Have you ever thought about the potential for angel investing in the heartland of America? In the latest episode of The Angel Next Door Podcast, host Marcia Dawood sits down with Bart Dillashaw, a startup attorney and angel investor based in the middle of Nebraska. Bart shares his journey into angel investing and how he has been involved with the Nebraska Angels, an Angel Capital Association member, for over a decade. He discusses the group's significant growth and its ranking as one of the top ten most active angel groups in the country. Bart also sheds light on the types of industries they primarily invest in, such as B2B SaaS, and talks about the intricacies of angel investing, including the accredited investor definition, tax advantages, and innovative strategies for maximizing investment opportunities. Bart’s extensive experience in the startup and angel investing landscape provides valuable knowledge and expertise that can inspire and empower both seasoned and aspiring angel investors. Listeners will gain a deeper understanding of the challenges and opportunities in angel investing, along with practical insights on accessing deal flow, diversifying investments, maximizing tax advantages, and driving impactful growth for early-stage companies. The episode is a must-listen for anyone interested in angel investing, entrepreneurship, and the evolving landscape of early-stage investments in the heartland of America.
Have you ever thought about the potential for angel investing in the heartland of America? In the latest episode of The Angel Next Door Podcast, host Marcia Dawood sits down with Bart Dillashaw, a startup attorney and angel investor based in the middle of Nebraska. Bart shares his journey into angel investing and how he has been involved with the Nebraska Angels, an Angel Capital Association member, for over a decade. He discusses the group's significant growth and its ranking as one of the top ten most active angel groups in the country. Bart also sheds light on the types of industries they primarily invest in, such as B2B SaaS, and talks about the intricacies of angel investing, including the accredited investor definition, tax advantages, and innovative strategies for maximizing investment opportunities. Bart’s extensive experience in the startup and angel investing landscape provides valuable knowledge and expertise that can inspire and empower both seasoned and aspiring angel investors. Listeners will gain a deeper understanding of the challenges and opportunities in angel investing, along with practical insights on accessing deal flow, diversifying investments, maximizing tax advantages, and driving impactful growth for early-stage companies. The episode is a must-listen for anyone interested in angel investing, entrepreneurship, and the evolving landscape of early-stage investments in the heartland of America.
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Marcia Dawood
Well, hi Bart. Welcome to the show.
Bart Dillashaw
Hi, thanks for having me on.
Marcia Dawood
Well, I am excited to hear from you today and learn about how you, in the middle of Nebraska are doing angel investing, how you got started, a little bit about your journey. So please get us started with that.
Bart Dillashaw
Sure, absolutely. So I'll start. My primary day job is actually startup attorney, where I have spent most of my career working with early stage companies. So of course doing that for a living, you can't help but get infatuated with early stage companies and start looking for opportunities to invest on my own. So as I had the opportunity to do so, and as I sort of started to meet the accredited investor definitions, I started doing investment. I primarily invest through the Nebraska Angels, which is an ACA member, founded in 2006 and consists of it's a network style of angel investor group of accredited investors located primarily between Lincoln and Omaha. And I've been a member of that group for a little over ten years and have had the pleasure of watching it grow. And this year the ACA annual reports just came out and for the second year in a row, we were listed as one of the top ten most active angel groups.
Bart Dillashaw
So it's been really fun to watch that group grow over the past few years and now sort of reach some of the top tiers of angel groups.
Marcia Dawood
That is really cool. I did not realize that you had been in the top ten for a while now. So how do you get your deal flow? What's it like being an angel in Nebraska?
Bart Dillashaw
Sure. So as you can imagine, we are in the middle of the country and don't have the same level of attention from outside venture capitalists and don't get as much attention from the coast. So much of the deals that we see are located in the midwest. It's probably about 60% of the deals that we do are in Nebraska, but our focus is a little bit broader than that. So anything in the sort of surrounding areas, we tend to get a good look at as well. Most of our deal flow comes from word of mouth. Like I said, we are sort of one of the more prominent, especially early stage investment groups within the midwest. So anybody that's sort of looking for sub million dollars of financing, that's sort of the world of angels.
Bart Dillashaw
And certainly our system is going to come up on that pretty quickly. So that's where we get most of our deal flow. Obviously that's referrals from members, it's referrals from portfolio companies. And then, like I said, just being sort of a prominent angel group in the region.
Marcia Dawood
And what are the industries that you're seeing primarily there.
Bart Dillashaw
So we primarily invest in B two B SaaS is probably the largest single vertical. And I think that's just sort of the nature of the beast that B two B SaaS companies tend to be the easiest for angels to invest in. They're less capital intensive. They have a lot of operating leverage. There could be decent exits at sort of a sub 100 million dollar level that have good returns for angels. But having said that, the spectrum is pretty broad. We have everything from consumer products to medical devices to some pharma. Being in Nebraska, we have a fair number of Agtech deals that are either some sort of crop maintenance equipment or technology helping to improve yields or reduce inputs.
Bart Dillashaw
So that's another decent sized vertical for us. But the group itself is industry agnostic. So we'll pretty much take any deal that looks like it has merit and the potential for return, but that's probably what we see the most of.
Marcia Dawood
And you're mainly investing at like the seed and Series A level? Yeah.
Bart Dillashaw
So it's the seed some precede and series a. Like I said, most of the time our groups are writing somewhere between 500,000 and a million dollar checks. So that kind of puts us in that seed range in terms of the capital stack.
Marcia Dawood
Wow, those are some pretty large checks.
Bart Dillashaw
Yeah, it's been fun. And again, there's been a huge growth in the group since we first started. I think when I first joined the group, we were about 22 members, and now, as of last count, we were at 107. So obviously, having more members makes it a lot easier to write bigger checks. And so the increase in the size of the group has really aided us in being able to do that.
Marcia Dawood
That's great. That's a large group, and that's a great segue into us talking about the accredited investor definition. And Bart, you and I met on the SEC advisory committee for Small Business Capital formation. So, of course, we will just have a little disclaimer that my views, Bart's views are our own, not part of the SEC or any of our colleagues. We were in Washington, DC in November, and we were talking very much about the accredited investor definition. And you had brought that up a little bit earlier, Bart. Just first, for the viewers who don't know, maybe just give us a quick rundown of the definition and then maybe a little bit about your views of what you heard at the meeting the other day.
Bart Dillashaw
Sure. So the primary definition that applies to most angel investors are individuals with north of a million dollars in net worth. Excluding your home or that are making more than $200,000 a year in salary. There are some other prongs that you can hit. There's some accreditations that you can have, like if you have your series 67 or series eight securities exams. And the SEC has recently expanded the definition a little bit. But for most angel investors, you're really looking at that sort of million dollars or more in net worth. And so that obviously was one of the big topics that came up at the meeting because that threshold was set, I think, in the early eighties. And so there's been some discussion with the SEC as to whether or not it's time to rethink at where those levels lie. I think you and I are, and this is one of the big areas of discussion. I know I was fairly vocal at the last meeting that I am in the camp that we should be having more accredited investors, not less. So I would like the thresholds to stay where they are or even expand the number of ways that folks can become accredited investors and not do anything to reduce that size. I know you had some thoughts on that as well.
Marcia Dawood
Yes, I am completely in that camp with you. We don't want to limit people to be able to participate in this asset class just because of their income or wealth. Of course, people need to have some money in order to invest, but nowadays they can even invest in equity crowdfunding and things that are even at lower thresholds. But I think the biggest thing is just because you have money doesn't mean that you're a good investor. So I'm a huge proponent in making sure that we have some education around the definition as opposed to just saying, well, if you have this certain amount of wealth, you could afford to lose it, so you can do whatever you want, because then people could get into it who do hit the accredited investor definition, they don't make maybe some very savvy investments or they don't diversify. At least let's just keep it at that. And then they get very disgruntled about the entire asset class because they don't do very well. And that, to me, seems like a know that's not the right way to go about it.
Bart Dillashaw
Yeah, I really couldn't agree with you more. And I got to hand it to the Angel Capital association because I think they've been at the forefront of this for a long, long time. And the member organizations, I think, are really just such a powerful force in helping not just the companies, but also the other angel investors to be able to process more deals to be able to evaluate them, and most importantly, as you and I both know, to diversify so that you can get into dozens and dozens, if not hundreds of deals, which is really hard to do as an individual investor. But being able to team up with a network like the ACA groups makes that so much more viable. And that's really important for this stage, as we know. I personally only invest in winners, but I, of course, have friends that haven't had the same level of luck.
Marcia Dawood
Exactly. Because you can always pick winners, right?
Bart Dillashaw
Yeah, absolutely. That's my official strategy. I like to tell folks.
Marcia Dawood
It's so funny, too, because it's the ones that you think are going to do so great. Those are sometimes the ones that do not very great, and then you've got others that you're like, not really sure about this and they're like hitting it out of the park.
Bart Dillashaw
Yeah. And I think that is it for any experienced angel investor. I think that is the number one lesson is that you can't tell. So it's really important to get in a pretty wide swath of them where you can.
Marcia Dawood
Yeah. And then at Nebraska Angels, how do you help your members to diversify?
Bart Dillashaw
Part of it is just the sort of collective education that happens when you're looking at evaluating deals with 100 other folks. Right. So one of the first lessons that we are very vocal about is you need to try to get into as many deals as you can. The way that the Nebraska Angels helps that is, obviously, we've got a process where we bring in deals, we evaluate, we screen them, we have screening committees, we have submember committees that all help to sort of categorize these deals and try to at least figure out the ones with potential and maybe try to weed out some of the ones that aren't quite ready for investment yet. And on average, we're presenting somewhere between 20 and 30 opportunities for investment to our members every month. And then even beyond that, once you're sort of in the group, there will always be what we call these sidetrack deals that maybe you're not ready for the formal angel process. But there may be a group of angels that have a particular affinity for a products company or a particular type of technology, and so maybe they'll kind of go off on their own and lead an investment in a deal. We see that a lot, especially with really early stage deals and that sort of late precede or almost even precede that are just looking for a couple of hundred thousand dollars to get off the ground.
Bart Dillashaw
So we see a lot of members sort of leading that initiative on their own. And that's a great way for members to try to get into broader deals and get a little experience trying to lead the valuation of the deal on their own.
Marcia Dawood
Yeah, I love that. I had no idea your deal flow was like that. I mean, that's a lot of companies to be showing to your members a month.
Bart Dillashaw
Wow. It is. Like I said, there are not many deals in the midwest. We definitely don't see the same level of volume that places on the coast do. But we see almost all of them because there aren't that many sources to go to for early stage investment. We don't have a lot of venture capital funds, so the total volume is not a ton of deals. But when you see all of them, that still gives us the opportunity to put a bunch of opportunities in front of our members that we feel like are legitimate quality opportunities.
Marcia Dawood
Yeah, totally. That's great. So before we started recording, we were talking a little bit about taxes. And sometimes when we start to talk about that, people's, everybody's favorite subject.
Bart Dillashaw
Yeah.
Marcia Dawood
They're like, what do you mean? You're talking about taxes again. But I will tell you, it's a very interesting topic when it comes to angel investing because of one of the big things. We call it twelve two. And I'll let you, because you're a lawyer, so you could explain it way better than me. I'll let you explain that in just a minute. But this is something that is not just very advantageous to angel investors, but extremely advantageous to the founders who have spent their blood, sweat and tears and time and years trying to build up their company. Give us a little bit of background on twelve two and then kind of how you have been using it in Nebraska.
Bart Dillashaw
Yeah, absolutely. So I'll start off with a caveat that nothing I say here should be taken as a legal advice. And definitely with all of these things, it's taxes. So it's very specific to the facts and be sure to consult with your own sort of tax advisors and lawyers. But yeah, this small business stock exclusion is frankly one of the best incentives for early stage investments that's out there, if you haven't heard about it. Essentially what it says is if you invest in an early stage operating company with less than $50 million in assets and it's a C corporation and you sort of buy original shares. So again, the vast, vast, vast majority of the types of deals that angels invest in will qualify for this. And if you hold those shares for five years, the first $10 million or ten times your investment will be completely excluded from taxation. So that's no capital gains tax, no AMT, no ordinary income tax on it. So, I mean, that's a really big deal when you're talking about just an extra 20% right off the top from any of your investments. And so it's really a big incentive for early stage investors. And again, the vast majority of companies that angels are investing in are kind of be below that $50 million in asset threshold. If you haven't had exposure to that, it's definitely one to keep an eye out of. I know one of the favorite things when we have an exit within the group, to be able to go to folks and say, not only is it great that we got an exit, because of course we all appreciate those, but if you've held onto it for five years, you don't have to pay any tax on it. And so that's a pretty big deal. And the folks that benefit the most from it, like you said, are actually the founders of the company because they almost always qualify for this as well, and are often put in the position of making the most off of some of these exits from companies. So it's really a great thing that's out there.
Marcia Dawood
Yeah. My very first investment as an angel, it was eight years after I made the investment, but they exited. It was a two x, and we were able to use the twelve two exemption and did not have to pay taxes. And you know what, the incentive for that, the whole reason behind it, and this is what I'm not sure people talk about enough, is the reason behind it, is because the government is thinking, we would really like you to take that. And instead of just saying, hey, I didn't have to pay taxes, you actually keep it going. You keep that ever flow. So you'll go and invest in more early stage companies. And that's exactly what I did.
I was so excited about it that I went and invested in two more companies. Just being able to keep that flow going, I think is really important.
Bart Dillashaw
Well, that's a great sort of segue into one of the other things that we were talking about before, is that one of the questions comes up is if you have an exit that occurs before that five year period has run. There is another provision of the tax code, section 1045, which allows you to what they call roll over your investment into another qualified business if you can do it within 60 days. So that's a way to do exactly what you said is if you have an exit, it maybe hasn't met that five year holding period yet, but you want to let it ride, as it were, to be able to find some additional investments to roll that money over into within 60 days will allow you to what they call tack that holding period. So that's a great way to sort of be able to maximize your opportunities underneath this twelve two. And as this rule becomes more and more familiar with folks, there's all sorts of great strategies that are evolving for individual investors to really help them maximize the opportunity for this tax exclusion event. And again, it's a great thing for early stage companies because, like you said, it gives angel investors more capital that most angel investors are wanting to redeploy and invest in that next generation of companies. So it's a great way to keep sponsoring small business in America.
Marcia Dawood
Yeah, I love that. And the 60 days part is what I know, and this is a different deal I was thinking of, but there was an exit and we needed to, I think it was like four and a half years had passed. So we were like, oh, we're just. But we knew about 1045, so we were trying to figure out what can we do? And you only do have 60 days, so you have to be like, hurry up and figure it out. So tell us a little bit about some of the ways that you've worked around that.
Bart Dillashaw
Sure. Because we've run into this as well. So, one, this is another great advantage of being part of an angel group is that you typically do have a portfolio of companies out there, some of which may be raising at the time. We had this situation come up not too long ago, and it was a great opportunity because basically we went to another company that didn't have an open round, but that, because they were part of the network, we knew that they were thinking about raising additional capital. And we were able to go to them and say, hey, we've got an opportunity where we may have some investors looking to roll over some money. Would you be willing to? What we did in this case was basically have them create a new series of preferred stock that mimicked a lot of the terms of a safe. So we were able to sort of pump on some of the valuation terms and some of the more complex preferred stock investment terms that you normally see in, like a series c or a Series A. But it was a win win across the board because the company got some rollover capital, effectively did it like a safe, but the investors were able to roll over their funds and maximize the potential under this twelve two.
That's sort of the tips and tricks and tools that folks are starting to figure out. That was a really great and creative one that our group was able to do. And I think there are several of them out there. So just always whenever you have an exit, be thinking of ways to maximize that twelve two benefit.
Marcia Dawood
So an example would be like what I was just talking about. We were at four and a half years, so we would take the gain and in that 60 day period, we would find another company that we could invest in and then we would take the gain, put it into that, and then the clock would continue. Right. It wouldn't be like, that's right. How to start again.
Bart Dillashaw
We would still get, you'd start at four and a half years. So then effectively after six months, let's say that the company you rolled over into sold in six months, then notwithstanding the fact that that investment was only six months long, you'd still meet this five year holding period and you'd be able to take advantage of the exclusion.
Marcia Dawood
That's awesome.
Bart Dillashaw
It's great.
Marcia Dawood
Yeah. These are things I think we need to just keep talking about more so people know that there are incentives out there. And for the most part, angel investors. We tend to have to be very patient, let's put it that way. We have to wait a very long time. In my case, I waited eight years. Now, was it a good return? It was. When I think back, I think the actual calculation on the IRR for me was something around 15%, which isn't terrible, but it was eight years that my money was tied up.
Marcia Dawood
It was completely illiquid, cannot get to it at all. Not like in the public markets where if I was like, well, I'll sell a little bit off here or there and nothing like that. I think it's just interesting that there are these things out there because of investing in the private markets. Know you have to be very patient, let's put it.
Bart Dillashaw
Do you. But it's great when you do get those winners. And again, for most of the ACA data shows that if you are patient, if you are diligent, in addition to all of the other reasons that folks like to angel invest, in terms of supporting new businesses and the economy and sort of getting back to the next gen, you can actually have a really good IRR as well. So it's sort of wonderful when you can do good and do well.
Marcia Dawood
That's right. Doing good while doing well. Exactly. I should write a book about that.
Bart Dillashaw
You should, yeah. Be a good title.
Marcia Dawood
Yes. Coming in 2024 for sure. So, Bart, before we wrap up, tell me about a company that you're excited about right now, or one that you've seen or one that's doing really well in Nebraska. I'd love to hear some details about what's going on.
Bart Dillashaw
Yeah, I'll tell you about one that I'm super excited about. It's a company called Opendoors, which is located here in Lincoln, Nebraska. It was originally founded by two ex University of Nebraska football players that were sort of looking for that thing to do after college football and started what amounted to an online marketplace for basically athlete endorsement. And for those that aren't familiar, a couple of years ago, the world of college athlete endorsement changed radically and that college athletes can now basically get advertising dollars to play. It's this name, image, and likeness or nil type space. And this company, Opendoors, is one of the leading marketplaces for that type of activity. And it's been really fun to watch these two young entrepreneurs that have now been doing this business for ten years. But to see the market open up for them in a way that is really sort of putting them on the map and letting them sort of define an entirely new industry right now.
Bart Dillashaw
So that's been really fun. And of course, they're in our backyard, so they got the whole state rooting on them. So that's been a good story.
Marcia Dawood
Oh, that's fun. Excellent. Well, Bart, thanks so much for being on the show today and bringing your wisdom about the out investor definition. Twelve, two, 1045, all kinds of fun tax things and telling us about what's going on right in the heart of the middle of the country.
Bart Dillashaw
No, I appreciate that. Yeah. Thank you so much for having me on. It's been fun. Bye.