‘Angel’ Investors Share Ideas at New England-Wide Summit

They’re called "angel investors" and they’ve been compared to Don Quixote, the fictional 16th century Spanish landowner/nobleman, brought to life in the writings of Miguel de Cervantes, who spent his later years chasing his dreams.

By:
Jerry Miller
Manchester Union Leader

Angel investors also chase dreams – theirs and others’. They do it by investing in start-up companies, whose entrepreneurial owners have long since maxed out their credit cards, depleted their personal savings accounts, borrowed money from relatives and, as one said, "other fools."

Some of these entrepreneurs have even remortgaged their homes, all in an effort to realize their dreams of bringing something of value to the marketplace.

In fact, if it weren’t for angels, many companies, large and small, would not be around today, including Bell Telephone, which began with a $40,000 investment in 1874 and Amazon.com, which started in 1994, when 12 angels each invested $100,000 in the dream of Jeff Bezos.

The Body Shop, which started in 1976 with a small investment of angel dollars, today boasts 700 stores around the country. The list goes on.

Unlike venture capitalists, angels invest in "early-stage" or start-up companies. Venture capitalists invest in many of the same companies, at a later stage, once angel funding has been exhausted.

Angel investors have long been considered the "farm systems" for venture capitalists.

"If angels retreated from seed investing, we’d all be in trouble," said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire’s Whittemore School of Business and Economics. "We’d lose the farm system."

Today, as the stock markets continue to languish, some venture capitalists have opted to join forces with angels, in hopes of getting involved with new companies from the very start, even though some angels and venture capitalists are leery about making co-investments. To the extent that it’s begun to happen, Sohl said it’s leading to the development of a new farm system.

Angel-sized investments

Angel investments tend to be small, ranging from as little as $25,000, to as much as $250,000, although some investments are larger. By approaching angel investor groups, a smart entrepreneur could raise enough dollars to kick-start a company.

Today, the typical angel deal ranges from $100,000 to $2 million and often includes six to eight investors.

According to Sohl, in 2002, 250,000 angel investors committed a total of $15 billion to 20,000 ventures. The figure represents a 50 percent drop from 2000, when angels invested $30 billion.

The decline in total investments, in so short a time, is due to the decline in stock prices and what that’s done to the dollars individual angels have available to invest.

The stock markets also took their toll on venture capitalists. According to the National Venture Capital Association, in 2000, the last of the boom years, its members invested $3.2 billion in 663 deals. The figure fell to $798 million and 249 deals in 2001 and declined even more in 2002, when $303 million was invested in 148 deals.

What angels want

Despite the hits taken by many high-tech stocks, angels still can’t get enough of companies with high-tech products.

An analysis of investment sectors shows the lion’s share of angel investments, 39.8 percent, are made in software companies, followed by other high-tech applications at 15.8 percent. A sector called "life sciences," another arena with high-tech implications, accounts for 14 percent of the total.

Other sectors are in single digits, including manufacturing at eight percent; biotechnology, 5.5 percent; retail, 5.4 percent; electronics, 4.8 percent; and telecommunications at 2.6 percent.

According to Sohl, biotechnology is not a good investment because the amount of capital required is simply "too large" for most angels.

Granite State angels

There is no shortage of angel investors in New England and many of them gathered recently at the New Hampshire Community Technical College’s Emerging Technologies Center at the Pease International Tradeport for what was billed as the New England Angel Organization Summit.

The half-day event attracted angels from Maine, Massachusetts, Vermont and Rhode Island and six New Hampshire groups: Acorn Investor Alliance in Hanover, the Breakfast Club of Nashua, the Portsmouth-based eCoast Angels, Technology Garden in Hollis, Great Bay Ventures in Durham and the newest group, First Run Investments, headquartered in the Mount Washington Valley. While each angel group has the same basic goal – making money for its members – that’s where the similarities end. Each club is very different.

Based on ‘feel’

Taylor Soper, an Orford resident and a member of the 25-year-old Nashua area Breakfast Club, the oldest and most successful of New Hampshire’s angel groups, reflects the independence of many angel investment operations. "We have no (formal) fund, no accountants and no lawyers."

So how are deals made? Soper, who has been an angel for 12 years and involved in some 80 deals, said the Breakfast Club does what it does through "a lot of networking."

As a result it receives as many as 25 proposals a month from hungry entrepreneurs. Two members, both graduates of the Massachusetts Institute of Technology, each with a good deal of "financial and technical savvy," screen the proposals.

"We do a lot on feel, rather than extensive due diligence," he said; and part of the "feel" includes taking a hard look at management. "It’s pretty much about betting on the horse running the company and letting him run it." Soper said the typical Breakfast Club investment might involve as many as five investors, each contributing between $50,000 and $250,000.

Asked if he considered a 15 percent return on his investment a good return, Soper immediately responded "no" and added, "I wouldn’t be in it if I were going for a 15 percent return." Rather, he said, a 30 percent return is more to his liking.

Soper, who has headed two manufacturing companies, added, "I’ve made some money and I’ve lost some money over the years," from angel investments. Soper said he frequently receives referrals from venture capitalists, who might be interested in making a later stage investment.

Soper said the Breakfast Club has between 12 and 15 members, most of whom know one another. There is a high degree of trust and confidence among the members, which helps with the deal making process.

Big problems, big solutions

Begun two and a half years ago, the eCoast Angel Network is centered around a half dozen investors, who, depending on the project, can be joined by as many as two dozen others. The group’s purpose is to support economic development, with an emphasis on the seacoast.

In its short history, the group has completed six deals, including Chaoticom, a Hampton Falls-based company that seeks to revolutionize the way people receive and listen to music.

"We’re looking for opportunities with high margins. Companies that will grow rapidly," said George McQuilken, one of the founders, with high-tech, especially software, as the main focus. "We’re looking for the big problems, with the big solutions."

McQuilken, an MIT graduate, who spent 16 years with IBM, said as an investor, he’s looking to earn between 40 and 50 percent.

"If you’re going to invest in risk, you have to have a good return."

While his expectations may seem high, McQuilken noted in the boom years of the mid-’90s, it was not uncommon to realize returns of 100 percent compounded. But today, he cautioned, it’s a very different situation.

"Anything above zero is quite astounding. The investor who stays even today is ahead of the game."

McQuilken and others in the group are also interested in doing more than making money. Doing more includes lending years of business expertise to something new. "I want to add value to the company through advice, experience and contacts," and he’s doing it with Chaoticom, whose board of directors he chairs.

The Port City resident said he’s also looking for companies that are "intellectually challenging."

McQuilken said it’s also critically important for an investor to "understand the business" in which the investment is sought and that’s the benefit of an investment group, whose members bring different expertise to the table.

Money: the easy part

Only nine months old. Great Bay Ventures is looking for small start-up companies it can make "investible," according to Scott Blackstone, a Durham resident and one of two entrepreneurs heading the group, so that the companies can become "premier investment vehicles."

Blackstone said the effort is in part about showing the New York and Boston financial communities that "New Hampshire has good investment opportunities."

In addition to dollars, Blackstone said the fund is interested in investing the experience of his member angels.

So what is he looking for? Blackstone said he’s seeking growth oriented technical companies, because, "Technology is what we understand."

Investments are expected to range from $100,000 to as much as $1 million, with the funds coming from the two principals and a network of other investors.

Blackstone said for a start-up to be successful, it must do more than obtain money, which he called "the easiest thing to get." There must also be a mentoring system in place, a supplier base and contacts with potential customers, as well as management that understands "financial discipline."

In short, it’s important that the entrepreneur "gets the system in place," before he’d be willing to invest.

More than feel-good

The newest entry into New Hampshire’s angel network is the Mount Washington Valley-based First Run Angels Group. With more than two dozen investors, mostly retired people who moved to the area, the group is about helping to bring jobs to the region.

"Once we get going and have established a decent track record, I’m pretty confident we can at least double the number of investors," said Dick Badger, one of the investors. "The stock market isn’t the greatest place in the world right now."

"There are a lot more people in the valley who are interested in these types of investments," said John Bruni a founder of the First Run Angels and a now retired, 37-year veteran of the computer industry. "We’re hoping they contact us."

"Before we came along, there was only debt financing available to new businesses," Bruni added.

The First Run Angels Group is a spin-off of the Mount Washington Valley Economic Development Council. The council has acquired 80 acres of land along the Saco River, which will be developed into the Mount Washington Valley Technology Village. The complex, expected to be operational in late 2004, will include a 12,500-square-foot business resource center, which will house critically important "incubator space" for start-up companies, as well as a 12,500-square-foot Leaning and Seminar Center, to be operated by a consortium of educational institutions and a business park, complete with infrastructure. The total space is expected to be 100,000 square feet.

First Run Angels is hoping to fund businesses to fill this technical center, as well as other businesses in the valley needing equity capital. Thirteen investors are already looking at one $650,000 deal, with as much as $350,000 already committed.

Bruni said perhaps the most common problem his group faces is dealing with entrepreneurs "whose business plans are often not ready to present to anyone."

"Some of our members are interested in what I’ll call feel-good deals, to help the economy in our area, but they must also be accompanied by good business plans," he added.

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Angel Groups- models for funding, successful investing and tips

A New England-wide partnership between angel and other early-stage investors took its first step towards formation Wednesday at Pease International Tradeport.

By:
Christine Gillette
Portsmouth Herald

Representatives of about 10 angels’ groups from around the region – representing about $100 million in investment capital – shared their models for funding, successful investing and tips for dealing with common issues during a meeting at the New Hampshire Community Technical College’s Emerging Technology Center.

"I guess my overriding goal is to make more investment capital available for the region," said the meeting’s organizer, George McQuilken of Portsmouth, a founder of both the eCoast Angels Network and of Chaoticom, a spin off of technology research from the University of New Hampshire.

"Angels" are investors who generally put their money into companies at the seed, or startup, stage, making investments earlier on in a business than venture capital firms are willing. And while investments by VC firms are often in the millions of dollars, angels more frequently invest the range of $250,000 to $1 million, either from funds managed by a group of private investors, or directly from their own pockets.

"This angel movement is something that has really picked up steam and interest," said McQuilken.

Angels accounted for $15.7 billion in investment to 36,000 startups in 2002, according to Jeffrey Sohl, director of the University of New Hampshire’s Center for Venture Research.

"For most of those deals, we’re seeing five, six, seven investors," he said, with each putting in about $50,000 per investor.

It’s not only the investment style and timing that sets angels apart.

"It’s not just the money, it’s what they bring to the table," Sohl said. That value-add, he said, is entrepreneurial experience that new businesses can draw on as they grow.

One problem angel investors face, Sohl said, is the misconception that venture capital firms are the ones doing all the early-stage investing.

"Venture capital (firms) are not the ones who start businesses," said Sohl.

That said, there are angel investors who work with VC firms successfully to fund startups.

Often, said those at the meeting, those partnerships are both successful for the investors financially, and for the companies, which gain footing with a VC firm for future rounds of funding.

However, working too closely with VC firms can result in deals being "cannibalized," said Rob Walsh of Great Bay Ventures, where the bigger money will buy or gain a larger stake in a company, locking out smaller angels who want to see their returns grow with a company.

"It’s the ‘Sierra Madre’ syndrome," McQuilken said. "At first, everyone wants to work together, then as soon as you turn your back, they shoot you."

Other challenges angels face, as well as other investors, is putting too much emphasis on investing in one hot sector. Most recently, he said, those sectors are biotech and nanotechnology.

"I thought we learned in the dot-coms you don’t put all your money in one basket," Sohl said. "I think it’s a mistake to sector-chase."

Angel Healthcare Investors is one sector-specific investment group that has found ways to diversify by using the health-care expertise of its members to evaluate investment opportunities that range from health-related publishing to medical equipment, said Mary McNamara, managing director.

The group – founded in 1999 – has made about $8 million in initial investments in the last four years, and put up another $1.4 million for 10 follow-up rounds of funding.

"Like most in the investment community, we’ve had to hunker down a bit and help our companies," McNamara said.

Present at Wednesday’s meeting were representatives of Angel Healthcare Investors of Newton, Mass.; Common Angels of Lexington, Mass.; First Run Investments of the Mount Washington Valley; Launchpad Venture Group of Wellesley, Mass.; Maine Angels from the Portland area; Rhode Island Angels; Great Bay Venture Group, based at Pease; and perhaps the deans of angel investing in New Hampshire, the Breakfast Club, a group of Nashua investors around since the 1980s.

After Wednesday’s meeting, McQuilken said he expects that the angels groups will meet again as a group occasionally, and hold meetings between individual groups, or sit in on each other’s proceedings.

In addition to Wednesday morning’s meeting among angel investors, the Greater Portsmouth Chamber of Commerce held an event jointly in the afternoon with Capital Venue at the same location, linking entrepreneurs with venture capital firms and angel investors, including Grandbanks Capital, Navigator Technology Fund, Zero Stage Capital, and DFJ New England Fund.

The program included a panel of investors addressing how entrepreneurs can prepare themselves to go after outside funding, and opportunities for business people to meet one-on-one with VC representatives.

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