When it comes to investing, Donald Marvin is no greenhorn. For the past decade, Marvin, the founder of Cairn Associates, a financial-advisory firm in Titusville, N.J., has been plunking down $25,000 to $250,000 in more than two dozen privately held health-care and biotech companies. Marvin has had his share of disappointments, but some of his investments have earned back 10 times his initial outlay within five years.
Still, when Marvin decided last year to put more money into startups, he got help. Marvin joined the Mid-Atlantic Angel Group Fund in Philadelphia. The fund's 70 investors pool their money -- most contribute about $75,000 -- to build a portfolio of startups. "I've been a lone-wolf investor for 10 years," Marvin says. In the fund, he says, "You get more eyes on the deal and decrease the risk."
More angel investors are hoping to find safety in numbers. In the 1990s, the heyday of angel investing, most flew solo. Angel investment slowed down considerably early in this decad, with the dot-com bust, September 11, and a slowing economy all playing a role. Now, angels are becoming more active, thanks in part to the increased power and security provided by formal angel groups. The number of angel organizations has soared, from 10 in 1996 to more than 200, according to the Angel Capital Assn. in Kansas City, Mo.
There are many benefits to joining a group rather than soliciting deals on your own. You can invest without putting your name in lights. You'll be exposed to hundreds of deals you might not otherwise come across, and you'll have the group's collective brainpower to evaluate them. Mingling your funds with those of other investors means you can make a bigger financial impact on a young company.
There are trade-offs, too. If you join an angel fund, you're subject to the whim of the majority. If the other members are smitten by an entrepreneur who leaves you cold, you will probably still end up with a stake in the company. Alternatively, you might want to stay invested in a company when other angels are ready to sell.
Any form of angel investment requires a good chunk of money, and the risk isn't for the faint of heart. Investing in startups, most of which have management and product but little else, can bring returns of 25% to 30% a year to the lucky. But the vast majority of individual investments will fail.
Angel investing's greatest lure is the chance to get in on the ground floor and win big. But no agency tracks the returns of angel organizations. Most groups are so new that they have yet to sell a stake and post a return. And it's quite possible you could lose whatever you plow into young companies. "We invest what we can turn and walk away from -- call it mad money," says Guy Iannuzzi, an angel investor and president of Mentus, a 24-employee public-relations firm in San Diego.
Still interested? Before you jump in, take a look at your own balance sheet. At minimum, you should meet the Security & Exchange Commission's definition of an accredited investor, with a net worth of at least $1 million or salary of $200,000 for the past two years. Most angels are much wealthier, with a net worth of $3 million to $20 million, says William H. Payne, an active angel who serves as entrepreneur in residence at the Ewing Marion Kauffman Foundation in Kansas City.
If you have the stomach and the cash, look for a fund or network that meshes with your goals -- and your personality. After all, angel groups are really no more than high-end investment clubs. Sipping cocktails and swapping stories is part of the appeal. "Our motto is do some good, make some money, and have some fun," says Robert E. Goff, founder and president of the Sierra Angels, a 50-member network in Incline Village, Nev.
The typical angel is about 50 years old with an advanced degree and a background in business, says Jeffrey E. Sohl, director of the Center for Venture Research at the University of New Hampshire. Angel investing gives entrepreneurs a way to juice their portfolios while helping others build companies. Some 11% of entrepreneurs with businesses more than 3 1/2 years old invest in other companies, compared with just 3.7% of the general public. Entrepreneurs with younger companies are even more likely to invest, according to research from William D. Bygrave, a professor of entrepreneurship at Babson College.
"Angels do want to make money, no doubt about it," says Steven B. Mercil, president of the Minnesota Investment Network, which oversees several angel funds. "But they want to help other entrepreneurs and have a positive impact on a community. They want to drive past a couple of the businesses they've worked with and see them running."
Angels' collective experience is invaluable when screening investments. "When an entrepreneur presents to us, there is someone in the room who knows the business cold," says Ron Randolph-Wall, a member of the Sierra Angels and chairman of Incline Village-based Quantum Loyalty Systems, a 47-employee company that runs customer-loyalty programs.
Angel groups also provide a crew to screen and approve investments. Due diligence alone usually takes three to four months. Besides scrutinizing the product and management team, angels analyze the target market and the company's ability to grow efficiently, typically weeding out those that can't make it to at least $30 million in revenue. Because many outfits will need a second or third round of cash, angels consider how much money the company might need in the future and whether it will later appeal to venture capitalists. "In the past, when you had an investment opportunity, you'd sort of make a few phone calls and go with it," says Goff. "Now there's much more emphasis on due diligence, the management team, and identifying and measuring major milestones."
And many angels bring their Rolodexes to the group. "I have a whole network of experts that I run technology proposals past," says Marsha Wulff, founder of consultants WulffCapital in Dallas. "I rely heavily on my patent attorney, who has a PhD in molecular biology."
Then there's the tricky work of putting a value on the company and structuring the deal. In general, angels hope to receive a 25% to 30% stake for a $500,000 investment, says Payne. A term sheet specifies the entrepreneur's salary and how and when the angels will be paid back. Angels hope to sell within five years, but it's possible the money will be tied up for much longer. In most cases, a representative of the angel group sits on the company's board of directors.
Choosing between angel funds and angel networks depends on how involved you want to be. Each group has its own entry requirements, but in most cases you'll be required to disclose your net worth, interview with the group, and provide references. Some groups require potential members to put their expectations into writing.
With an angel fund, investors pool their money and invest collectively. They usually have managers and screening committees that evaluate businesses and present them to the group. Votes are taken at monthly meetings, but because the group invests by majority, you can miss a presentation and still have your money in the deal. Many angels also elect to invest more of their own cash in certain of the fund's companies. John May, co-founder of the Washington Dinner Club in Washington, gets about 500 business plans a year. The fund's two-person staff screens pitches and invites about 30 entrepreneurs to present to the group. Members whittle those down to about a dozen and eventually invest in four or five.
Joining a network generally means a bigger time commitment. Most expect members to attend meetings. That's because while members listen to pitches together, individuals decide for themselves whether or not to participate in a deal. Miss a meeting and you may miss a good investment. Not all networks have managers that handle administration, and those that do may charge an entry fee of up to $5,000 a year. Most groups have a screening committee that reviews business plans, as well as separate committees, broken down by sector, to do due diligence.
In the end, deciding which group to join may come down to geography. Most groups are local, and the majority of angel deals are made within 50 miles of the angel's home, says Payne. Consider your interests, too. Some angel groups focus on a single industry, such as health care; others are generalists. Most important, pick a field that excites you. "My passion for health-care innovations is where I can add the most value," says Wulff. If you join an angel group, you won't have to limit your passion to just one company.
By Karen Cheney