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Collapsing banks and constricting credit markets have compelled many newly risk-averse investors to scurry for the sidelines. But not Eric Rosenfeld and his merry band of 50 angel investors in Portland, Oregon.
His Oregon Angel Fund recently raised about $2 million—more than twice as much as it did last year—and is eagerly scouting for promising young tech companies to invest in. "We see more checks being written, more companies being financed," said Rosenfeld, who is also a managing partner of Capybara Ventures, a Portland venture capital fund.
Rosenfeld and his fellow angels—private high net-worth individuals who fund start-ups and small companies—are hardly alone. Despite limits on their ability to cash out their investments—a downturn in initial stock sales, tighter credit at banks, and a decline in mergers and acquisitions—many angels say they are still willing to invest.
The Angel Capital Association recently surveyed 145 angel group leaders to ask whether they believed the number of investments and amount of funding would increase this year; nearly 55 percent of respondents said yes.
Speaking for themselves, association members said the number was even higher. About 81 percent said their group intended to invest in three to nine companies this year, compared with 77.5 percent the year before. A full 12 percent said they planned to make 10 or more investments in 2008, almost double the number in 2007.
What's more, the total being invested by the estimated 258,000 angel investors in the country is growing, albeit at a slower pace. The number grew 1.8 percent, to $26 billion in 2007, according to the Center for Venture Research in Durham, New Hampshire. And the number of entrepreneurial ventures that received funding in 2007 went up 12 percent, to 57,120.
Those figures, of course, were from before the recent credit crunch. There is no data for 2008, but Jeffrey Sohl, director of the Center for Venture Research, said the amount of angel money invested this year should be comparable to 2007.
At the same time, angels are also treading more carefully—asking tougher questions, choosing later-stage companies, or investing smaller amounts. And they're more likely to invest in businesses and industries with track records of success.
Still, becoming an angel remains an attractive alternative for many wealthy investors, particularly because the usual alternative investments, like stocks and bonds, are less welcoming these days. And many angels say that they still see plenty of investing going on.
John May, managing director of the New Vantage Group, a Vienna, Virginia, firm that runs several angel groups, for example, said that deal size at his organizations is the same or bigger than in the past—and members are itching for more opportunities.
Take James Hunt. A member of Active Angel, one of May's groups, Hunt already has stakes in about 12 companies, and plans to invest "less than $100,000" in another five or so companies this year.
Ian Sobieski, managing director of the investment group Band of Angels, in Menlo Park, California, said he generally makes one to two investments a year and expects to do the same in 2008. Band members put money in 12 to 14 new companies in each of the past four years.
In some cases, angels say they're investing because they haven't taken much of a hit or don't have their cash tied up in previous deals. In others, they're looking for alternative places to put their money.
"The stock market isn't that attractive. Real estate isn't that attractive. Bonds aren't that attractive," says Rosenfeld. "Angel investing offers people a different option."
They also tend to take modest positions. Sobieski said that most angels only invest a tiny part of their total portfolio—no more than 5 percent—in new ventures.
Many angels also get a boost from organized angel funds like Rosenfeld's. His two-year-old enterprise pools $25,000 to $50,000 contributions from members and invests in about four companies each year.
Other groups, like Active Angel, also aggregate money from members, but investors are allowed to opt out of investments they don't like.
In either case, there's safety in numbers, since fellow angels help with due diligence on companies and tend to seat one of their own on the board. "I know there are extremely competent investors who are watching out for my interests," says Hunt.
While not new, spreading the risk through pools also encourages more angels to stay in the hunt for the next big thing in parlous times like these. Many, of course, are doing so more cautiously than before. Average total deal size in 2007 dropped to $450,000 from $500,000 in 2006, according to the Center for Venture Research.
They're also most likely to invest in what they consider to be "surefire" areas, including green technology, and Web 2.0 applications like social networking sites.
In addition, safer, established businesses are attracting more interest, especially those run by founders with previous entrepreneurial success.
Dave Nelsen, C.E.O. of TalkShoe, a three-year-old business that allows social network users to talk online, raised more than $400,000 in March from two angel groups. His background in starting, running, and selling CoManage, a telecommunications business, helped to open doors. "I had a track record for building a company and raising money, and that's what really helped us," he says. When angels do look at start-ups, they are raising their standards. Former Google executive David Scacco, for example, invested in 10 firms and said he expects to do about the same in 2008—with a difference. "I'm holding them to a higher bar," he says.
That means considering only businesses with at least a working prototype or, in the case of Web enterprises, those that can show increases in the number of users.
Recently, for example, Scacco said he turned down a suitor with what he considered to be an interesting social networking application, because it wasn't up and running; as recently as last year, Scacco added, he wouldn't have been deterred by the fact the service hadn't launched yet.
Scacco said he also spends more time questioning companies, meeting three or four times with managers over a period of three or four weeks, compared with the two or so get-togethers he held before. And he conducts more of his own market research. It also helps if a business already has a prominent backer. Early this year, Gregg Smith, C.E.O. of Acuity Mobile, a two-year-old company that provides marketing messages on cell phones, closed on a major round of funding.
While he can't reveal the total amount, 25 percent of it came from two angel groups and the rest from Navteq, a Chicago-based digital mapmaker. One angel group made its offer contingent on Navteq's public commitment. The other waited until after the deal was actually signed.
Ultimately, as financing for new ventures from private equity plummets, angels expect to be in an increasingly stronger bargaining position. Angels report asking for such favorable terms as additional equity if certain goals aren't met or more warrants to buy shares at a specified price.
It's not surprising, then, that a majority of angels anticipate that the quantity and quality of deals will increase this year, according to the Angel Capital Association. Says Greg Baszucki, an angel in Portola Valley, California, "If the market goes down, it will be great—a great opportunity."
That is, of course, as long as they choose the right companies.
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