From the June 2001 issue of Startups

When it comes to business financing, the past two years have had a Wild West feel to them. There were companies funded by venture capitalists and taken public in a matter of months, firms whose valuations soared heavenward at light speed, and entrepreneurs in their twenties cashing in on ventures they founded in their dorm rooms.

Then reality hit. Venture capitalists slammed on the brakes, and banks snapped their purse strings shut. Now hundreds of young companies and would-be entrepreneurs are left with start-up and expansion hunger pangs and no clear idea how to satisfy them.

While firms that are more established can turn to the $5 trillion in nonventure private equity available from brokers/dealers, private bankers and qualified institutional buyers, start-ups-especially those not located in the traditional investment hotbeds-will likely need to fall back on an old standby: the $30 billion angel investor arena.

The good news is, today's angel investors are much easier to find than their predecessors, because a growing number of them have created formal and informal networks. Even more encouraging is that a number of these groups are popping up in nontraditional regions.

According to Carol Sands, founder of Angels' Forum LLC in Palo Alto, California, these angel funds or networks fall into three basic categories:

1. There are "social clubs," which bring angels together to view a high volume of companies and then allow investors to execute their own investment deals. This format is a little less personal, and it places the onus on entrepreneurs to make presentations that stand out.

2. There are those that are organized and run like funds, where angels put up a certain dollar amount upfront and one individual manages the process and selects companies to present at regular meetings. Sands says these groups typically invest as a single entity but don't do follow-up work with the company; their only interest is the cash-investment relationship.

3. The final format, into which Angels' Forum falls, is a fund that utilizes a venture capital structure and process, but instead of investing other people's money, they invest their own. These groups invest in companies as a single unit, typically require a board seat and provide continuous assistance. For instance, at Beverly Hills, California-based Idealflow Angel Fund LLC, which targets technology companies nationwide, assistance comes in the form of a "virtual incubator."

These are the basic structures of the new networks, but there are also hybrids like Arizona Angels Investor Network Inc. According to Greg Cobb, managing director of the Scottsdale, Arizona, network, entrepreneurs interested in securing funding from his group must find a lead investor, who doesn't have to be a member of the network. That person handles due diligence, negotiates on behalf of interested investors, and is responsible for taking care of the LLC formed to invest in the business.

For more information on nontraditional angel financing, check out "Angel Funds and Networks".

Angel Funds and Networks

Nontraditional sources of angel financing

Structured Funds:

  • Idealflow Angel Fund LLC
    Founded: 2000
    Structure: Fund investing as a single entity
    Investment range: Varies with number of members (each one contributes $1 million per company and can be given permission to invest additional amounts)
    Target companies: Early-stage tech firms
    Geographic preferences: Asia and North America
  • Sierra Angels
    Founded: 1997
    Structure: Members investing collectively but able to opt in or out of any investment
    Investment range: $250,000 to $2 million
    Target companies: Start-up or seed-stage tech firms
    Geographic preferences: Nevada and Northern California

HYBRIDS:

  • Arizona Angels Investor Network Inc.
    Founded: 1999
    Structure: Network of angels who invest individually
    Investment range: $500,000 to $1.5 million
    Target companies: Early-stage firms in any industry
    Geographic preferences: Arizona
  • Gathering of Angels
    Founded: 1996
    Structure: Network of angels who invest individually
    Investment range: $300,000 to $1 million
    Target companies: Predominantly seed-stage tech firms
    Geographic preferences: Atlanta; Hilton Head Island, South Carolina; Houston; Phoenix; Santa Fe, New Mexico
  • New Product Development Consortium
    Founded: 1998
    Structure: 130 CEOs of large multinational corporations
    Investment range: Starts at $500,000
    Target companies: Entities in all industries at the pre-seed stage (no company formed yet)
    Geographic preferences: Global
  • Silicon Pastures
    Founded: 2000
    Structure: Network of angels who invest individually
    Investment range: $300,000 to $850,000
    Target companies: Pre-seed-stage, early-stage and seed-stage companies and high-growth firms in all industries
    Geographic preferences: Midwest (particularly Illinois, Minnesota and Wisconsin)

What's Brewing

  • The Louisiana Business and Technology Center at Louisiana State University has created a venture forum that will meet quarterly beginning in September. Entrepreneurs can present to interested angel investors. For details on the process, call the center at (225) 578-4842.
  • The Genesis Group in Rapid City, South Dakota, is currently raising money for the $5 million Genesis Equity Fund and expects to begin making investments in October. The fund will provide start-up and seed financing ranging from $75,000 to $275,000 to firms with the potential to reach annual revenues of at least $1 million. This privately operated fund also has connections to governmental business assistance groups and can direct entrepreneurs to these resources for help creating presentation materials.
  • Charleston Angel Partnership is creating a $5 million fund targeting high-growth New Economy firms, particularly those in the health-care, biotech and telecommunications industries. Companies should be just beyond the start-up stage with a management team in place, have a developed business plan and be looking for $300,000 to $500,000. The group meets monthly, and all deals are initially screened by the partnership administrator. For details, contact the group at charlestonangelpartners@hotmail.com.