19 Jan They’re Back: Technology Industry Spotting Angels Once Again
CHICAGO – They’re back.
In its forecast of the top 10 entrepreneurial trends for 2004, Red Herring magazine recently proclaimed: “Angel investors are back – funding the small start-ups that will be tomorrow’s giants.” Angels, of course, are an important source of venture financing.
The Center for Venture Research (CVR) at the University of New Hampshire estimates in 2002 that 200,000 angels invested almost $16 billion in 36,000 ventures. This investment level was down 50 percent from 2001 because, like most other investors, angels got burned in the tech and Internet meltdowns so the pool of potential angels is much larger.
So, if angels are back, entrepreneurs are excited. How important, though, are angels to entrepreneurs in the Midwest: the perennial backwash of entrepreneurial financing?
It’s tough to say. Aside from the CVR data, there is very little information on angel activity especially at local, state and regional levels. By definition, angels are individual investors investing their own funds in private companies. Public information, therefore, is very limited.
One popular proxy for angel activity is the existence of angel investor groups, which have much more public exposure than individual angels and have become very popular in the last several years. Their popularity stems from the perceived advantages for angels to be part of a group rather than going it alone: sharing of diverse expertise, combining funds and sharing risk and pre-screening opportunities.
In addition, angel groups are considered a good proxy for local angel activity because most angels have a strong preference for investing in their own “backyards”. Even more than for venture capitalists, it’s easier for angels to keep tabs on a local investment compared to one that’s a plane ride away.
Interestingly, a recent effort to extend the investment reach of angels beyond their own backyards by means of “joint investment” has been initiated by the Angel Capital Alliance, which is sponsored by the Kauffman Foundation of Kansas City, Mo. Still, it’s far too early to see any results.
So, what’s the status of angel groups in the six-state Midwest region? Well, a Google search turns up an impressive 26 organizations that characterize themselves as angel investor groups or as channels to angels. This ranges from an incredible 11 groups in Wisconsin to a single group in Indiana.
In comparison, a California search turns up 12 angel groups, so it appears that the Midwest has reasonably significant angel activity. Appearances, of course, don’t have fat wallets.
Based strictly on their Web presence, the quality of these groups varies widely and ranges from well-established groups with helpful Web sites to groups with dead-linked URLs. Few of the sites have current information on the investments their members have made, which makes it difficult to judge their significance.
Equally unsettling, it’s far too easy to claim to be an angel because there’s no certification procedure. It’s also easy to claim to be an angel group because there are no standards of performance and no public-reporting requirements.
In contrast to venture capitalists, angel investing is entirely optional and they don’t have limited partners expecting a certain level of deal activity. Moreover, the entrepreneurial media (at least in the Midwest) don’t seem to provide much help in assessing the activity of angel groups.
So, entrepreneurs are pretty much on their own to gauge the value of pursuing any particular angel group. But remember: even if they are members of a group, angels invest as individuals. Ultimately, an entrepreneur is trying to locate individuals who see a particular venture as a great opportunity. Those folks may or may not be part of the angel groups.
Most important, there is another way to find those angels (especially if you understand what you want). Several years ago, the Entrepreneurship Center at MIT helpfully grouped angels into four categories depending on what they bring to the company they are investing in:
1) Guardian angels, who have both entrepreneurial and industry expertise.
2) Entrepreneur angels, who have entrepreneurial expertise but in a different industry.
3) Operational angels, who have industry expertise but have not been entrepreneurs.
4) Financial angels, who bring nothing but their cash.
Entrepreneurs should look first to guardian angels because they have an advantage in understanding and managing two of the most important risks of venture investing. Other factors being equal, they are more likely to be successful investors, more likely to be long-term angels and, if they are from your industry, more likely to understand your vision and consider investing in your backyard.
The best way to find these angels is to network within your industry. This has several potential advantages: you may already have a well-established network, one angel is more likely to know others in the same industry and later investors like seeing early investors who know something about the target industry.
Finally, soliciting angels from your own industry may save you all a lot of time and money because, if all you get from these angels are rejections, then maybe you need to rethink your plans. After all, you don’t want to be known as one of those fools who rush in where angels fear to tread.
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Darrell Dvorak is a partner with Tatum Partners. Formerly, he worked in senior roles at Skokie, Ill.-based Searle (now owned by Pfizer) and Ameritech (now SBC). Dvorak can be reached at ddvorak@tatumcfo.com. This article has been syndicated on the Wisconsin Technology Network courtesy of ePrairie, a user-driven business and technology news community distributed via the Web, the wireless Web and free daily e-mail newsletters.
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