Touched By An Angel

By Charina Chatman



The 1990s witnessed a surge in equity seed investments by venture capital (VC) firms. Many startup companies that rode the tech bubble used these funds for operational growth and/or research and development. According to Money Tree's recent survey on venture capital investment activity, VC funding has recently slowed to a trickle. Total VC investment, which has mainly been directed at the more mature companies, has declined to $3.8 billion just in this calendar year alone - its lowest since third quarter 1997.

With this downward trend very likely to continue, the question becomes, "Where can startup companies find the seed money to accomplish their objectives?" That is where angel investors come into play. Angel investors are high net worth individuals willing to incur the risk of investing equity in startup companies. The amount of investments made by these individuals is substantial. In the United States, 50,000 companies received $40 billion in capital from 3 million angels in 2000. Comparatively, only 7,000 companies received capital from VC firms during the same period, with only 28% of funds being invested in early stage companies.

Angel investors can be categorized as well-educated, elusive individuals. As one might expect, angels anticipate a good return on their investment - often 10 to 20 times their original investment over a period of five to 10 years. With only one in 10 startup companies able to produce a return for their investors, angels often take a substantial financial risk. Unlike many VC firms, angels do not become directly involved in the daily operations of the company. Instead, some angels sit on company advisory boards while others provide more informal business guidance.

Angel investing has been around for years. This concept was the principal reason for the rapid growth and expansion of high tech companies in Silicon Valley, California during the latter part of the 20th century. Today, individual angels still make substantial investment in technology companies, but in a very different environment. One main difference between angel investing of the past and that of the present has to do with the speed of technological advancements. In many cases, angels must make decisions with limited understanding of the businesses in which they are investing.

Now more than ever before we are seeing the pooling of angel resources, know-how and investment into groups, allowing Angel investors to screen, invest and obtain a better return on their investment dollar. These groups, which have sprung up all over the United States as well as overseas, originated right here in the Washington-Baltimore region. Some of the major clubs currently operating in Maryland include the Maryland Angel Council, Women Angels Club, Chesapeake Emerging Opportunities Club and the Washington Dinner Club. All have web sites and clearly outlined rules of engagement.

These groups are often categorized as Angel Funds or Angel Networks. Angel Networks screen companies collectively, but invest independently, while Angel Funds screen and invest collectively and therefore often share the financial risk. Because these groups have a much higher profile than the individual investor does, they tend to attract more lucrative deals.

One downside of angel groups is that they do not have consistent screening processes for reviewing funding applications. This can represent a significant barrier for a startup company. Recognizing this problem, programs such as Angels and Eggs in Howard County have stepped in to fill the void. A first of its kind, the Angels and Eggs program has received an international award as the "Most Innovative Incubator Program of the Year" from the National Business Incubation Association. It has become a valuable resource in connecting investors with investment-ready firms.

The financing landscape is changing for young startup technology companies as the sources of venture funding diminish. The active organizations made up of angel investors have created an economic force, which is being used to sustain and grow early stage businesses in the new millennium. For many startup companies, being touched by an angel may be the only financial backing they can look to for help.



Charina Chatman is a member of the Howard County Economic Development Authority's team that manages and administers the Authority's Center for Business and Technology Development. Her most recent program work includes the administration of the Angels and Eggs investment program. She can be reached at 410-313-6181 or cchatman@hceda.org.