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Angels for a new age – In tech’s post-boom era, angel investors rewrite the rules of the club

The early morning meeting of the new Active Angel Investors club might look like a gathering of wealthy investors from the late 1990’s technology boom as they listen to pitches from entrepreneurs seeking money for their young companies.

By:
Tania Anderson
Washington Business Journal

But this is 2003, after the crash, a new era for angel investors. The conversation — and the way angels share their wealth — is different. Even angels don’t want to get burned again. Yet the revised investment strategies by Active Angel Investors and similar groups formed since the first of the year are also helping the tech industry. Money is flowing to some promising ventures.

Angels are people with a high net worth who invest in startup companies, usually with amounts less than $1 million, giving entrepreneurs a boost that helps get them to the point where venture capital firms feel comfortable providing larger rounds of financing. About 80 percent of seed and startup capital comes from angels, according to the Center for Venture Research at the University of New Hampshire (www.unh.edu/cvr).

In the traditional angel club, each new member would likely put at least $100,000 into the pot, and members would vote as a group on whether to invest the pot in a company. But after the group vote, some angels may have found their money was going to a company they weren’t that keen on.

Vienna-based Active Angel Investors (http://www.activeangelinvestors.com), launched in January by angel veteran John May, has become a model for the new way of structuring angel clubs.

The club is set up as pledge fund. Rather than giving a lot of money upfront, members pay an annual fee of $2,500 and then pledge to make investments in presenting companies during that year.

Members can choose which companies to invest in. Individual angels aren’t bound by a group decision. If enough members are willing invest a combined $200,000 to $250,000 in a company, an investment partnership will be formed.

The organization and management of the partnerships is handled by Vienna-based New Vantage Group, an early-stage venture fund manager, where May is a managing partner.

Washington attorney Jonathan Aberman was one was one of the first to join the club.

"It’s much more appealing to have the ability to control your individual investments rather than have it controlled by a consensus vote," he says.

If a club member is interested in a company but can’t get enough other members on board to reach the $200,000 to $250,000 for a club partnership, the interested members can still invest individually, but they’ll have to manage the investment on their own.

A similar approach has been adopted by Washington-based Capital Investors (www.thecapitalinvestors.com), an angel group whose members have included heavyweights such as Netscape co-founder Marc Andreessen, former AOL chief Steve Case and Mark Warner before he became Virginia’s governor.

Capital Investors changed in January from the traditional model to a pledge fund. The group, which does not disclose information about membership fees or pledges, also changed its management structure.

Previously, Capital Investors had a full-time manager who brought in companies for presentations. Now members themselves are responsible for bringing in a presenter, shepherding the company through due-diligence review and following its progress. Investments range from $200,000 to $600,000.
Still scarred

Members of the angel community say the emergence of the pledge fund model is largely driven by apprehensions that linger from the tech market crash. They want a little less upfront commitment and, like Aberman, a little more control over their money.

During the tech boom, angels invested about $40 billion across the country in the 1999 to 2000 period, according to New Hampshire’s Center for Venture Research. Angel investments in 2001 were about $30 billion and last year just $15.7 billion.

In the Washington area, risk capital is still lacking as investors continue to "lick their wounds" and work on old deals, May says.

Capital Investors changed its structure after attendance at its monthly meetings dropped dramatically. The meetings were drawing only about half of the 23 members, and investments were being put to a vote without the entire group’s input, says Jagtar Narula, who was the full-time manager of Capital Investors before the restructuring and still helps part time.

SV Group, an early-stage investment banking and finance firm in Reston, tried to start a club earlier this year to focus exclusively on financial services and use a model similar to Active Angel Investors. However, a principal with the group said the idea was scrapped in April, but would not say why.
The fortunate ones

The pledge fund models do seem to be bringing some players back into the game.

Active Angel Investors has doubled its membership to about 35 people since January. It listens to two pitches a month.

Thus far, Active Angel Investors has helped two companies: 13 members invested a total of $380,000 in ATM National of Bethesda, which enables financial institutions to provide customers with surcharge-free access to ATMs nationwide; and 10 members invested $250,000 in a Rockville company now known as Naviscan PET Systems.

Naviscan, which makes a high-resolution "positron emission tomography" scanner that produces images used to detect cancer, raised a total of $2.8 million in this round. Besides May’s group, other investors included the Maryland Angels Council, Chesapeake Emerging Opportunities Club in Columbia, venture capital firm Walker Ventures in Glenwood, Md., and Atlantis Group, an angel group in Durham, N.C.

"It’s a difficult environment," says Michael J. Strauss, CEO of Naviscan (http://www.naviscanpet.com). "We consider ourselves quite fortunate to raise the funds we did."

For Capital Investors, the most recent investment was late last year, in Icode, a Chantilly-based software firm.

One reason for the lack of activity, Narula says, is the overall drop in venture capital investing. But another factor is the new model, which puts more responsibility on members to recommend companies for presentations.

"These days since the intros are coming through the group, they’re busy running their own companies and aren’t necessarily looking for business plans," Narula says. "As a result deal flow drops off."

The number of companies being presenting to the group has fallen from about two per meeting to one.

However, Narula says the pledge fund model still is a better option because companies that do get funding will receive more focused attention from their angels. When angels are making investment decisions as individual members rather than through a majority vote, they may be more engaged in helping the young company succeed.

"When you’re part of a big a group with a vote, it doesn’t encourage the individual help," Narula says.

New and traditional

Other angel clubs in the region are staying true to the traditional model.

One of them is Chesapeake Emerging Opportunities (www.ceopportunities. com), which was started in 2001 and has made five investments, says co-manager Steve Dubin.

The companies have included businesses in such fields as life sciences and Internet-based supply chain management. Each investment averaged $220,000.

Chesapeake has about 45 members, who put in $40,000 initially and commit to writing two $30,000 checks in about a three-year period. The group has about $2 million left to invest.

Dubin has no interest in changing the club to the pledge fund format.

"It’s a nice cooperative effort," he says.

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