Angel investors spread wings more cautiously– Risk-happy investors revise strategies for funding startups

Investor Steve Hess has lost 50 percent of his net worth. But since they were losses on money he’s made, he figured "it was only paper money anyway."

At one point in the last 21/2 years, his stash sagged by 80 percent, but he recently recouped 30 percent on the stock market.

The Oakland Tribune

When people have incomes in the multimillions (Hess won’t specify the extent of his wealth), it’s hard to sympathize when they lose $80 million out of $100 million.

But his losses and those of people like him do matter to the rest of the economy. For Hess is one of those rare individuals who help fuel the invention of new technologies with their wealth.

Called angel investors, these King Midases sink their cash into startup companies normally considered too risky for the public to support. They infuse a newborn with the cash to get to a certain stage of maturity when other investors, perhaps venture capital funds or corporations, will be willing to look at them as potential moneymakers to nurture.

Today, bruised angel investors are pulling back and revising their strategies, and that may be hurting innovation.

Risk-happy angels have been tarred with some of the guilt of fueling the bubble economy by funding companies with small chances of succeeding. But without them, many companies on which we now depend wouldn’t have emerged from the drawing table or the laboratory.

"Take any major company of the last few years and they’ll have angel money in them," said Hess.

Today, under the aegis of IStrategies International in Berkeley, he is investing in NanoMuscle, an Antioch company that produces linear motiondevices.

Today, many angel investors have backed off entirely and the rest have cut back considerably on their commitments.

"Individuals (in angel groups) have by and large been shellacked so there’s less money available," said Steve Stephansen, president of Sand Hill Angels in Menlo Park and an investor in WebV2, a young company in Berkeley.

"If I asked a group of angels, no one would tell me they are working with the same dollars as in the past. Groups are more leery and more cautious (about taking on new startups)."

"Very few of the groups can really put together the dollars to give any startup companies lift."

Angels might be willing "to put up a couple hundred thousand for a good investment when what they really need is a million."

So startup founders can be stuck. If they don’t get the seed money from angels, they surely won’t get it from venture capitalists who will tolerate only a more mature company.

"We’re losing a tremendous amount of innovation," Stephenson said. "We think the number of companies being formed is significantly down."

So angels like Sand Hill Angels or Sierra Angels, which once invested in deals they jealously guarded, are changing how they play the game in two significant ways. They’re becoming more exacting of the startups in which they invest. And they’re spreading their deals among other networks.

Hess is spearheading the formation of another circle, the South Bay Angels Forum because he said he thinks, failed fortunes be damned, this is the best time to invest in start-ups.

"In the last three recessions, the best and biggest companies have been started," he said. "Bad times are the best time to invest."

He said he’s also intending to introduce Finnish and later Asian startups to the South Bay Angel Forum.

Since the Finnish and Singaporean governments invest in their local startups, Hess said he considers that these companies thereby have been pre-screened and are toothsome deals for his colleagues in the Bay Area.

Stephansen, however, is going the route of crosspollination. Once, an angel shared the deal just with his group. Now groups are forming larger networks.

He pointed to a network of angel groups, the Northern California Association of Angels that started earlier this year.

"The new model is that angel groups have to work together to pool moneys to get financing to levels up to a point where it’s worth investing. … You’re going to see a lot more collaboration," Stephansen of Sand Hill Angels said.

Of his own group, he said, "We’re becoming more sophisticated in the way we evaluate deals. We’ve only invested in a handful of companies this year. We’re now selling consulting services to generate revenue."

To the company looking for angel investment, this enlargement of angel networks has an upside and a downside, according to Jon Gregory of Golden State Capital Network, which identifies promising young companies and exposes them to investors. He sees scores of companies seeking to attract seed money.

On the one hand, the startup that once was vetted only say by Sierra Angels is now "being shopped" to the Keirtesu Forum in San Ramon, for example, and other groups. So it takes longer for it to snag the swag it needs.

But on the upside, that startup is "now exposed to expertise from different groups," Gregory said.

For the future, the aches and pains of angels will have some sobering benefits.

"I see them continuing to be more and more VC-like, wanting to see strong management as part of the team," said Gregory, comparing them to venture capital funds.

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