Some Angels Allying and Still Flying

All older, many poorer and some wiser than they were at the height of the tech boom, about 50 "angel" investing fund managers flew in from around the country to gather at the clubby Occidental restaurant downtown Tuesday night.

By:
Shannon Henry
Washington Post In NASVF.org

The Prairie Angels (Chicago) and the Sierra Angels (Nevada) sipped scotch and ate crab cakes with the Angels With Attitude (Seattle) and the Desert Angels (Tucson). These high-net-worth individuals who invest in high-risk technology companies did not meet just to commiserate over bad deals of the past few years, although some of that discussion was inevitable. The angels came to Washington this week for a summit, to talk about new investments and to form what will be the first national association for such investors, the Angel Capital Alliance.

Angels are individuals who give a company its first outside money — well before banks or even venture capital funds would risk it — and are often friends or family of the business’s founder. This type of investment isn’t groundbreaking; inventors back to Thomas Edison and before needed wealthy patrons to get started. But over the past decade or so, rich people began to form angel clubs like several run in the Washington area by John May, who will be on the board of the new association. During the tech boom, angel investing took on an increased glow that attracted many newcomers. What they learned, however, was that angel investing does not mean easy money.

"It doesn’t just happen," says May of winning the proverbial jackpot or helping to create a great new technology. "It can be heartache and cancerous stuff."

Until now, angels have found each other and their investments largely in haphazard ways, through word of mouth, research or by accident. The founders of this new alliance figure that by organizing, this type of investing will gain greater recognition as a way to raise money. Also, by formalizing networking and peer communication, the Angel Capital Alliance hopes to improve the business and profit potential of the whole industry.

"It’s the network effect," says Luis Villalobos, founder and director of Tech Coast Angels in Irvine, Calif. "Investors tend to invest with people they know."

The alliance will be funded by and initially run from the Kauffman Center for Entrepreneurial Leadership in Kansas City, Mo., although founders say it could eventually move, possibly to the Washington area.

Villalobos wants the alliance to foster a better understanding of the role of angel investors. "People don’t understand the magnitude of angel investing," he says. Although some say annual angel investment amounts to more than all venture capital investments combined, research and statistics on these deals is still lacking. Villalobos points out that VC funds started organizing in the 1980s, and the angels are now at that same stage.

The group’s formation comes at a low ebb for angels. Many well-heeled investors who tried to become angels fell from grace. A number of local angel groups that formed four years ago have either disbanded or gone into hibernation.

When asked where all the angels have gone, James Geshwiler, managing director of the Boston area’s CommonAngels, grabs a notebook and draws a diagram of angel types, showing that the ones with little experience in industry or entrepreneurship have disappeared, and those with lots of experience who are too busy running their own companies have gone too. He calls the ones who are still around "the guardian angels."

"The guardian angels never left the market," he says. The others "had the rude reminder that this is work."

"Everyone didn’t lose all their money," says Ian P. Sobieski, managing director of the Band of Angels in Silicon Valley, probably the best-known angel fund in the country. "This is what VC was like 15 years ago — not formed," he says.

Mark G. Heesen, president of the Arlington-based National Venture Capital Association, gave a speech to the group in which he said angel money is badly needed because the venture capital market is still struggling, and many private equity firms have curtailed investing in early-stage companies. "We’re crawling our way out of the hole," he said.

"In today’s market an angel is doing the garage kind of investing," said Heesen. He called angels a "farm team" for other investors. "You don’t have a major league without a minor league," he said.

Venture capitalists and angels often view each other as either competitors or annoyances. And being referred to as "minor league" by someone representing the venture capital community did indeed offend some angel investors in Heesen’s audience. One angel said that he’d rather be a farm team for "fox hunters."

Though angel investors may be regrouping after a bad stretch, seed investing of the sort they provide is still in demand. Area universities are increasing their interest in supporting this type of investor because they provide not only money but hands-on help to young entrepreneurs. The University of Virginia’s Darden Graduate School of Business Administration will announce this week the appointment of May as director of Darden’s Northern Virginia Initiative, a program to foster the link between the school, entrepreneurs and investors in the Washington area.

Also this week, the Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business will launch a new matchmaking effort for entrepreneurs and angel investors called the Capital Access Network. The school will filter business pitches to potential investors and help arrange meetings. "Angels need some kind of a structure to help them find networks," says Dingman Center Director Don Spero. It’s just harder to find angels now, just as it’s more difficult to locate donors for the university, he says.

William Payne, entrepreneur-in-residence at the Kauffman Foundation and a member of angel groups in California and Las Vegas, hopes organizing will bring about some sort of comprehensive database for angel deals, like those that track venture capital investments. And he also expects to learn from others.

"Angel investing is lonely," says Payne, who has been putting his money into young companies since 1980 . "You always wonder, ‘What does he know that I don’t know?’ "

http://www.nasvf.org/web/allpress.nsf/pages/7897

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