NEW YORK-Start-up American companies searching the financing firmament for venture capital
might do better by setting their sights upward toward the hidden realm occupied by angels.
Angel investors are
high-net-worth people whose small, patient investments in fledgling companies play a unique and critical role at the
bottom of the economic food chain. During the past 10 to 15 years, angels have jumped into a void left by venture
capitalists, many of whom have become increasingly risk averse, said Ellen Sandles, president of Sandles Capital
Resources, New York.
Sandles, whose earlier career included sales and marketing positions in high technology
divisions of AT&T Corp. and Harris Corp., describes her current role as one of matchmaker between angel investors
and development-stage companies.
“I run a dating service, and we marry for money,” she said.
In
the early 1980s, before federal laws allowed institutional pension funds to invest in venture-capital funds, venture
capital looked more like angel capital does today. It was early-stage, high-risk capital. A typical venture capital fund
had about $4 million, and its managers would consider individual investments of $500,000 to $1.5 million.
In
response to the influx of pension fund money, many venture capital funds have grown to a size of $100 million to $200
million. They are looking at sectors like information technology and health care for larger investments in later-stage
companies that have the potential to generate $100 million in revenues, she said.
The median venture capital deal
today is about $6 million, and only about 300 early-stage companies received funding from the approximately $13
billion in venture capital investments made in 1997, Sandles said.
By contrast, the 250,000 or so angels in this
country invest about $30 billion annually, all of it in start-up companies and generally in amounts of $50,000 to
$250,000. Sandles Capital focuses on deals in the range of $150,000 to $3 million, so that individual companies may
get financing from more than one individual angel.
Angel investors typically look for companies that can earn $20
million in revenues and have the potential to generate a 50-percent internal rate of return over five to seven years, she
said.
Their exit strategy can follow several scenarios. Most new companies get acquired or merged. Fewer than 10
percent go public. Sometimes a venture capital investment “takes out” the angel or angels. Alternatively,
the angel may maintain his or her investment in the company if it continues in business and pays the angel a regular
dividend or profit check.
“Angels tend to be 45- to 65-year-old men, successful entrepreneurs who no longer
have to work, rather than people who inherited large amounts of wealth,” Sandles said.
“This is not a
passive form of investment because involvement helps angels hedge their risks. They take different kinds of roles,
some operational, some want to be on the board or serve as consultants.”
However, each angel has his own
work history, industries of interest, amounts he is comfortable investing in a single company and number of companies
he is interested in investing in during a given year.
Angel financing requires a good deal of due diligence on the part
of prospective investors. They spend months of their own time and hire experts to conduct due diligence investigations
of fledgling companies before agreeing to invest in them.
“I do the initial screening … To hold onto my
investors, I must continue to forward to them deals of a certain quality,” Sandles said.
Sandles said she looks
for a sound business plan, which includes: a good management team; an operational business so that there “is
proof of concept that the technology has viability in the marketplace;” a significant monetary investment by the
company’s founders; complete financial statements; and good presentation of the company’s merits.
Sandles also
said she works with companies she considers promising candidates for angel investing in order to refine their business
plans if they are missing certain key elements.
Sandles Capital Resources, an affiliate of International Capital
Resources, San Francisco, has access to a proprietary data base of 7,500 accredited angel investors. Accreditation is a
Securities and Exchange Commission definition that restricts individuals permitted to invest in high-risk, start-up
companies to those whose net worth is more than $1 million, not including their house, furnishings and
clothing.
Sandles Capital also has relationships with venture capital funds chartered to specialize in start-up
company investments, she said.
Sandles said her business is one of a gatekeeper exploiting a niche created by an
inefficiency in the marketplace that is the result of three major factors. Entrepreneurs typically are creative and
inventive people who are not trained to find investors and raise capital. Furthermore, SEC regulations prohibit anyone
from soliciting investments from people they don’t know, so advertising for investors is not an option.
Finally, high-
net-worth people seeking to serve as angel investors in fledgling companies guard their privacy ferociously because
they do not want to be hounded by requests.
