A new breed of wealthy investors is daring to put their money where others won’t: untested start-ups that have little chance of landing venture capital
Todd Horton, cofounder of a Cambridge start-up that lets customers send instant gifts via cellphone, had just finished a five-minute pitch for funding to a roomful of angel investors, wealthy individuals interested in backing young technology companies. The wary audience peppered him with hardball questions about his business plan, his technology, and his firm, KangoGift.
Then Bill Warner stood up.
“Basically he said, ‘I’m in,’ ’’ Horton recalled last week. “ ‘I’ll invest.’ ’’
Warner is among a new breed of investors who dare to go where ordinary angels won’t. Known as “super angels,’’ these wealthy backers — many of whom made their money launching and building tech firms — are filling a gap in the state’s economy, investing in the earliest and riskiest stages of start-ups, when traditional angels can’t and large venture capital firms won’t.
An idea that first began in California’s Silicon Valley, super angels get involved in promising new companies when they are still too small and untried to attract venture capital. But super angels take a more aggressive and systematic approach than plain angels, investing more money, more often. Where a traditional angel might back one or two start-ups a year, super angels will get behind as many as 20, investing anywhere from $25,000 to $250,000 in each one.
Warner, for example, has backed five companies in the past two months alone, providing an average of $25,000 to entrepreneurs working on instant gifts, tools for software developers, and wearable sensors. His goal, he said, is to invest in 10 companies this year, 40 by the end of 2013.
“I used to be a classic angel, but last spring I decided I wanted to fund more start-ups, and do it faster,’’ said Warner, who has founded two companies including video editing firm Avid Technology Inc. of Burlington. “It usually takes just one meeting, and I’ll tell you ‘yes,’ or ‘not for me.’ If it’s yes, I’ll print out a term sheet right on the spot and we can get going.’’
Behind the super angel phenomenon are technological advances that make it less costly to launch Internet and digital media firms. For example, where start-ups might have once needed to spend tens of thousands of dollars on servers and equipment, “cloud’’ or remote computing provides them access to computing power and storage at a fraction of the cost.
For investors like Warner, that means they can back more companies. Roughly a dozen other Boston-area investors are thinking along the same lines. They include established super angels like Dharmesh Shah, cofounder of Web marketing company HubSpot Inc. and investor in a dozen local start-ups, as well as new players, such as former Microsoft executives Katie Rae and Reed Sturtevant; Boston-based entrepreneur Nicole Stata; and former Internet advertising executive Jennifer Lum.
The result: a new source of funding for Boston entrepreneurs. Established venture firms typically cannot justify investments under $10 million, too much to lavish on unproven companies, said Bill Aulet, senior lecturer at MIT’s Sloan School of Management and managing director of the MIT Entrepreneurship Center. Super angels fill the funding vacuum by investing smaller amounts in lean, young companies.
“Super angels have emerged as a viable option for many start-ups,’’ Aulet said. “And the more options that entrepreneurs have, the better it is for the whole economy.’’
Warner’s interest in super angels was sparked last year when he noticed the movement growing in Silicon Valley. What appealed to him was the impact the fast-moving investors were having. Dozens of super angel investors, most veterans of the Bay Area tech scene, were backing scores of companies, helping to accelerate growth, innovation, and job openings.
Last spring, Warner flew to California to meet several prominent super angels, such as Reid Hoffman, a cofounder of the LinkedIn social network, and Aydin Senkut, a former Google Inc. executive. Their message to Warner: “Just do it.’’
Warner, 55, is a pioneer of digital video editing who in 1987 founded Avid Technology, which sells editing software for film and television. Later, Warner marshaled speech recognition technology to create Wildfire Communications Inc., which was sold in 2000. Since then, Warner has split his time between funding nonprofits, helping entrepreneurs, and investing in multiple start-ups.
Today, Warner works out of a small office in the far corner of the Cambridge Coworking Center, a communal space available to entrepreneurs in Kendall Square’s Cambridge Innovation Center.
Warner chose this location so he could walk through the rooms several times each day, maximizing his interactions with the young entrepreneurs hunched over laptops. Over the past few years, he has invested in five companies based in the Coworking Center.
Warner is taking a different approach than the one followed in Silicon Valley, where super angels focus on narrow technological niches in which they have had success launching their own companies. For Warner, that would be digital video and voice recognition.
But Warner prefers to work with a variety of entrepreneurs and technologies, an approach, he said, that is more in tune with Boston’s technology ecosystem, which encompasses everything from robotics to complex software systems.
“Our strength in Boston is our diversity,’’ he said. “We’re good at a wider range of technologies than the West Coast. That’s an advantage I want to press.’’
Like most venture and angel investors, Warner makes money by taking shares in the company in return for his investment. If the company is sold, or sells stock in an initial public offering, the payoff can be significant. But for Warner, it’s not only about money: It’s also about working with young entrepreneurs to get their ideas off the ground quickly.
Horton, of KangoGift, is still marveling at how fast Warner works. Within an hour of making his presentation during the investor event in Kendall Square last fall, he and Warner were huddling at the cocktail reception that followed the presentations, finalizing the broad terms of a deal that included $25,000 from Warner.
“It was exhilarating, exciting,’’ said Horton.
Warner is also excited by the impact that a growing corps of super angels could have on Boston’s entrepreneurial community. Which is why, although he’s investing at an increasing clip, he’s not interested in graduating to venture capitalist. “Super angel,’’ he said, feels right.
“I love the idea of sitting down with an entrepreneur and getting a sense of what he or she wants to do,’’ he added. “Then if it’s a good idea, I can say, ‘OK, I’m in. Let’s move.’ ’’
D.C. Denison can be reached at firstname.lastname@example.org.