Shannon Henry (The Post)

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Shannon Henry's
The Download Live
The State of the Local Angel Investing Scene
Thursday, Jan. 31, 2002; 1 p.m. ET

Long before the IPO, and often before the venture capitalists show any interest in a start-up, the angels are there. Angel investors, that is. A large number of start-ups in the Washington region rely on these "angels" to provide the first, often small, bits of funding that allow them to launch their product and (hopefully) lure in more money. Angel investors are often groups, or "clubs" of private individuals who put up their own money instead of money from institutional investors. They, along with the entrepreneurs, share the big risks of early stage start-ups.

In her column this week, The Download's Shannon Henry takes a look at the state of the local angel investor scene, and what she finds will surprise you. Join her on Thursday at 1 p.m. to talk about her piece.

More on Angel Investors: Last month, The Post's Nicholas Johnston reported on the hard times facing many angel investors: "The drop in early-stage angel investing has ramifications throughout the funding community. Larger venture capitalists often wait to back start-ups until after an angel round of funding has helped the company get on its feet. ... Even so, angels remain an integral part of the funding cycle" (Dec. 6, 2001). See also a Sept 27, 2001, report by The Post's Cindy Webb on a recent book on angel investing by two local entrepreneurs. And don't miss two related columns from The Download's archives: Women Who Earn Their Wings (Feb. 8, 2001) and Don't Just Look Homeward, Angels (Dec. 14, 2000).

Submit Your Questions and Comments: Join Shannon Henry from 1 p.m. to 2 p.m. on Thursday, January 31. And don't miss the weekly Tech Thursday feature in the newspaper and online.

About Shannon

Washington Post columnist Shannon Henry has been covering the local technology scene since 1995, documenting the successes and failures of local tech companies, and the culture and ideas of local business personalities. Her column appears on Thursdays in the Business section of the newspaper, and she regularly hosts The Download Live on Washtech.com, The Washington Post Web site dedicated to covering the region's technology sector.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

washingtonpost.com: Shannon Henry's The Download Live will start at 2 p.m. EST today. Feel free to send in your questions before and during the show.

Shannon Henry: Hello! Let's get started....Send questions, complaints, whatever...on angels or anything else.

Washington, D.C.: What is angel investing?

Shannon Henry: Ah. This seems to be the place to start. "Angel" investing is done by wealthy individuals, so-called "angels" because they swoop in and financially help the company. Angel investors are often the first to put money in a start-up business, before venture capitalists take notice. Angel clubs or funds are made up of sometimes dozens, sometimes hundreds of individuals who pool their money to invest. The term comes from what people called investors in Broadway shows...which could either fall or fly. Not all angels are created equal. Some are more knowledgable than others and some want more control over their investment.

Washington, D.C.: Shannon: Aren't most of these local clubs only 2-3 years old? how long does it NORMALLY take for a venture portfolio to realize investment exits?

Shannon Henry: Great point. The fund organizers say this is a three-to-five year cycle, and many of these clubs are only a couple of years old. In the column and in conversations with me, the organizers said: Be patient. It's not realistic to expect returns right away. However, many of the club members say they simply don't want to wait.

Washington D.C.: Shannon,

Thanks for taking my question. The employment situation has taken a hit during the shake-out. When do you think that will improve?

Thanks

Shannon Henry: There was positive news today from the Fed and other economy-watchers that the recession could be over. There are still many out-of-work people, but my sense is that things are going to start to recover now....and that will mean good news for job-seekers. I'm also looking for glimmers of new technological innovation, if any of you have examples...

Arlington, Virginia: How does one become an angel investor? Is there an "Angel Investing for Dumbies" book, (and that's open for interpretation)?

Shannon Henry: There's actually a set financial requirement in most clubs based on your personal net worth and income. Two guys who run some of the local angel clubs here have written an excellent book: "Every Business Needs an Angel" by John May and Cal Simmons. I recommend you read this book to get a sense of what's involved.

Vienna, VA: Why do so-called 'angel' clubs waste both their own and early stage companies time by going through mettings, presentations, follow-up meetings, con-calls ad nauseam when they have no real interest in early stage investing?

I have met with three angel funds and presented to two dinner clubs. All of them said what my company had accomplished with zero funding was impressive, they were amazed by our client list and wished that more companies were able to turn a profit like we do. Still, we are not in their targeted profile for investment.

That's fine...I'd rather run under my own steam or take institutional funding if it's a better fit but what is the point of dragging us both through the process if they no interest in a company that fits our profile regardless of our profits, customers or success rate?

Frustrated by wasted time,

Vienna, VA.

Shannon Henry: Sorry to hear you've had a bad experience...but I've been to enough angel presentations and seen the follow-up investments to know these groups certainly do early-stage investing, and most take it seriously. Sometimes, a great little company won't be a good angel investment, or venture capital investment, because it doesn't have the potential the angel or VC fund is looking for. Do you want angel money for the advice or the cash? If you can bootstrap, why not avoid selling chunks of the company, but ask some trusted mentors to act as advisers?

Bethesda, Md.: One viewpoint is that many unqualified start-ups were funded during the dotcom rage and some deserving companies were ignored because they did not inflate the ROI numbers.

Any comments?

Shannon Henry: Yes, that's fair. But it's interesting to see that some of those who didn't get the investment are still plugging away...while their heavily-funded counterparts have gone bust.

Arlington, Va.: Aren't most company's "angels" really just their moms and dads and friends? Maybe the dearth of angel investors is really just the demise of rich individuals who were roleplaying as venture capitalists?

Shannon Henry: Sometimes...those first investors are the 3 F's, Friends, Family and Fools. Certainly a former employer, a rich uncle, or an Internet-interested neighbor could be an angel. The clubs have formalized the process, though and give more investing power to the group as the money is pooled together. As individuals' net worth has fallen, you can bet their angel involvement will too.

Washington, DC: I've just joined the chat so please forgive me if this has already been addressed. What is the opinions of those angels about forming a biotech angel club since a lot of vc investment is turning towards biotech?

Shannon Henry: Interesting...I don't know of an all-biotech fund, but it's a hot topic. Problem is, biotech has a different cycle than Internet. Any angel club managers out there who care to comment??

Alington, Va.: Seems as if the pace of small-round investing is picking up again. There might be fewer angels to seed startups, but maybe the post-startup babies are getting more attention on the other hand -- ?

Shannon Henry: That's what I'm hearing from VCs these days. The new deals, they say, are very good, although they are doing fewer of them.

Reston, Va: Hi Shannon - Growing and maturing a company, of any size, takes time. It doesn't happen in a year or even two (hello! to the dot-com issue). It seems that angel "clubs" or well organized private equity groups should understand this. Do you think that investors have set expectations for returns too high? Are they collectively ill-informed about the business of growing a business? Do you think the groups themselves are putting too much pressure on small businesses or even startups to perform against unrealistic ROI goals? Businesses regularly develop 5-year plans, maybe investors should adjust their investment goals against a scale that's a little more realisticly focused.

Shannon Henry: Hi Reston. All good points. I think expectations got way out of whack. I see angel fund organizers' stance that hey, we never told you you'd be millionaires in a year....There may be other reasons why angels are unhappy in the funds. I've received emails today from some individuals who didn't like the deals the rest of the group chose. But I think it shouldn't be a surprise when you sign up that you'll have to go along with the majority, and that it will take a few years to return your money.

Bethesda, MD : Are the angel clubs interested in getting
better tools to evaluate business plans and
perform technical due diligence?

Shannon Henry: Many angel funds invest "along-side" venture funds that do the heavy due-diligence lifting. Every fund has made some bad investments in recent years, and it's difficult to say how that can be prevented in the future. I think appointing teams to investigate the deal, even if it's also being looked at by a VC, is the right way to go.

Washington, D.C.: What do some of the lucky tech CEO's do after they sell their companies & fulfill their obligation to the buying company? For example; the young guy that used to own Proxicom in northern Virginia?

Shannon Henry: That's really interesting to watch--what WILL they do next? Raul Fernandez, who started Proxicom, is about 35, way too young to retire. He's still an exec at Dimension Data, which bought his company. And he spends a lot of time on the sports teams he bought with Ted Leonsis. But you can bet he'll do something else when his Didata obligation is up. Some are getting into politics, others philanthropy, still others starting new companies. Actually almost all of Washington's tech pioneers have a new gig, and it's fascinating to see what they choose.

Chantilly, Va.: Some angel investors are waiting until companies are further along before considering them. Who might these "latter day" angels be? Does this make them plain old venture capitalists?
Also, do you know where we can get a roster of VCs (in the U.S.) interested in investing in telecom?
Thanks - and, once again, glad you're back.
Holly

Shannon Henry: Hi Holly, glad to be back....Many angels and VCs that used to specialize in early-stage funding are waiting a bit longer these days. They are still the same groups and funds, but are altering their missions to lessen a bit of the risk. It will be interesting to watch because way back before the boom there was such a dearth of start-up capital, then there was too much and now its slipping away again. What will that mean? The Mid-Atlantic Venture Association and the National Venture Capital Association have great lists of member VCs and should be available online.

Washington, D.C.: Shannon, this is really not a question but rather a response to the question about a biotech angel fund. Angel clubs look to maximize returns and in part they do this by having a diversity of investments including type of industry, stage of development, etc. Most of the angel clubs have been looking at bio tech investments, but, as you responded, they were thought to have much longer exit times. WomenAngels does have a biotech investment in its portfolio and I think several of the other clubs do as well. Certainly in these times the clubs are looking at more of them as they become less concerned with exit time and more concerned with viability, valuation and diversification.

Shannon Henry: Thanks, Washington. Sounds like diversification is a better recipe for these times.

Gaithersburg: Has there been any follow-up to the story about the average relative pay of women managers going down? Since the NUMBER of women managers went up, obviously their average experience and seniority went down, so it's not surprising their average pay would, too.

Shannon Henry: Hi, Gaithersburg. Guess you read the story I wrote last week about the increasing pay gap between men and women managers. There has not been a follow-up study that I know of, but your suggestion is one of many viable points that could explain the discrepancy. It's just not clear yet why the gap has been increasing, but those who did the study hope to learn more from census data that is due out in September.

Shannon Henry: Thanks again for the chat...It's fun to hear what's on your minds. Bye!

washingtonpost.com:

That wraps up today's show. Thanks to everyone who joined the discussion.

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