huntsville and Birmingham, and most recently worked at a banking software start up in Birmingham selling compliance software to community banks. Born and raised in Huntsville, Anderson currently lives in Birmingham with his wife Allison.
Lowery will serve as the Executive Director for AIM Group’s newest chapter in Nashville, Selous Venture Society. He is a graduate of The University of Georgia’s Terry College of Business where he was also a member of the UGA Men’s Golf Team. Prior to AIM Group, Lowery received extensive experience in financial services where he worked with entrepreneurs and early stage companies from his past tenures with A. Logan Brokerage in New York City, and Rhodes Risk Advisors in Atlanta. Lowery works hand in hand with our members to provide them with opportunities to build the best portfolio of early state companies.
Our new staff looks forward to meeting their members and starting work to grow the chapters in number and influence. Be looking for our email announcement for the next road show and make sure to come out to meet these new Executive Directors in your city!
Clay Corman, managing partner of AIM Group, participated in AL.com’s River Region Young Professionals Summit in Montgomery on April 29. Corman was one of 4 panelists that discussed the developing future of the River Region and Alabama in technology, entrepreneurship, and community engagement.
Another of our team members, Montgomery Chapter Director Clay McInnis led the panel conversation and asked Corman to highlight the value of community and teamwork in relation to what we do as AIM Group.
A founding principal at AIM Group is that there is strength in numbers. We can do more together as a collective of Angel Investors than individual, including investing in better companies seeking more money for more return, having more leverage to negotiate great deals for our members, and building a network of support to allow Angels across the state the opportunity to grow together and connect.
There is strength in community on a larger scale in regards to the startup community as well. Being able to connect companies together, through a common investor, is a great added value to working with AIM Group. We’ve seen several of our portfolio companies introduced and provide resources to help grow their ventures.
We see a bright future for AIM Group and our portfolio companies in the growing technology economy. It was a pleasure to be represented among the young professionals of Alabama’s River Region.