Angels are all around you. They mill about in places befitting angels: placid desert spas in Santa Fe and Boston’s premier hotels. Together they drink and dine on cabernet sauvignon, poached salmon, and crme brle (or coffee, eggs, and fresh fruit in the a.m. hours). They speak not of godly deeds but of their next investment venture.
In the last three years, nearly 50 angel groups have formed nationwide as private, seed-round investing has gained in popularity, drawn by the potential equity returns of funding new technology companies. Currently, more than a million accredited angels have a total of $20 billion invested in more than 30,000 technology startups, according to estimates by Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.
Many of these angels, who started as lone investors conducting due diligence on their own, are now realizing it makes better sense–and for smarter investments–to team up. Because of this, the pioneering Band of Angels, located in Silicon Valley’s Palo Alto, has become the template for other groups–from Seattle to Boca Raton, and Los Angeles to Burlington, Vermont. The Club House at Las Campanas, the residential community in which Gathering of Angels founder Tarby Bryant lives and holds his meetings, is styled in traditional Southwestern decor. Outside of downtown, alone under the stars of the Santa Fe sky, it is not the most convenient location, but it has ambience. After half an hour of mingling, Bryant calls the 40 or so guests–some there for the first time–into the dining room. Voyager Communications, a local streaming audio company founded by two ex-Apple product managers, is busy setting up its broadcasting equipment to transmit the meeting live on the Internet at gatheringofangels.com. It is also one of the presenting companies. What better way, reason the two founders, John Chan and Bart Wilson, for potential investors to see their product at work?
As it happens, Voyager’s actual call for cash, a pitch given by Chan and Wilson, is a little rough around the edges. Still, a number of angels seem interested. Bryant arranges for the founders to meet with Michael Grantham–a young, independently wealthy investor and former chairman of the state’s venture capital subcommittee–at Grantham’s small downtown office the following morning. As this magazine goes to press, a term sheet has yet to be signed (Grantham wants time to conduct additional due diligence; meanwhile, Voyager continues to court other investors), but Wilson is confident that Grantham is his local ace in the hole. Chalk one up for Gathering of Angels.
The Texas Angel Investors meet at the tony Barton Creek Country Club in the rolling green hills 15 miles outside Austin’s city center. The Texas Angels run things a bit differently than Bryant’s group. Investors network while they eat buffet-style, then make their way into a bright, auditorium-like hall nearby to hear company presentations. On this particular evening, the company that grabs the most attention is not a dot-com but a fledgling low-cost network monitoring company tentatively called NetBotz.
CEO Gerry Cullen makes a strong pitch, and the technology has impressed Marc Seriff, who sits discreetly in the audience. Seriff, one of the original founders of AOL, now lives in Austin. He plays a crucial role in the angel group’s steering committee, helping review company business plans and presentations a few days before they are thrown before the entire group. (The steering committee bluntly told Cullen that his wrap-up was weak and that he should redo the end of his presentation. Cullen has clearly followed that advice.) Seriff and Bobby Inman, former White House and State Department adviser and former deputy director of the CIA, contribute their know-how to help the group’s leaders weed through the 25 or so business plans it receives each month. Their insight and their celebrity are invaluable (see “Exalt in Your Diversity,” page 150).
After the presentations, the entrepreneurs situate themselves around some make-shift tables and wait to be approached by potential investors. There are no formal introductions, as in Santa Fe; if a deal is to be made, it will happen on its own. As the night wears on, two of the presenting companies pack up, empty-handed. Even Seriff leaves the building, never having cracked open his checkbook. But a local Lucent executive and a former Cisco employee approach Cullen and invite him to the bar out front. All three close down the place at 2 a.m., and Cullen is confident a term sheet will follow. A week later, NetBotz is $250,000 richer.
Most angel groups operate informally like Santa Fe’s. Investors approach an entrepreneur and agree to an investment, doing the deal on their own, individual terms. But some groups, like the Dinner Club, which meets in a northern Virginia suburb of Washington, D.C., invest as a group. After a presentation, Dinner Club angels vote, deciding on whether or not to invest in the startup.
To gain a piece of the collective fund, each angel in the group agrees to contribute at least $80,000 over three years. Dinner Club members claim they do so simply to avoid the headaches of having too many term sheets, tax forms, and individual shareholders.
Investing as a group is also a good way to maximize angel equity in startups, thus warding off “vulture” capitalists, who are increasingly sneaking into earlier rounds. Local Austin VC firm CenterPoint even planted a scout at the Texas Angels meeting. The scout called NetBotz’s Cullen and told him that CenterPoint was interested in being its lead VC investor…and that Cullen should not take any angel money. “I had a shoe box full of checks and he told me to give them all back,” says Cullen. ALL ANGEL INVESTING IS LOCAL Angels like to invest in companies close to home. Despite the potential for companies to go on a road show, contacting angel groups nationwide, such a trend hasn’t really materialized. “There are many pools of money, but what you really want is a local cheering section,” says Jeff Weiss, cofounder of Picture Network International and an investor at northern Virginia’s Dinner Club. Most angels often will claim they provide guidance and leadership as well as money to startups. Boston’s CommonAngels, for instance, consists primarily of former software entrepreneurs known in the angel community for giving a refreshing “been there, done that” perspective.
Unlike the Gathering of Angels, which allows anyone willing to pony up $50 to attend a meeting, CommonAngels of Boston limits its membership. David Solomont, founding trustee and former chairperson of the Massachusetts Software and Internet Council, and CommonAngels’ leader, thinks the large size of some angel groups is too unwieldy. Because of his own group’s increasing popularity–largely due to a front-page article in the Boston Globe–Solomont has proposed that rather than expand the group, they should split it into two separate entities. But the suggestion has met with resistance. “I’d hate to miss out on deals that were being presented to the alternative group,” says one CommonAngel.
Angel groups are always happy to take on more savvy investors. Says John Dunning, an investor at BayAngels.com in Sausalito, California: “We act as filters for one another and for the VCs who will eventually see these companies in later rounds.” Such filtering is one of the benefits of participating in a collective fund. Yet critics contend that such a group is less likely to go out on a limb. “I can get them all together, but will they pull the trigger?” says John May, manager of northern Virginia’s Dinner Club. His club, however, has invested $2.2 million in four companies over the past six months, a rate just as impressive as any other group’s.
Many angels argue that a group’s main goal should not be the volume of deals but how wisely the group invests. Figuring out which angel organizations are doing well on this score isn’t easy, however. Since many of the funded companies have only private valuations, investment success is difficult to compare and evaluate.