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Seeking more ‘angels’ — Networks match wealthy investors with start-ups

A growing number of networks seek to match wealthy investors with promising start-ups here and across the country

One problem that bedevils the region’s start-up companies is finding "angels" — wealthy individual investors who are willing to provide the initial seed money entrepreneurs need to get their businesses far enough along to attract venture capitalists.

By:
Pamela Gaynor
Pittsburgh Post-Gazette

http://www.nasvf.org/web/allpress.nsf/pages/8665

Pittsburgh certainly has its share of deep pockets. But for years there were hardly any orchestrated efforts, particularly in the for-profit sector, to match angels with the region’s emerging businesses. Instead, the matchmaking that did occur tended to bring together investors with later-stage, more traditional businesses or older manufacturers seeking to sell.

Lately, that’s changing. The most recent push comes from BlueTree Capital Group LLC. Since September, the firm’s principals, Catherine Mott and Tom Jones, have been pulling together a group of wealthy individual investors known as BlueTree Allied Angels. The group’s ambition is to help local investors profit from homegrown start-up ventures and give the fledgling companies more reason to stay home, said Mott.

BlueTree’s arrival comes on the heels of a handful of other organizations that have cropped up here in the past several years to pool investment dollars among members. They include the Fairview Fund, a network of about 60 investors launched four years ago by two North Hills businessmen, and Advanced Global Technologies, put together in 1997 by a group of Sewickley Hospital physicians and since expanded to include 50 members from diverse occupations.

Even the state is pitching in. Eighteen months ago, Innovation Works, a state-sponsored agency that assists start-ups and young businesses, launched the Southwestern Pennsylvania Angel Network to bring investors and promising ventures together. And last week, it teamed with the Pittsburgh Life Sciences Greenhouse to start another angel network, LifeSpan, to showcase biomedical ventures.

Each of the groups operates differently. But all of them are in step with a nationwide trend toward the networking of angels.

Investors in technology hot spots such as San Diego, San Francisco and Boston have been forming networks for more than a decade, but the idea didn’t begin spreading nationally until the past few years.

Driven in part by the tech boom, the number more than tripled, to 170 in 2002 from 50 in 1997, according to the University of New Hampshire’s Center for Venture Research.

Even since the tech bust, the growth has continued, said Professor Jeffrey Sohl, the center’s director. That’s partly because economic developers and other organizations, such as the Ewing Marion Kauffman Foundation, based in Kansas City, Mo., are trying to stimulate interest. But it’s also because inexperienced angels, as well as experienced ones who suffered significant losses after the tech bubble burst, are looking for ways to spread the high risk associated with financing start-ups, said Matthew Harbaugh, director of external finance for Innovation Works.

That’s one of the reasons Mott, a former banking executive, and Jones, who scouted acquisitions for the former computer networking upstart Fore Systems before it was sold to Marconi, launched BlueTree.

By investing together with other wealthy individuals, angels can make smaller investments in any single company than they might be required to on their own. "Market conditions are crying out for a structure like this," Jones said.

Just six months old, the new venture, which charges each member a $2,500 one-time initiation fee and annual dues of $2,500, has signed up 36 investors, about half of the 75 it’s targeting. BlueTree also expects to generate management fees on each investment the group makes and eventually a percentage of any capital gains it harvests.

Members must be "qualified" under Securities and Exchange Commission regulations that require them to have an annual income of at least $250,000 or a net worth of at least $1 million, aside from home equity. BlueTree’s managing partners screen the deals before taking them to the group. Based on investor interest, there’s then a due diligence process that draws on expertise of members as well as principals.

Individual members can opt in or out of any deal, but must be prepared to put $20,000 toward any deal in which they choose to participate. For BlueTree to make a commitment, the collective interest of its investors must come to at least $200,000.

Other local networks have different rules. Advance Global Technologies, for example, charges a $6,000 one-time entrance fee, but that gives members stock in the parent corporation.

Unlike BlueTree, the parent also uses its own treasury funds to make investments, said Dr. Laura Pallan, an ophthalmologist who was among the founders. Individual members’ investments in any deal can be as little as $2,500, she said.

"There are probably four or five models of angel network floating around," said Sohl, who runs the University of New Hampshire’s venture research center. There also are some very loosely knit groups with no set meeting schedule or investing thresholds.

"It’s not one size fits all" because the attitudes, risk tolerance and other characteristics vary among groups, he said, noting that the nature of investing opportunities in any given region also can influence how networks take shape.

To develop their model, BlueTree’s principals consulted with or researched some of the nation’s more established angel networks and their founders, including John May, who organized Active Angels, in Washington, D.C.

Mott and Jones also tapped expertise at the Ewing Marion Kauffman Foundation and engaged the foundation to give education seminars to prospective members.

As a result, BlueTree is relatively structured compared with some networks, said Sean Sebastian, a partner with Birchmere Ventures, a North Side venture capital firm. "I think they’ve done a lot of homework," he said.

Another difference, said James Brown, whose Cranberry firm, Autumn Hill Capital, also helps wealthy investors find private equity deals, is the way BlueTree is marketing itself.

For a long time, bringing private equity deals to the region’s wealthy investors was a quiet process, said Brown, who helped perform the function at money manager Allegheny Investments before starting his own firm. By contrast, BlueTree is opening up the field, he said. "What they’re saying is we’re loud, we’re proud and we want to do deals."

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