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Venture Capital Report

Angels play key role in financing

Smaller companies benefit from money and hands-on advice

PORTSMOUTH, N.H. - As venture capitalists shift their focus to later-stage deals with more mature technology companies, a growing and increasingly organized class of private investors known as "angels" has been picking up the slack in funding smaller start-ups.

US business angels, many of them wealthy entrepreneurs who have sold their companies, injected $11.9 billion into 24,000 ventures in the first half of this year, Jeffrey E. Sohl, director at the University of New Hampshire's Center for Venture Research, told the Northeast Regional Angel Investor Conference meeting here last week.

In the same period, venture capital firms invested $14.5 billion in 1,822 companies, according to the MoneyTree survey sponsored by the PricewaterhouseCoopers accounting firm and the National Venture Capital Association using Thomson Financial research data.

The larger number of deals and smaller financing rounds by the angels - they typically invest $100,000 to $1 million per round, compared with $2 million to $10 million outlays for venture firms - underscore their emerging role as go-to financiers for start-ups comfortable with small budgets and wary of tapping venture funds.

"We're individuals who can be very flexible in seeding deals," said George McQuilken, a serial entrepreneur and cofounder of the eCoast Angel Network, which hosted the conference. "We can invest in your pizza parlor if we want to. We can invest in lunatic ideas."

In fact, while angel capital fuels a variety of businesses, the largest three investment categories mirror those of traditional venture capitalists: computer software, healthcare, and biotechnology.

And while some venture firms have been seeding smaller companies, sometimes competing directly with angel investors, the larger trend in venture capital has been toward later-stage deals that enable firms to recoup their investments more quickly - ideally at high multiples - through acquisitions or initial public offerings.

"Venture capitalists are moving upstream and doing bigger deals," said Don Dodge, an angel investor and director of business development for Microsoft Corp. "That's where the angels come in."

But angel financing appears to be leveling off in 2007 after five years of increased investments. Outlays are on track to total just under $24 billion for the full year, down from $25.6 billion last year but up from the $23.1 billion invested in 2005, according to the figures from the UNH Center for Venture Research, which is considered the most authoritative source for the low-profile angel financing sector.

At the conference here, there was no consensus on why angel activity was slowing this year or whether that was an encouraging or a worrisome trend. Sohl, who presented his latest data, noted that yield rates, the share of proposals presented to angels that are ultimately funded, slipped to 20.1 percent in 2006 and 19 percent in the first half of this year, after climbing to a five-year high of 23 percent in 2005.

"I really see the market calming down a bit," Sohl said, citing the cluster of "latent angels" with uninvested money on the sidelines. "Things are getting a little dicey, valuations are getting a little high. It could be the angels are saying, 'Let's put a little sanity in this market.' "

Others see the angels - and the entrepreneurs they seed - hampered by an inability to keep up with a growing pipeline of pitches and business proposals and a needlessly complicated due diligence process, especially when angels don't know the business owners.

"A lot of the due diligence is unnecessary," said angel investor Martin F. Lowenthal, a member of the Boston Harbor Angels, suggesting some angels spend too much time studying market niches even though business models are constantly changing. "At the end of the day, these are risky investments, but I think we could be moving faster. If we can get our act together, we could be doing even more deals."

The term "angel investors" is credited to Bill Wetzel, founder of the Center for Venture Research, who in the early 1980s borrowed a phrase used to describe those who bankrolled Broadway shows. While some private investors initially resisted the label, it gradually took hold, and most self-made investors now embrace it.

While angel groups on the upper end of the market are pooling their money into funds invested over time, like venture firms, most angels invest their own money - often in concert with other angels - in specific deals. In addition to their ownership stake, they typically play an advisory role in a company that is deeper than that of venture capitalists, who can sit on the boards of multiple portfolio firms.

"Many entrepreneurs put a higher value on the knowledge and experience that the angels bring to the deal than the money," Sohl said. "The hand-holding and value add are very important."

Robert Weisman can be reached at

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