Angels bring hope - and money

By SUSAN FLYNN

News staff

From where Carol Vallone sits _ a spacious corner office with lots of windows _ angel investors are indeed the saviors of the entrepreunerial world.

Without a handful of wealthy individuals who were willing to take a risk on her business idea, she would not be the president and chief executive officer of WebCt, a multimillion dollar computer software company in Lynnfield preparing to go public.

Vallone, a Manchester-by-the-Sea resident, received $220,000 from six angel investors in her first round of financing. The money enabled her to strengthen her company to make it more attractive to venture capitalists.

"Venture capitalists don't want to invest until they have some success stories," Vallone said. "Angel investors provide the seed money. Banks will loan you money, but I personally did not want to sign for anything. And I did not want to take on any debt."

In that way, angel investors allow entrepreneurs to pursue their dreams without the added worry of possibly losing their home and other personal investments if the business fails.

The term "business angels" originated many years ago in the theater when financial backers invested in productions and contributed their skills and contacts to enhance the success of the show.

Today, angel investors _ basically wealthy individuals in search of money-making business opportunities _ provide money and expertise to entrepreneurs in exchange for equity in the company.

A typical angel investment is between $25,000 to $150,000, according to the California Research Bureau, a public research institution based in Sacramento.

According to the same outfit, about 250,000 angel investors pump an estimated $20 billion into more than 30,000 small businesses in the United States each year.

"Angel investors play a very valuable role. They really are the angels of this start-up world," said Elaine Guiney, the director of the Small Business Administration office in Boston. "They fill a gap between banks and venture capitalists. Angel investors are the people in the middle of the two who are free of restrictions."

A recent study commissioned by the United States Small Business Administration sought to portray the typical angel investor. In general, an angel is identified as a person whose individual worth exceeds $1 million and whose annual income exceeds $200,000.

Typically, the study found, angels invest in ventures involved in markets and technologies with which they are familiar. They also invest relatively close to home _ about a one day's drive in the car, the study found.

Also, angels often take bigger risks or accept lower rewards when they are attracted by the non-financial characteristics of a proposal.

Vallone, of WebCt, found this to be the case.

"The very first group of investors would have donated the money," Vallone said, adding that many were inspired by the promise of the company's products.

Fred Young, director of the Small Business Development Center at Salem State College, helps entrepreneurs put together business proposals to make themselves attractive to angel investors.

But Young estimated that only one out of 100 of his clients are interested in angel investors, with the majority going the traditional bank route.

"But occasionally a client comes through and a bank won't take that kind of risk on them," Young said. "Angels are very often people who have been successful in small business themselves. They'd really like to invest in another small business and hit a home run. They are high-risk takers."

The problem with angel investors, Guiney said, is that they keep a low profile. Often, it takes connections to find an angel to agree to listen to an entrepreneur's pitch, she said.

In fact, the Evening News attempted to reach several angel investors and networks of angel networks without success.

"They don't advertise in the yellow pages, and for good reason _ they'd have no lives," Guiney said, explaining the investors would be inundated with requests. "If you live or move in wealthy circles, you can find money. If you're a regular person with a great idea for a business and a great business plan, but don't have contacts with wealthy people, you're not going to know who these people are."

To address this so-called "capital chasm," the U.S. Small Business Administration has created a network to enable angel investors to find small growing companies through an Internet database. The network is managed by the Whittemore School of Business at the University of New Hampshire.

There are also a number or organized networks, such as Walnut Ventures in Boston, where groups of wealthy individuals get together monthly to hear a slate of business proposals. Vallone, in fact, received funding from a member of the Walnut Ventures group.

Typically, Vallone said, angels invest in a company because they have some expertise in that area. While some entrepreneurs don't appreciate the trade-off that comes from taking outside money, Vallone said she's been fortunate.

"Some people don't like (angels and venture capitalists) because they feel like they can't control their company anymore. My experience has been very positive," Vallone said. "Our investors are the type who give a lot of opinions, but let me do what I want."