Only the Most Dedicated ‘Angels’ Survive the Slump

Flush with cash from a white-hot economy, wealthy individual investors known as angels flocked to back scores of local companies too small to be noticed by venture capitalists during the technology boom.

By Nicholas Johnston
Washington Post Staff Writer

But as the Nasdaq has fallen from grace and tech investments have turned into tax write-offs, the mood and number of local angels have begun to change. Angel investing is no longer an avocation for people with money to spare.

"We’re definitely retrenching to serious business angels," said John May, who manages some local angel groups. "What we’ve evolved from is sort of the casual pre-venture-capital angel or the checkbook angel to the ‘mentor capitalist’ who is serious that they have to help grow businesses."

The change is a return to the roots of angel investing in Washington, to a time when wealthy former defense contractors and consultants used connections and business expertise as much as their money to help fledgling businesses.

"Part and parcel of the boom, you had this tremendous explosion in angels," said Edward J. Mathias, an angel investor and managing director at the Carlyle Group, a venture capital firm.

For a spell, there were a host of angel investors in the region, with some of them swarming into groups such as the Private Investors Network, founded by May in 1996. Growing stock market wealth and the success of many local companies such as America Online Inc. and UUNet, which made millions for their employees and investors, helped to swell the ranks of angels — usually accredited investors with at least $250,000 to invest.

"They started having what we call in the business ‘play money,’ " May said. "It was very inexpensive money to them."

That money found its way to scores of Washington start-ups. Because angel investors who invest privately do not have to make public disclosures, the actual scope of angel activity is unknown. But angel investors and venture capitalists say the amount of local angel investing has fallen dramatically from the highs of 1999 and 2000.

"There are fewer angels involved in the deals we’re involved with," said one local angel who is still making investments. "And we’re doing less-frequent investments with smaller amounts of money."

Others, burned by plummeting stock holdings and bad angel investments, have given up on the practice entirely.

"I have universally regretted it," said one former angel investor. "People go out who are inexperienced and they fall prey" to bad deals.

"There’s a big difference between somebody with 25 years of experience in information technology and a doctor or a lawyer who dabbles in venture," said Jack Biddle, a founding partner of Novak Biddle Venture Partners. "If it was easy, everyone would do it, and for a while it was easy and everyone did do it."

Now, since many of those who still do it have less money, the nature of investment clubs and the deals they seek out have changed. May, for instance, is putting together a new angel group that doesn’t require upfront financial commitments to a fund, as some of his earlier groups did. The new group, he said, will require a nominal membership fee, and in a nod to cash-strapped investors, investment decisions will be made on an individual basis by each member, allowing them to pick and choose their start-ups.

Many angels have also learned tough lessons about shepherding their investments through tough situations, including future rounds of funding and "cramdowns," where investors who are unable to invest in follow-on financings lose their prior investments.

Those added risks, along with lingering economic woes, have only helped to thin the ranks of local angels. Those left tend to be the same kinds of people who were there before the technology boom.

"The people who are doing it now are probably the true believers," Mathias said. "The vacationers and the tourists have gone home."

© 2002 The Washington Post Company

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