The Trouble with Angels

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His response--however bluntly expressed--is more appropriate than ever. The attention surrounding angel financing has attracted some less-than-reputable figures. Some of them aren't angels at all, as Barney Adams knows. Adams, founder and CEO of Adams Golf, a $35-million maker of golf clubs in Plano, Tex., says that he's taken regular calls from would-be investors claiming to represent foreign angels and wealthy-but-reticent families. Asking for cash up front to cover fees, they'll offer to raise angel money for Adams, should his company meet certain requirements. Curious, Adams once played along with some "angels" who requested $50,000 up front, but he held off on sending the check. Suspicious of the forms the angels asked him to fill out, he played along by making a counteroffer: I'll double your fee, he said, if you send me the investors' check first. Not surprisingly, the investors refused, but they offered to reduce the $50,000 to $5,000. It was the last time he heard from them.

Adams also hears from investors who like to think of themselves as angels. One such big shot offered to advance Adams a considerable sum just as he was headed to an important trade show. The local businessman, whom Adams knew only slightly, encouraged the founder to go, relax, and call him to hash out the details when he returned. Counting on the money, Adams charged the trip on a credit card, only to discover when he got back that his would-be benefactor wouldn't return his calls. The lesson: perfect angels rarely fall from the sky. They materialize through long-standing relationships.

In fact, 90 days after that fiasco, Adams hooked up with a former coworker and fellow entrepreneur who wanted to invest more than $250,000, an offer he felt confident accepting. Sure, a shared history helps. But not everyone is lucky enough to have sat behind a future angel in grade school. The key is to recruit investors who understand your industry well, so they won't panic during a seasonal slump.

When Dennis Harmon, CEO of Synchronicity Inc., a Marlborough, Mass., company that builds software for the semiconductor industry, launched a private placement in early 1996, he and his three cofounders listed 124 people they believed would make ideal angels. They stuck to former coworkers who had money; industry executives and salespeople who knew the founders' work history and could presumably meet the net-asset requirements; past customers; and members of their network who would bring additional resources, such as advisers and more investors. Then they called each candidate. Those who didn't flinch at the $25,000 minimum got a 12-page executive summary and a letter outlining the investment process. Of the 24 new investors, more than half have their roots in the semiconductor industry, giving the company lots of helpful connections. One, a former boss of Harmon's who is now a senior vice-president at a large software company, has introduced Synchronicity to a customer with whom Harmon hopes to forge a strategic alliance. "He has a vested interest in hooking us up with the right people," says Harmon. Another angel introduced the founders to bankers and venture capitalists.

What Looks Like a Halo at First Could Be a Noose--Intended for You

Understandably, Joseph Freedman jumped at the opportunity to accept funding from three local entrepreneurs for Amicus Legal Staffing Inc., the company he had founded in 1991. "I was hoping for coaching and mentoring," says Freedman, who was looking for money to expand in 1993. Active company builders, as opposed to retired CEOs, could better relate to his problems. As it turned out, they were far too busy. "Their business took off when mine did," he says.

Working angels are a relatively new phenomenon, partly spawned by a proliferation of IPO-enriched CEOs. Pressed for time, such angels are often inexperienced investors with less tolerance for risk than even they realize.

Freedman, a law student who probably should have known better, forked over a 65% equity stake in exchange for $150,000. For the angels, it turned out to be "a hell of an investment," as Freedman points out. Last year, when the $11-million company was scooped up by AccuStaff, a $2-billion staffing company, their stake was valued at about $13 million, according to Freedman. He doesn't begrudge his angels their hefty return. He actually learned more by doing things himself, he says. But back then, their lack of involvement irked him. "It was frustrating," he says. "I really needed more than money."

Of course, more-experienced entrepreneurs might yearn for an angel who exudes aloofness. What's crucial is to surmise ahead of time whether the kind of angel you've attracted is going to be gratified by providing the help you need. Van Aken was working with three partners to launch his second software venture when there appeared before him an angel offering wisdom (she professed industry knowledge), riches (she invested an amount he would have expected from three angels), and discretion (she promised to forswear second-guessing). But before long, Van Aken says, "her advisory role shifted from a silent investor to a day-to-day role. And that included creating mini-alliances with other partners." Her meddling was not the sole reason Van Aken ultimately hightailed it out of the venture, but he says it did set into motion a series of "political problems" that put him on that course.

Van Aken advises entrepreneurs to contact other companies in which their prospective angels have invested. He also suggests that entrepreneurs and angels set guidelines that clarify each other's roles. "People have needs that aren't necessarily financial," he says. "She wanted a place to play and mess around and have a social setting."

For the most part, angels don't suddenly "turn into devils," as entrepreneur Mike Watts claims. But their motivation for investing needs to be scouted out ahead of time. If it's not, it will likely reveal itself just when it can do the most damage. When Watts and his father, Gerald, founded Professional Resources, a software-programming company in Merriam, Kans., they made a deal with the only investor who would give them money: the certified public accountant of the younger Watts's former secretary. But the terms should have signaled a clue about the angel's reason for participating. Not that the younger Watts was looking that carefully. "I always had this image of an angel with a halo," he admits.

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