Angels Who Hope To Make A Killing

These investment groups focus on early-stage startups

Some 75 well-dressed professional women in their 30s to 60s, seated around tables at a Washington, D.C., restaurant, have made it through their salads and salmon and are now listening with keen interest as two young entrepreneurs make their pitch. Chris Gergen and Burck Smith hope to persuade the women to cough up a total of $500,000 for their fledgling company, Smarthinking, which offers online tutoring and research assistance to high school and college students.

The group that Gergen and Smith are addressing isn't just any professional women's organization. It's called, an early-stage private-equity investment club. It is just one of many similar "angel" groups that are springing up in high-tech areas around the country. Angels are private individuals who invest their own money in potentially hot new companies before they go public. As a rule, they provide financing at an earlier--and riskier--stage of a company's development than venture capitalists, who invest huge pools of institutional money at $5 million to $50 million a clip. Most angels operate alone or with small networks of friends. They usually put $100,000 to $1 million into a deal, and their money is tied up for at least three to five years. By forming a club, neophyte angels can pool their expertise, combine investments as small as $10,000, and spread their risk.

HUGE RISKS. Spurred by the proliferation of high-tech startups and tales of huge killings, angel clubs have emerged in recent years as a way for less sophisticated investors to get into the game. The risks are enormous: The vast majority of startups limp along or fail outright. But a single big winner can more than compensate. Tri-State Investment Group in North Carolina's Research Triangle, for example, put $500,000 three years ago into Accipiter, a maker of online marketing software. The group walked away with more than 60 times its investment 18 months later when the company was acquired by CMGI.

Such mammoth gains may be harder to achieve in the future. Nasdaq's big decline and the recent cooling of the market for initial public offerings have made some angels more cautious. Although the flow of deals at the clubs hasn't slowed noticeably yet, individual angels are taking longer to research and close transactions, says John May, who runs New Vantage Partners in Vienna, Va., and manages four angel clubs in the Washington area.

Nevertheless, the angel business is hardly ready to fold up its tent. Jeffrey Sohl, director of the University of New Hampshire's Center for Venture Research, keeps tabs on the private-equity market and guesses that some 50 angel clubs have been formed so far. All told, Sohl says, there are 2 million angels in the U.S., of which 400,000 are active in a given year. Together, they funnel $30 billion to $40 billion into more than 50,000 startups each year.

Angel clubs come in two distinct forms: loose networks and organized investment groups. Band of Angels in Silicon Valley and Seraph in Redmond, Wash., are examples of the former. Their members hear pitches at monthly meetings, then decide on their own whether to invest, performing their own research, legal work, and negotiations. "Everyone can pursue his or her own goals. I may have four dot-com investments and not want a fifth," says Paula Chauncey, managing partner of Redwood Group, a Boston consulting firm for young businesses and one of the 10 members of an angel club called Renaissance Ventures.

COMMITTED. Other clubs, such as Tri-State or, invest as a unit through a group treasury. "We set it up as a formal legal structure, to learn and invest together," says Rob Stein, a manager for, each of whose 85 members has agreed to commit $75,000 over three years. These clubs also offer members a chance to invest individually in "side-by-side" arrangements. The club might agree to put $500,000 into a company, for example, then let individuals pony up an additional $300,000 on their own.

If you want to form an angel club, consider these tips from the


-- Location is crucial. The closer you are to a high-tech mecca, such as Silicon Valley, Boston, Washington, D.C., or North Carolina's Research Triangle, the more interesting deals you'll see. Deal flow is perhaps the most important factor in success. If a club wants to make 8 to 10 deals a year, says May, it needs to screen as many as 300 to find the best ones. Angels often become advisers and board members at the companies they invest in. They help refine the business plan, provide contacts, and advise on strategy. So it's smart to choose companies close to home.

Proximity also provides the ability to screen deals through local connections. "We invest only in Silicon Valley, and then only in people we know and have access to," says Hans Severiens, manager and founder of Band of Angels, which was formed in 1995 and is the oldest angel group. Severiens' group, which has so far invested $60.5 million in 109 companies, consists of 140 cashed-out high-tech executives, mostly former CEOs who enjoy mentoring.

If you don't live in an emerging-growth area with lots of innovation, it will be harder, but not impossible, to form a group. The best bet is to get acquainted with banks, brokers, university entrepreneurship programs, and local technology councils to steer deals your way. Another way to establish credibility is to recruit a well-known local corporate chieftain as a member to give the group networking leverage.

-- Screen members carefully. To join an angel club, a person must qualify as an "accredited" investor under federal securities law--which means having a minimum net worth of $1 million or an annual income of $200,000, or $300,000 jointly. Candidates must sign forms vouching that they are "accredited," but many groups add criteria of their own. New Seraph members, for example, must pass muster before a screening committee. "We all know each other," says Seraph member Lori King, CEO of "If Bill Gates's wife, Melinda, wanted to join, we would say yes, but if a stranger asked, we'd probably say no. We're exposing entrepreneurs to this group, and we can't afford to have any frauds."

-- If members' money is pooled, hire a professional manager who is well-regarded in the business community. You'll want "someone with big-network or private-equity experience," says May. Managing Partner Kyp Sirinakis gathers and screens business plans, coaches presenters before they make their pitches, leads the due-diligence process to make sure that it's thorough, and coordinates communications among members. The manager's salary is often minimal; the real compensation comes from getting a piece, typically 15%, of profits on each deal the club makes. A manager with an interest in the portfolio is a must.

How did it go for entrepreneurs Gergen and Smith? The members of are still researching Smarthinking and have asked for a more specific breakdown of their costs. They expect to decide whether to invest sometime in June. Then will come the hardest part of all: the big wait for the deal to pay off.

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