Venture Capital: Angel investors are coming out of the wings

When the dot-com bubble burst four years ago, Artour Baganov curtailed some of the risky bets that he was placing on startup technology companies. But now — with entrepreneurial energy percolating — the Seattle investor is on the prowl again.

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

http://seattlepi.nwsource.com/venture/175329_vc28.html

"This is the best time to be an angel investor," said Baganov, who started investing in startups after selling his software company in the mid-’90s. "The bad environment really shook the tree and now there are only good apples on the tree and we are picking them out."

Baganov is a founding member of the Alliance of Angels http://www.allianceofangels.com/abo.asp , a loosely knit group of high-net-worth investors who meet once a month at the Seattle Tennis Club in hopes of finding the next Microsoft, Starbucks or Amazon.com. They call themselves angels because their timely investments can make the difference between success and failure in a startup venture.

In recent years, angel investors have experienced plenty of failure as once promising Internet and telecommunications companies hit the wall. Many lost their shirts when peer pressure drove them to invest in deals without doing proper research. In other instances, they were squeezed out of deals by larger venture investors in what is known as a "cram down."

Membership at the Alliance of Angels was cut in half between 2000 and 2003 as wealthy investors tried to cope with their own staggering losses in the stock market. Funding dried up with the group providing only $1 million in startup capital in 2002 — the lowest amount since the organization was formed in 1998.

During the period, it seemed as if angel investing was about the last thing anyone wanted to discuss.

But angel investors, like their venture capital counterparts, are starting to get active again. Membership is on the rise at the Alliance of Angels, with eight new members joining since September. At 85 members, it is still well below the peak of 170.

Frazier Technology Ventures’ Dan Rosen, who has been chairman of the Alliance of Angels since 1998, said member- ship may have dwindled, but the enthusiasm for angel investing remains strong in Seattle.

"What we lost was the less active members," Rosen said. But with the economy improving, Rosen said the remaining angel investors are starting to write checks again.

Last year, the Alliance of Angels invested $3.1 million in seven companies — the highest dollar amount since 2000. And the momentum continues this year, with the group on pace to reach 10 new investments.

At last month’s meeting, ScaleOut Software’s Bill Bain — an Alliance of Angels member — presented a business plan for his Bellevue software company. Two weeks later, the former Microsoft Corp. employee received more than enough money from the group.

"It went from: ‘Hi, my name is Bill’ to fully subscribed in two weeks," said Chris Somogyi, an angel investor who participated in the deal. That sort of activity had not been seen in years, Somogyi said. Yet, the 44-year-old founder of two Seattle-area health care companies remains cautious.

"I would call the market improving, not fully recovered by any means," he said.

At a meeting this week, about 35 people listened to entrepreneurial pitches from an audio equipment designer, a maker of climate control systems for the home and two software companies. After the 10-minute presentations, investors peppered the entrepreneurs with questions about competition, patent protection, security and other issues.

It was too early to tell whether any of those presentations would bring investor dollars. But Chris Kemp — the 26-year-old founder and chief executive of Escapia — felt pretty confident. After the meeting, the former chief software architect at Classmates Online received a term sheet from one venture capitalist and set up meetings with three other investors.

"We actually had some great success," said Kemp, whose Seattle software company helps real estate firms better manage vacation rentals.

Since Escapia started the fund-raising process four weeks ago, Kemp said he has noticed a significant uptick in investor interest.

Hal Alles, the chief executive of Home Comfort Zones, has tapped personal funds and angel investors to help get his Beaverton, Ore., company off the ground. An experienced entrepreneur, Alles said angel investors are more willing to place bets on younger companies.

"We are below the radar screen of most venture capitalists," said Alles, who presented at this week’s meeting. "VCs have tended to shy away from real venture investing."

If that trend continues, it could open the door for angel investors who can stomach the risk.

Baganov, who over the years has made 11 angel investments, including one in Escapia, is looking to fill that financing gap. After experiencing the euphoria and despair of the dot-com era, he thinks Seattle’s angel investors are ready for the challenge.

"In 2001, angel investors sat on the fence and were licking their bleeding wounds," he said. "Now those wounds have healed and lessons learned."

P-I reporter John Cook can be reached at 206-448-8075 or [email protected]. For more information on Seattle-area startups or venture capital firms, visit http://www.seattlepi.com/venture.