A few weeks ago, 40 successful business people sat around a table in a university lecture hall asking questions of four aspiring entrepreneurs. The aspirants were giving 20-minute presentations about their start-up companies to the Los Angeles chapter of Tech Coast Angels, a group that invests in new businesses.
In a hotel ballroom in Anaheim, Calif., a dozen eager entrepreneurs recently took part in an even more intense screening called the Fast Pitch Competition of the Orange County chapter of Tech Coast Angels. In Fast Pitch, competitors have 60 seconds to give an account of their business and their plans in hopes of impressing venture capital funds, which typically put up bigger money than the Angels do.
Early in a company’s financial life, after friends and family have been tapped for initial stakes, comes angel capital—investments from individuals, often successful entrepreneurs themselves, who back newcomers starting out as they once did. Their numbers and importance are growing. Last year, Angels, along with some venture capital backers of start-ups, invested $4.2 billion in more than 1,000 early-stage companies, according to Luis Villalobos, founder of Tech Coast Angels in Orange County. It is one of some 200 angel capital groups in the United States.
The movement was inspired by Band of Angels, the first formal angel group of a dozen Silicon Valley entrepreneurs gathered by Hans Severiens, a nuclear physicist and investor, to listen to aspiring entrepreneurs and possibly take a chance on their dreams. The Band, which first met in 1994, has backed now well-known companies like Cisco Systems. It now has more than 100 members and still meets once a month to examine prospects.
It’s a sign of how attitudes toward risk have changed in little more than a decade that seasoned executives and financial managers now readily join groups to put $200,000 to $1 million behind people with ideas and a sense of adventure. Top corporate executives with outsize pay and perks may have been heroes of American business in bygone decades, but these days the entrepreneur is king or queen and praised for creating jobs and innovation in the American economy.
It helps that returns on angel investing have been quite attractive. “Angel investors typically earn 5 to 10 times their money in four to eight years,” says Villalobos, citing a Pricewaterhouse Coopers Money Tree study of venture capital. But the spread of angel investing attests also to the economy’s encouragement of innovation, whether in high technology or everyday products. For example, Richard Morganstern, a patent lawyer who is president of Los Angeles Tech Coast Angels, recalled the group’s introduction to Language Weaver, a company that created a software product for automatic translation at the University of Southern California, with the aid of grants from the Defense Department. The Defense Advanced Research Projects Agency asked the group in 2000 to help Language Weaver become a commercial enterprise, Morganstern says.
“So we mentored the inventors and brought in executive talent. And then in 2002, after 9/11 increased demand for Middle Eastern languages, we invested along with other venture groups,” he says. Today, Language Weaver, much in use in Iraq, is adding corporate customers interested in translations to Chinese and 16 other languages.
Angel capital groups, whose members invest their own money, pride themselves on rolling up their sleeves to help fledgling concerns. With each group member obliged to review four to eight companies a month and invest $50,000 a year in some of them, Angels say they do the due diligence on small companies that traditional venture capital funds no longer take time for. One Angel network, the Keiretsu Forum, founded seven years ago in Lafayette, Calif., has grown to 500 members in Colorado, Idaho and Washington, as well as California. Keiretsu’s size allows it to make larger investments, says Randy Williams, who started the group. (The name derives from the Japanese word for companies linked by cross-ownership of shares.)
The next stage for angel capital? Not surprisingly, it’s globalization. There appears to be a receptive audience for entrepreneurship in China. Kevin Scanlon, a member of the Los Angeles Tech Coast Angels, returned recently from China, where government officials and businesspeople “were eager to learn how angel capital works and how we put our groups together,” Scanlon says. “The angel capital idea could be our next great export.”
By James Flanigan