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The Trouble with Angels

A new breed of private investor has emerged from today's bull market. These angels can behave more like venture capitalists, demanding quick turnaround on their investments.

What's the difference between a venture capitalist and an angel investor? Not much anymore. Just try finding an old-fashioned angel

What will it take to persuade Hans Severiens to invest in your start-up? Ask him, and he'll issue a litany of demands--a business plan, well-defined milestones, a significant equity stake, and usually a board seat--rigid enough to make any entrepreneur want to leap into the arms of the nearest angel investor. Except that Severiens is an angel investor. Or what passes for one these days, when it's harder and harder to separate the angels from the venture capitalists. "There really isn't much difference," confesses Severiens, who belongs to the Band of Angels, one of Silicon Valley's better-known angel-investor groups. "We're all trying to make sensible investments, and we're exercising some due caution."

Nonchalant as he sounds, Severiens is emblematic of a surprising turnabout: not long ago angel investors were viewed as start-up saviors, quietly stepping in to fill the gap where venture capitalists feared to tread. Angels were defined by how distinct they were from the venture types: eager to make smaller investments, they were willing to wait longer for a payback and were fully expecting to play an active mentoring role along the way. Largely consisting of retired entrepreneurs looking to invest their accumulated wisdom and wealth--in that order--the angels clung to their discreet and inefficient operating style. You found angels less by trying than by hoping: through a chance meeting or a remote contact or plain happenstance. They wanted it that way.

Not anymore. In the wake of a raging bull market, many venture-capital funds have grown too big to even consider any investment below $1 million, leaving a much wider field for the angels. Meanwhile, a sizzling market for cashing out has enabled a broader range of wanna-bes to act on their angelic impulses. At least 10% of CEOs on this year's Inc. 500, a ranking of the country's fastest-growing companies, actually consider themselves to be angels. "There's a lot of money in the hands of young people who are technically competent and not afraid to invest," observes Severiens. Investing their cash also lends them cachet. Calling yourself an angel puts you in the orbit of such celebrated winged ones as Microsoft cofounder Paul Allen. It conjures images of the heavenly returns earned by the angels who backed Amazon.com, the on-line book retailer that was one of last year's hottest initial public offerings.

The angel community's newfound notoriety has come as a by-product of its growth: it's estimated that in 1996, 250,000 angels invested upwards of $20 billion annually; in comparison, roughly 600 venture firms put in half that amount. These days angel investors are about as publicity shy as the average Geraldo guest. Competing for the best deals, some resort to making cold calls. "They're hard to say no to," says Dale Van Aken, chief executive of Syncro Technology Corp., a $5.8-million software developer based in Langhorne, Pa. "They're saying, 'Here's my name, and I want to give you money.'"

Not that angels are all working their way through the yellow pages. Still, chances are that if your accountant doesn't know an angel, your lawyer will. If neither pans out, flip open the Wall Street Journal--where you'll find ads for matchmakers who specialize in linking entrepreneurs with angels--or do a search on the Internet, where even the government maintains a site, ACE-Net, aimed at pairing fund-loving entrepreneurs with well-heeled angels.

Dave Berkus, former CEO of an Inc. 500 company, says that the angel network he created, Los Angeles-based Berkus Technology Ventures, sees more and more deals that have been sent by venture capitalists. "I consider myself a seed venture capitalist," says Berkus. "But angel is a good description, too."

That very overlap makes angel a less-than-helpful label for those seeking to raise money. Like the budding venture capitalists of the 1960s, angels have discovered that pooling resources and sharing due diligence make for greater efficiency. Brand-name groups like the Band of Angels have helped legitimize angels as a breed. And harden them. "Nine times out of 10, entrepreneurs are too greedy," says Thomas Barr, who has invested in seven ventures while serving as CEO of HydroLogic Inc., a fast-growing environmental-services business in Asheville, N.C. "They want to keep too much. That turns off an investor more than anything else."

It's that sort of attitude that earned venture capitalists their unaffectionate nickname: vulture capitalists. Angels aren't there yet, but they are bringing new sophistication to every aspect of the deals they do, meaning that the wisest entrepreneurs are learning to perform some serious due diligence of their own. "We think of the classic angel as patient money," says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, "but some of these investors are looking for a quick turnaround and will destroy the business to get the money out." With so much at stake, it's worth learning the new realities of angel investing.

Angels Who Fall from the Sky May Crush You

CEO Dale Van Aken would be happy not to hear from an angel again anytime soon. "I'm busy," he tells the angels who call him out of the blue. "I'm trying to grow a company. This is a distraction. Go away."