Miracle Money

Angel investors eager to fund promising businesses are gathering in groups across the country. But consider yourself truly blessed if you're able to connect with these elusive alliances. By Anne Field.

Angels. They may be the answer to your prayers, especially if you own a growing business. These wealthy private investors step in at the most delicate of times - when entrepreneurs have outgrown their initial financing from family and friends but lack the muscle to attract venture capital. And there's a big supply of backers. In 1996, some 250,000 angels invested in 30,000 companies to the tune of $20 billion, according to the Center for Venture Research in Durham, New Hampshire.

Sounds miraculous. But despite their abundance, good angels - or even bad ones - are hard to find. And since they tend to pledge just $50,000 to $150,000 apiece, you may have to track down a whole lot of them before you've accumulated the amount you need.

Thank heavens, then, for angel groups. Lately, an increasing number of investors have formed their own alliances. They hold regular meetings to swap tips about promising start-ups and hear pitches from companies seeking cash. Gatherings may include as many as 200 investors or as few as five. Some are highly structured; others, informal. But they all provide a systematic way for investors and entrepreneurs to hook up.

"If it weren't for that group, I don't know how I would have finally funded my company," says Mary Schenck Ross, who raised $300,000 from a local angel get-together for her one-and-a-half-year-old Adaptive Learning Technology, an educational software design firm in Santa Fe, New Mexico.

Group Dynamics

Who joins these alliances? Mostly, successful entrepreneurs looking to put some of their self-made fortunes in high-growth investments with the potential for returns of 40 percent of 50 percent. Because angels invest less than $1 million in risky enterprises and don't expect returns for as long as seven years, they differ from venture capitalists. The latter tend to invest at least $3 million of other people's money in more established businesses, hoping for a payback in around three years.

Angels are motivated by more than making money: They want the excitement of launching a business without the sleepless nights. "It's the difference between being a parent and a grandparent," says Kathleen Lane, who has invested in seven start-ups with her husband, Bill, since joining a Silicon Valley group called Band of Angels two years ago. "You get the fun and not the pain."

Like many angels, Lane says she and her husband participate actively in the companies they select, from faxing appropriate articles to the CEO to sitting on a firm's advisory board. "My investments are always in the back of my mind," she says.

For that reason, the groups tend to be regional. "They want to be close to the company so they can feel it, touch it," says Jeffrey Sohl, director of the Center for Venture Research. A Gathering of Angels, a 38-member group in Santa Fe, Focuses on New Mexico, while Walnut Venture Associates in Boston, with 15 members, tends to consider businesses in the New England area. Perhaps the most notable exception is a seven-year-old group called Investor's Circle, whose 170 members invest in companies nation-wide. Because this San Francisco-based organization looks for socially responsible investments, it puts money in women and minority-owned businesses.

First Contact

While angel groups may want to reach out and touch someone, they don't advertise in the Yellow Pages. Even if you find one, it probably won't release the names of its members. Whether or not they're part of a group, angels are highly secretive, ever wary of becoming inundated with request for money. Tracking down groups is often a matter of word of mouth and heavy networking through accountants, business associates, and friends.

In some parts of the country, well-connected law firms are a particularly good place to start. Peter Goettner, founder of DigitalThink, a Web-based training company in San Francisco, hired an attorney with connections to deep pockets in Silicon Valley. Through the lawyer's efforts, Goettner was able to contact Band of Angels, which came up with $1.2 million for his business.

Band of Angels may be the model investor alliance. It was started in 1995 by Hans Severiens, a veteran semiconductor industry analyst who found himself barraged by business plans from entrepreneurs. Investigating just one could take weeks, especially when it came from an unfamiliar industry. So Severiens got an idea: Gather a group of like-minded investors with money to burn who could recommend investments to one another and pool their expertise and finances. And they'd have a good time meeting once a month for a nice dinner, where they'd trade gossip and listen to presentations from companies looking for funding. Severiens and an old friend, Jack Carsten, a former senior vice president of Intel, drew up a list of 20 names and sent out invitations to the group's first meeting at a posh French restaurant in Palo Alto. Band of Angels now has over 100 members, and about 65 typically show up for monthly four-course dinners at the Los Altos Golf and Country Club. Total investment: $29 million for about 64 deals.

Making the Cut

Band of Angels is known for its strict screening process. Entrepreneurs can't talk to the group unless they're sponsored by a member. That means more than just getting a stamp of approval: The member investor must have a stake in the company or be about to take one.

Consider DigitalThink's Goettner. His first move way to arrange an informal breakfast meeting with Severiens, who then passed him on to a few members likely to be interested, including Kathleen and Bill Lane, both of whom had done stints in the software business. Severiens's match-making instincts were on the mark. The Lanes looked over Goettner's business plan, talked to customers, suppliers, and associates, decided the business was worth a $50,000 stake, and gave Goettner the go-ahead to appear before the larger group. And so last June, Goettner made his 10-minute pitch, the last presentation of the evening, to the assembled investors over dessert and espresso.

Not all groups host such gala affairs. Band of Angels' lavish dinners are, after all, appropriate for Silicon Valley's chummy, affluent high-tech community. Other groups simply hold early morning danish-and-coffee meetings in conference rooms. But angels' methods can differ in more substantial ways, especially in how a group chooses companies to review each month. At A Gathering of Angels, the decision is mostly in the hands of founder Tarby Bryant. At Private Investor's Network, in Maryland, a special committee passes executive summaries to the group's 106 members, who respond via e-mail and fax. The committee bases its decisions on members' reactions. Methods of post-presentation follow-up also vary. Band of Angels investors who want to get serious meet the entrepreneur the next week for lunch. Other groups just have a session at the end of each get-together, where more explicit deal-making can occur.

Members aren't the only ones who come through with the goods. Angel groups are all about networking and sharing information. Outsiders who hear about opportunities through members often wind up making key investments. For example, Schenck Ross of Adaptive Learning Technology didn't get money directly from anyone at The Gathering of Angels dinner she attended last year. Instead, one member, the head of the Smith Barney branch office in town, invited her to talk to various colleagues and clients the next week. Two of them eventually invested $25,000 and $150,000 each. Schenck Ross hopes to become an angel herself one day. "That's my ultimate goal," she says, "to be able to nurture other opportunities."

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