Angel investors get more down to earth

Entrepreneurs have found it hard of late to lure capital for their start-ups, especially in the Midwest, but some experts say that may be changing

After contacting more than 180 people about his emerging biotechnology firm and raising $700,000 from individuals, Bob Gonzalez has figured out that fellow entrepreneurs are far more likely to invest in a start-up than most people.

By Ann Meyer
Special to the Tribune

http://www.chicagotribune.com/business/chi-0405030139may03,1,2033605.story?coll=chi-business-hed

They’re the ones who don’t mind a little risk. Plus, they like building companies from the ground up. And often they have needed the help of people like themselves to get their companies off the ground.

To the entrepreneurial firms they fund, their willingness to assist often seems angelic, and in a challenging economy these investors may be a start-up’s only hope.

Gonzalez also can tell you how hard it is lining up these "angel investors," professional accredited investors with a net worth of $1 million or more.

"You find out it’s a rare breed in the Midwest who’s willing to invest," Gonzalez said.

Finding investors is particularly difficult in the biotech sector, which commands just 11 percent of angel investment, according to an April report from the Center for Venture Research at the University of New Hampshire.

But no matter your niche, experts say that after a steep downturn in 2001, securing investment dollars for a new business may be getting slightly easier.

Total angel investments reached $18.1 billion in 2003, up from $15.7 billion the previous year, though still a small fraction of what it was in 2000, the center said.

The number of angel investors rose as well. Nationwide in 2003, some 220,000 individuals invested in 42,000 entrepreneurial ventures, up about 10 percent from the prior year, according to the report.

The figures do not include the friends and family members of entrepreneurs, who often make investments in a company simply because they have a personal connection to it, said center director Jeffrey Sohl.

Angel investment is "a lagging indicator" that tends to rise only in the later stages of economic recovery, said Wally Cornett of Northfield, who has started 15 companies since 1968, invested in about 60 and runs the Cerulean Fund. "People have to feel financially secure" before they are willing to put their money on the line, he said.

But at any given time, some intrepid souls are willing to roll the dice on a promising idea. Individual investors have enabled Gonzalez’s company, NewNeural LLC in Lisle, to lease lab space and hire two executives and a scientist to work on its adult stem-cell biotechnologies.

Gonzalez and his investors hope the technologies, based on the discoveries of Kiminobu Sugaya at the University of Illinois at Chicago, will lead to new treatments for diseases of the central nervous system, such as stroke, blindness, Alzheimer’s disease and multiple sclerosis.

But even with other funding from the University of Illinois, Illinois Technology Enterprise Corp. and the West Side Entrepreneurship Center, Gonzalez is only half way to raising the $2 million necessary to do the groundwork to move the technologies forward.

Raising money is a little like making a sale, said Gonzalez, an experienced business executive who is president and chief executive of the start-up.

"It takes about seven touches. I don’t think anybody would invest the first time you talk to them," he said.

And because there is no list of those most likely to invest, "It’s very inefficient," he said. "There is no magic way of doing this."

Gonzalez has found 18 individuals willing to take the plunge.

Angel investors traditionally have worked alone, or in small, informal groups of three or four, to evaluate promising companies, said Marianne Hudson, who manages the Ewing Marion Kauffman Foundation’s recently formed Angel Capital Association. But since 1999, the number of angel groups has tripled, suggesting that more individuals are looking to collaborate with others.

Among the newer groups locally are Northern Illinois Angels, the Ceres Venture Fund, Dirt Angels and the umbrella Midwest Angel Network Association, which is teaming up with the Kauffman Foundation’s angel initiative to share best practices and work with other angel groups, said Barry Moltz, co-founder of Prairie Angels and chairman of the angel network association.

The umbrella organizations hope to boost angel investing by helping new groups form, providing resources and building alliances with venture capital groups.

Still, it can be difficult to find individuals willing to join an angel group. For example, the Ceres Venture Fund, in formation since 2002, is still looking for a few more investors willing to put in $50,000 before it begins investing in high-growth women-run businesses in the Midwest, said Denise Browning, executive manager. The fund has raised $1.8 million, but Browning said it is taking longer than expected to reach its target of $2.5 million.

In part, the tough economy is to blame, experts say. It has made investors more conservative while putting a damper on early-stage investments across the board, Sohl said.

In addition, a decline in venture capital investments has created a funding gap, spurring more angel investors to provide additional rounds of financing for their investments, Sohl said.

While angels traditionally have been the largest source of start-up-stage capital, 35 percent of their investments in 2003 went to post-seed-stage companies, the center reported, leaving slightly less for the youngest companies.

Still, some say securing funding for a start-up should be an uphill battle. While entrepreneurs may not understand why so few investors are willing to back their great idea, "there’s only a handful [of companies] that are worthy of it … as eight out of 10 start-ups fail," said angel investor Bob Geras, president of LaSalle Investments in Chicago.

Some entrepreneurs have a misconception about angel investments based on the dot-com boom of the 1990s, when individuals who hit it big in the stock market saw investing in start-ups as a way to get in on a deal before an initial public offering.

First-time angel investors plowed money into business concepts that were not fully developed, and Cornett estimates the ranks of Chicago-area angel investors swelled to 20,000 in the late ’90s, up from about 2,000 historically.

But when the bubble burst, "that came to an abrupt halt," Cornett said. "A lot of angels wound up losing most or all of their money."

So, the number of Chicago-area angels willing to invest has plummeted in recent years, though Cornett sees signs that it is picking up again.

The era of easy money will never return, however, experts said.

"We’re back to reality," said Geras, who has invested in about 100 companies in the last 35 years, including four deals in the last 18 months. Only eight or 10 of the 100 have really paid off for Geras, he said, with many ending up as tax write-offs.

It takes more than a great idea to woo angel investors. Entrepreneurs need to take some of the risk out of their proposition by putting in more of their own money or that of immediate friends and family, to move the business concept along, Moltz said.

But when you find an angel who likes what you’re doing, you often get more than financial assistance. Most mentor the start-ups they invest in, drawing from their own experience.

That experience is one reason entrepreneurs tend to make better angel investors than those who have never built a company from the ground up, said Bart Carlson, chairman of Northern Illinois Angels in Naperville. In fact the group now requires its members to do some mentoring.

"It’s difficult for someone who has only been at a very, very large company to understand the problems of small business. All entrepreneurs have had trouble with cash at some point," he said. "You get in situations where you have to make tough decisions, and it helps if you’ve been through it before."

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