source: MSNBC.com, August 25, 1999
Copyright =C2=A9 MSNBC Interactive News, LLC
-------------------------------------------------
They=E2=80=99re the forgotten funders, providing the early financial fuel=
for many,
if not most, of the hottest companies of our time. Angel investors =E2=80=
=94 wealthy
individuals =E2=80=94 now inject an estimated $50 billion into young comp=
anies every
year. That=E2=80=99s more than twice what venture capital firms contribut=
e. For
decades, though, angel investing has been largely unorganized and
unsophisticated. Until now.
HISTORY HAS NEVER dealt an investor like Rob Bolt so good a hand. Bolt ha=
s
founded and sold three different companies, including most recently Wallo=
p
Software, which was acquired by IBM. Bolt has made millions, and is eager=
to
lend his entrepreneurial expertise to fledgling firms. In the past, Bolt
would have had to rely solely on his own personal connections to find
private companies that piqued his investing interest.
No more. Today, Bolt is an active member of Garage.com, a Web site devote=
d
to matching entrepreneurs with investors. Meanwhile, he also helped form =
a
new group of seven angels who team up to scope out, and invest in, deals =
of
all sorts. And finally, Bolt also established an even smaller angel
organization =E2=80=94 called Pyrite Partners =E2=80=94 that allows frien=
ds and family
members to participate in his private investments. =E2=80=9CThis is a ver=
y
interesting time for the private investing marketplace,=E2=80=9D says Bol=
t. Indeed,
angel organizations of all sizes are beginning to sprout as fast as the
companies that they seed. Many cities now contain at least one angel grou=
p,
the types of organizations that meet once a month to hear pitches from
several different entrepreneurs. Southern California has its Tech Coast
Angels, Seattle its Alliance of Angels, Silicon Valley=E2=80=99s Band of =
Angels, and
so forth. But angel organizations are quickly expanding beyond that
well-worn model. Several Web sites have sprung up to serve as posting
services for entrepreneurs trying to find backers for their ventures.
Meanwhile, individuals are increasingly banding together to form loose
investing groups. And some ambitious start-up organizations =E2=80=94 suc=
h as Angel
Strategies of Southern California =E2=80=94 are promising to perform exte=
nsive due
diligence on young companies to help angels find desirable deals. =E2=80=9C=
Angels
are now becoming much more sophisticated,=E2=80=9D says Bill Reichert, pr=
esident of
Garage.com.
INVESTMENT, ADVICE AND MORE
Angel investing is decades old, tracing back to Broadway at the turn of t=
he
Century, when investors backed shows in order to hobnob with the stars. B=
ut
for most modern angels, the frivolity has been drained from the experienc=
e =E2=80=94
and replaced with cold, hard profit motives. Investors in startup compani=
es
are often looking for returns of 40 percent a year =E2=80=94 a payoff tha=
t even a
hot stock market can=E2=80=99t usually match.
Here=E2=80=99s the way startup funding tends to work: An average angel in=
vestor
might contribute $100,000 toward a seed capitalization of $500,000 to $1
million need to help get a new venture off the ground. That investment te=
nds
to take a company to another round of financing, say $2 million to $15
million, which usually involves venture capital firms that are backed by
institutions and staffed by professional investors. At each stage, of
course, startup-company owners must relinquish equity in return for the
investments. Deals vary widely, but a group of angels might expect to
receive about one-third of a new firm=E2=80=99s shares when it provides s=
eed capital
of, say, $750,000. High demand for the deal could drive that percentage
down. Moreover, if early funders are considered =E2=80=9Cfriends and fami=
ly,=E2=80=9D the
terms may not be quite so generous. Startup-company founders tend to be
drawn to angels for early financing, rather than large venture-capital
firms, for several reasons. Activist angels, for instance, are likely to
provide some early hand-holding that venture capitalists often can=E2=80=99=
t. (Just
this week, for example, Bolt helped one of his young companies by calling=
on
a potential client and participating in employee recruitment efforts.)
Consider Virtualis Inc., a Web hosting company. Ignitio participated in a=
$9
million round of funding, and partner Victor Long has been highly active =
in
advising Virtualis on management issues like compensation and hiring =E2=80=
=94 which
was one of the primary reasons Virtualis chose the angel group. =E2=80=9C=
It=E2=80=99s
wonderful to have one partner who knows everything about the business,=E2=
=80=9D says
Joshua Marks, president of Virtualis. The difference between having
traditional venture backing vs. Ignitio angel backing, adds Virtualis CEO
Chris Lyman, =E2=80=9Cis the difference between having a wealthy uncle an=
d a caring
father.=E2=80=9D There=E2=80=99s an even simpler reason fledgling compani=
es seek angel
funding first: VCs, armed with tens of millions of dollars, tend to stick=
to
bigger deals.
There=E2=80=99s no definitive count of the number of investment angels in=
this
country. Leo Feldman, president of the private equity service Rule506.com=
,
estimates that there are now 2 million to 3 million millionaires.
Economists, meanwhile, estimate that there are perhaps as many as 6 milli=
on
households with seven-figure net worth. The number of active angels among
them isn=E2=80=99t clear, but investment officials say the number seems t=
o be rising
quickly. Certainly, the Internet business segment, with its oft-soaring
stock prices, is churning out new millionaires every week. And the Intern=
et
is also making capital more accessible than ever before; personal contact=
s
and geographical proximity matter, as ever, but not nearly as much as the=
y
once did. The result: a fast-growing and highly active angel investment
community.
LET=E2=80=99S MAKE A DEAL
Reichert=E2=80=99s Garage.com is one manifestation. Garage.com has found =
that
wealthy investors are so project-hungry =E2=80=94 and entrepreneurs so ea=
ger for
cash =E2=80=94 that both sides flock to the site. Garage.com has held wha=
t it calls
=E2=80=9CBootcamps=E2=80=9D for entrepreneurs. And now, due to the heavy =
interest, the
company is running Bootcamps for angels as well. The firm performs some
screening of business plans, including visiting companies in person, befo=
re
allowing them to be posted on its site. Password-protected access to thos=
e
plans is available for registered participants. Meanwhile, Garage.com tri=
es
to recruit investors who can contribute not just money but also expertise=
to
young companies. Bolt is just such an individual. Through various network=
s,
including Garage.com, Bolt has invested in such companies as KIVA Softwar=
e,
Intraware, 401kForum, BoomerangMarketing.com, Sporting Life Software and
GuardOne. The BoomerangMarketing deal came through Garage, and proved
fateful in more ways than one. As several different investors dined toget=
her
to discuss the deal, they found they had lots in common =E2=80=94 so much=
that they
decided to form their own investment vehicle. Dubbed Ignitio Partners, th=
e
combined effort enables the seven founding investors to participate in de=
als
at a higher funding level than they would otherwise. Instead of contribut=
ing
perhaps $100,000 individually to a deal, for instance, Bolt can join with
Ignitio and inject $250,000 to $750,000. The result: a greater likelihood
that a hot company will choose Bolt=E2=80=99s money, and probably better =
financial
terms as well. Investment experts say that such confederations simply did=
n=E2=80=99t
happen very often until recently. =E2=80=9CIt=E2=80=99s definitely a diff=
erent game than it
was 10 years ago,=E2=80=9D Reichert says. Of course, not all angels succe=
ed. Quite
the contrary. Startup ventures are risky by nature and more often fail th=
an
succeed. For that reason, federal investment regulators are keeping close
tabs on Internet-based investment vehicles like Garage.com and another si=
te,
Rule506.com, which bills itself as a provider of =E2=80=9Cprivate placeme=
nts for
sophisticated investors=E2=80=9D and is named for the most commonly used =
legal tool
for private placements. In fact, Rule506.com president Feldman warns that
many sites are violating the law by determining investment suitability fo=
r
investors without proper licensing. Nonetheless, Feldman says he expects
services for angels to grow quickly. In contrast to any older angel
networks, his own operation is experiencing some of its greatest demand f=
rom
abroad. =E2=80=9CI think we=E2=80=99ll see this thing really explode in E=
urope,=E2=80=9D Feldman
says. =E2=80=9CThere=E2=80=99s just so much money looking for deals world=
wide.=E2=80=9D
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335