Venture Capital: Angel investors guarding money

Kirk Marple and Jason Turner have encountered so many
problems trying to raise angel money in Seattle, the
entrepreneurs are considering moving their digital media
start-up to the East Coast.

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

"I really can’t blame investors for keeping their pocketbooks closed," said Marple,
who co-founded Agnostic Media Inc. with Turner last year. "But something’s going
to have to change or there just won’t be any small companies surviving in
Seattle."

Agnostic Media, which has developed software to manage the encoding, storage
and distribution of online video and audio, is like a lot of young companies in
Seattle.

Unable to attract financing from early-stage angel investors and lacking the
customers and revenues necessary to bring in venture capitalists, the year-old
start-up is stuck in a financing gap.

Surviving for the past year on $200,000 from friends and family, Agnostic Media is
now looking for $1 million in angel funding to help launch a recently completed
product. Its best investment prospects have turned up in New York City.

Marple and Turner haven’t had much luck tapping into Seattle’s network of wealthy
individual investors, also known as angels.

"Folks that had extra money sitting around from stock market successes have
either lost most of it, or are sitting with their money underneath their mattresses,"
Marple said. "You’re not seeing Microsoft alumni, of which I am one, throwing
around angel investments with their stock profits. Several of my retired Microsoft
friends have been burned by early-stage investments over the past few years. …"

Angel investors — who place small $100,000, $250,000 or $500,000 bets in
prerevenue start-up companies — aren’t around like they used to be.

And some in the local technology community say if angels don’t come back
soon, Seattle’s high-tech community could suffer.

"If we don’t have angel investing, we greatly diminish the importance of Seattle as
a venture community and the likelihood of great start-ups building into great
companies. It is that important," said Jon Staenberg, founder of Staenberg
Venture Partners.

Angel investors typically feed hot opportunities to venture capital firms, which in
turn bankroll the companies through later stages. Without angel investors’ early
bets, deal flow slows.

That ripple effect has been going on for months in Seattle, according to
Staenberg.

Only eight local companies have announced financing deals this year, the bulk of
which occurred as second or third rounds in existing companies, according to
information compiled by the Seattle Post-Intelligencer.

"Seattle is hurting and it worries me," Staenberg said. "The angels have put up
their wings for a while."

Jay Powers, managing partner at Bear Creek Venture Partners, agrees.

But while Powers still encounters angel investors burned by the dot-com
meltdown, he senses that a bottom has been reached.

"I think the angels that have the stamina and the experience to understand the
down cycles are actually starting to do some things," he said. "We have seen
some of our companies having more success raising bridge financing or finishing
out rounds of capital and this comes from what I would call more traditional
angels that are starting to wake up."

Susannah Malarkey, who oversees the Alliance of Angels, a 140-member
organization that invests in early stage companies, said angel investing is still
happening in Seattle. It is just not the "deal-a-minute frenzy" of 1999.

The 4-year-old organization, which holds regular meetings where members listen
to presentations from entrepreneurs, helped place $4.4 million in 11 companies
last year.

That compares with $7.7 million invested in 11 companies in 2000 and $13 million
invested in 16 companies in 1999.

The last company to raise money through the Alliance of Angels was Lone Wolf
Technologies, a Seattle software firm that was reborn a year ago after executives
updated the technology and restructured the ownership.

"Our success really came from having an existing product and actual revenues,"
said Chief Executive Chris Noble. "It is hard to go out and raise money with just a
business idea."

Noble, who presented his company at the January meeting of the Alliance of
Angels, will close out Lone Wolf’s funding next week at $3 million.

Another local company that recently attracted angel investment was
MountainZone.com, which like Lone Wolf was restarted from the remains of a
failed enterprise.

MountainZone.com founder Skip Franklin, who purchased some of the assets of
the company for $250,000 from bankrupt Quokka Sports last year, attributes the
fund-raising success to brand recognition, customers and a new focus on
profitable areas of the company.

Still, the entrepreneur thinks the market is tough for those seeking angel money.

"Angel investing is very difficult as you can imagine," said Franklin. "But in a VC
freeze, it still is the only avenue available for most."

Staenberg, a venture capitalist who has invested in digiMine, Motiva and Shoptalk
Network, said angel investors — like many venture capitalists — are sitting on the
sidelines.

"Most angel investors have a prolonged and horrible case of indigestion,"
Staenberg said. "And no amount of Rolaids is going to help. It is just going to
take time."

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

http://seattlepi.nwsource.com/venture/61378_vc08.shtml