Professor Raiton’s Inside Perspectives: Entrepreneurship, Creativity, Innovation

By Rob Day, Greentechmedia:blogs 

I’m referring, of course, to angel investors — individual investors who put money into startups, typically at a pretty early stage.  Here on this site, and even more so in the media, the heavy focus is on venture capital inventments from institutional investors.  But that ignores the critical role angels often play in getting the VC-backed startups off the ground in the first place.

As the attached Center for Venture Research survey results show (note: link opens pdf), angels are a major player in the financing of entrepreneurs in the U.S.  In the first half of this year, CVR estimates that 23,100 startups received funding totaling over $12B.  Compare this to the $14.9B and nearly 2,000 venture deals tracked by Moneytree in 1H08.  Roughly comparable amounts, but more than 10x the investments — as reflecting the CVR survey’s conclusion that 46% of angel investments were in seed and start-up stage.

Let’s make this more specific to cleantech — the CVR study indicated that 10% of the angel investments in 1H08 were made into “Industrial/Energy”.  So we can roughly estimate that about 2,000 cleantech startups received angel funding during the first half of the year, of which about half were seed or startup stage.  Meanwhile, E&Y tracked 29 seed and first round VC investments into U.S. cleantech companies during 1H08.  I would argue that most VC-backed seed rounds are left stealth and unreported, so the E&Y figures are undoubtedly low.  But even still, the difference in number of investments by each type of investor is significant.

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It’s tempting to believe there are many extremely wealthy ex-entrepreneurs out there eager to swoop in and invest tens of thousands of dollars in your start-up — even though you’ve never met. But a new book, “Fool’s Gold? The Truth Behind Angel Investing in America” by Case Western Reserve University entrepreneurship professor Scott Shane, argues that such “angel” investors are far rarer than most entrepreneurs imagine.Prof. Shane analyzed Federal Reserve data and other research on business investments and discovered many misconceptions about these so-called angel investors in terms of who they are, how much they invest and what types of businesses they invest in.

In an interview earlier this week and in his book, Prof. Shane lays out some of these myths. Here are five of them:

Myth #1: Angel investors are like VCs, they just invest less
Prof. Shane finds angel investors are far more varied in their investments than venture capitalists. While VCs tend to focus almost exclusively on high-growth industries like technology, angels will invest in everything from the local dry cleaners to a restaurant. They tend to stick with industry’s they are familiar with. Plus, they are far more hands off than VCs. Most angels spend less than an hour a week with the companies they invest in. And fewer than 5% of businesses who receive angel money go on to get VC money.

Myth #2: Most angel investing is done by organized groups.
Groups only account for 500 to 600 each year, he says, and only 2% of all angel investment dollars come from organized groups or networks of angels.

Myth #3: Angels are wealthy and savvy investors
Prof. Shane found that only 21% of angels meet the Securities and Exchange Commission’s requirements for being an “accredited investor” – or an individual making $250,000 annually or more, or a couple making $350,000 or more (or net worth of more than $1 million). What’s more, the majority of angels don’t end up making money on their investments, and only 2% of businesses they invest in eventually become IPOs. And only 15% of angels do “extensive” research on the sectors of the businesses they fund.

Myth #4: Angels frequently invest $50,000 or $100,000 in businesses, sometimes up to $500,000 or $1 million.
The average angel investment is around $10,000, Prof. Shane found.

Myth #5: Many people invest in businesses of people they barely knew beforehand.
Of all informal business investments, 92% are made by friends and family. Few are made by an “angel” who isn’t one of those.

Competition for startup cash is tougher than ever, and companies that might have sought venture capital in the past are turning to angels

By Amy Barrett, BusinessWeek 

Meet the new breed of angel-backed entrepreneur. Donna Myers, president of software provider TowerCare Technologies, is in the process of securing $2 million in angel funding. But she’s no newbie: Her 22-person Wexford (Pa.) company has 160 customers and last year generated $500,000 in sales.

In years past, a firm of Myers’ size might have sought venture capital. But as venture capital funds have moved upstream, doing larger deals, angel investors are being pitched by much more established companies. Now it’s not just first-time entrepreneurs or those whose companies are in their infancy who are winning cash from angels, although those entrepreneurs are still pitching. Increasingly, successful candidates, like Myers, boast impressive experience and a significant customer base.

“The bar has been raised,” says Catherine Mott, who runs Pittsburgh’s BlueTree Allied Angels, which expects to put $2.8 million to work in about a dozen transactions this year, up from $1.8 million in eight deals last year. Her group plans to fund three more deals by yearend and has the enviable problem of picking among a half-dozen promising companies. “We are seeing such great quality deals,” Mott says. “Those six are going to be difficult to choose from.”

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From StartupNation Blogs by Rich Sloan

Angel investors have become more cautious in light of the recent economic uncertainty, trying to reduce their risk exposure by including more angels in each deal, according to the Angel Market Analysis for the first and second quarters of 2008 released by the Center for Venture Research at the University of New Hampshire.

According to the analysis, “Angel Investors Steady But More Cautious in First Half of 2008,” total investments in the first and second quarters of 2008 were $12.4 billion, an increase of 4.2 percent over the same period last year. A total of 23,100 entrepreneurial ventures received angel funding in the first half of 2008, a slight decrease of 3.8 percent from the same period last year, and the number of active investors was 143,000 individuals, an increase of 2.1 percent over the same period in 2007.

“While angels continue to represent the largest source of seed and start-up capital, market conditions and the capital gap are requiring angels to engage in more later-stage rounds. New, first sequence, investments represent 65 percent of angel activity in the first and second quarters of 2008, unchanged from the same period last year, indicating a continued preference for new, as opposed to follow-on, investments,” Sohl said.

According to Sohl, if the angel market is to achieve sustainable growth, there needs to be a reasonable augmentation in active investors, and thus, level of participation is an important consideration. While the number of angel organizations, and individuals that are members of organized angel groups, is increasing, there is a significant percentage of latent angels — individuals who have the necessary net worth, but have not made an investment.

“In the first half of 2008, 58 percent of the membership in angel groups was latent angels, which is the same as the first half of 2007. This significant percentage of latent investors indicates that while many high net worth individuals may be attracted to angel groups, they have not converted this interest into direct participation. Many angel groups are now beginning to recognize the more basic systemic need for educational programs and research to move the latent angel to the active investor, in addition to quality deal flow,” he said.

A new US Small Business Administration Office of Advocacy-sponsored research report assesses the role of angel investors in funding new entrepreneurial ventures. The report is critical of existing analyses of the scope and scale of angel investing in the US. It finds that the angel capital market is smaller than previously estimated, and that most angel-backed firms are not potential high-growth start-ups. Instead, they share similarities with many other established small firms. For example, angel backed firms had been operating for an average of more than 13 years, and that the largest portions of angel investing occurred in the retail (25% of all investments) and personal service (12.5% of all investments) sectors. While the report includes a number of cautions about the size of angel capital markets, it does acknowledge that angel investing remains a significant activity. Between 2001 and 2003, angel investors backed anywhere from 50,000 to 57,000 companies for a total annual investment of $23 billion.Download the September 2008 US Small Business Administration Office of Advocacy-sponsored working paper, “The Importance of Angel Investing in Financing the Growth of Entrepreneurial Ventures,” by Scott Shane, at http://www.sba.gov/advo/research/rs331tot.pdf

While VCs make much larger investments, angel groups give from around $25,000 to $50,000—and tend to want real involvement with the company

By Tom Taulli, Business Week 

Is your company looking for an equity investment under a few million dollars? You might first think of approaching venture capitalists, but I suggest you try angel groups. For the most part, VCs manage large pools of money—sometimes in excess of $1 billion—and do not have the time to deal with many investments. They prefer to make large investments that range from $5 million to $10 million per transaction.

Angels, on the other hand, are wealthy individuals who invest funds in early-stage companies (BusinessWeek, 4/17/08). The amounts often range from $25,000 to $50,000 per deal. Over the past decade, angel investors have formed angel groups that meet either monthly or quarterly—and pool together their deal flow, resources, and capital.

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From Angel Investment Journal - Angel Investing and Entrepreneur Blog 

Gigaom has a post discussing Lookery’s recent round of funding that was raised entirely from Angel’s. Lookery’s CEO, Scott Rafer (former CEO of MyBlogLog), talked about 5 reasons why getting angel investing is better than VC money:

1) Focus. “Angels can concentrate on the individual strategy of your company, rather than the larger portfolio management strategy a VC must bear in mind.”

2) Deal Terms. Angels generally don’t demand as much in liquidation preferences and other deal terms.

3) Future Funding Rounds. You will generally have more control over future negotiations in getting additional funding.

4) Transactional Control. “You won’t have to seek permission from investors who aren’t on your board or worry about what a VC needs to have happen vis á vis managing his limited partners… Angels have no LPs, so their agendas tend to be far more transparent.”

5) Exit. “Angels aren’t compensated in ratios. Angels get 100 percent of the profit they generate with their investment in your company. A VC only gets a fraction of the ‘carry’ generated on your deal. This is one reason a VC might be motivated to urge you to sell bigger.”

Rob Conway, a well known “super angel”, follows up with 3 more reasons why Angel money is more attractive than VC money.

1) The due diligence process will be less rigorous since angels are acting in their own interest and not investing OPM (other people’s money).

2) Angels are generally more vertical specialists than compared to VC’s.

3) “Angels have one-degree of separation from people in their professional network — not two, or three, or four. But because angels tend to be operational types, the business relationships they bring to the table are personal, not transactional. ”

Finally, Allan Leinwand, follows up with a counterpoint on why Entrepreneurs should prefer VC money over angel money. He claims VC’s will be better able to stick with the startup over the long term, if things don’t work out quickly. However, Tom Perkins, of Kleiner Perkins Caufield & Byers, says they put companies in the “ICU” if they are not performing well. They either see if they can get out of it or they shut off everything right away.

From GigaOM » FoundRead 

Lately we’ve been discussing the many reasons why taking smaller, angel-sized investments instead of larger venture capital stakes often makes more sense for startups in a wobbly, exit-bereft market like the current one.

Today, Ron Conway, the well-known founder of the Silicon Valley-based Angel Investors LP fund, now associated with Baseline Ventures, weighs in with his own assessment of the benefits of the “all angel” investment path.

A former semiconductor executive who went on to co-found Altos Computer Systems, Anchor Intelligence and, most recently, SNOCAP, Conway took up angel investing in 1998. He’s seen his share of both hits and duds, but among the investments that earned Conway his “super angel” status are Google(s GOOG), Digg, PayPal(s EBAY), and Ask Jeeves (now Ask.com(s IACI)). He is also an advisor to Facebook. In other words, Conway knows what he’s talking about. So, if you’re seeking funding, you’d do well to consider his advice, dished out below the fold.

1) Angels are not fiduciaries. Angel investments are always going to be smaller, but the due diligence process is also going to be less rigorous, because angels are not acting as a fiduciary to another investors. VCs are duty-bound to put your company through a thorough review process because they are investing other people’s money. This is why I enjoy being an angel and not being a fiduciary: I can make my own decisions based on my intuitive process, my own opinion and gut feel about a company, because I am investing on my own account. This means I can make decisions faster, which is also good for the entrepreneurs.

2) Angels are often vertical specialists. Some VCs tend to be generalists when it comes to an industry (e.g., retail), or technology (e.g., mobile). Because angels often come from a successful industry background, you can do a better job of hand-picking a partner who will add expertise and value relevant to your precise market area — not just money. If your company operates in social networking, you might be enticed to go to a bulge-bracket, or marquee VC firm—and they would consider you because the space is so hot. But chances are that even some of the biggest VC firms won’t have someone with deep domain expertise in social networking, it’s just too new. But you could go see Owen Van Natta, who just left Facebook. You’re in cloud computing? Go get Diane Greene, the former CEO of VMWare. They’d both make great angels.

3) Angels have one-degree of separation from people in their professional network — not two, or three, or four. But because angels tend to be operational types, the business relationships they bring to the table are personal, not transactional. Angels also tend to invest in concentrated themes, consistent with their operating experience. So when it comes to accelerating your business development — through things like recruiting, partnerships, cultivating sales, etc. — angels tend to connect the dots. The combination of first-hand relationships and focus means an angel can might get your company to an “exit” sooner.

From The Angelsoft blog

To follow up on Jason’s post about unfundable deals, I wanted to lay out some guidelines for what makes a fundable deal:

Entrepreneur/Team

Angels invest time and money in seed/startup and early stage deals. They seek investments in ventures lead by inspired, experienced entrepreneurs who genuinely seek counsel of experienced investor/advisors. While the management team need not be complete, the entrepreneur should have a good understanding of the team necessary to do the job and probably has a team member or two waiting in the wings.

Scalability

Funding startup entrepreneurs is very high risk investing. Only 10 to 15% of startup ventures provide all the return on investment for angels. Consequently, angels only look at companies that can scale revenues quickly to at least $30 million in revenues in five years or less. Angels personally invest $25,000 to $50,000 in seed/startup rounds ranging in size from $250,000 to $1 million. (Less than 5% are larger than $1 million.)

Business plan/Strategy

Angels seek entrepreneurs who have a complete business plan, not just a product or technology description. Company should have a well-articulated strategy to capture and defend a significant market share, including the ability to construct significant barriers to entry. Complete proforma financials for three to five years are a must.

Location

Most, but not all, angels seek investments within an hour’s drive of the angel’s residence, so they can conveniently visit the entrepreneur, as needed. Helping local companies can also be part of the angel’s give-back strategy for his or her community.

Bill Payne is an angel investor on the west coast, and has a website here at BillPayne.com

by Anne Field,  Portfolio.com

Tight credit has hobbled some entrepreneurs, but angel investors are still willing to step in where bankers fear to tread.  

Collapsing banks and constricting credit markets have compelled many newly risk-averse investors to scurry for the sidelines. But not Eric Rosenfeld and his merry band of 50 angel investors in Portland, Oregon.

His Oregon Angel Fund recently raised about $2 million—more than twice as much as it did last year—and is eagerly scouting for promising young tech companies to invest in. “We see more checks being written, more companies being financed,” said Rosenfeld, who is also a managing partner of Capybara Ventures, a Portland venture capital fund.

Rosenfeld and his fellow angels—private high net-worth individuals who fund start-ups and small companies—are hardly alone. Despite limits on their ability to cash out their investments—a downturn in initial stock sales, tighter credit at banks, and a decline in mergers and acquisitions—many angels say they are still willing to invest.

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