Heaven help us - 'business angels' provide investment capital - includes related articles on finding investors and investment planning

Nation's Business, Nov, 1993 by Dale D. Buss

For nine months, Dr. Robin Potter scoured the Plains in search of fellow visionaries to invest in his idea of a national health-care credit card. He schmoozed and he networked. He developed a marketing plan and a slide presentation that he showed to hundreds of investors in individual meetings.

By early 1989, Potter, a 42-year-old dentist from Overland Park, Kan., had located about 20 individuals willing to invest a total of $700,000 to make his idea a going concern. Now, nearly 10,000 physicians in 50 states are customers of PulseCard Inc., based in Overland Park. Each year, PulseCard transactions total more than $35 million.

Potter, who gave up his dental practice to demonstrate to investors how serious he was about PulseCard, is certain his angels will be happy that they had confidence in him. "They believed I could do what I said I would do," he says.

Potter found what many entrepreneurs hunger for: bold individuals able and willing to provide them with enough capital to move their start-up to the next phase. Known as "business angels," they are the only source of seed capital for many start-ups. By the time angels appear, most business owners have already tapped out friends and relatives and have been rejected by numerous banks.

The pool of today's angel capital is five times the amount in the institutional venture capital market, providing money to 20 to 30 times as many companies, says William Wetzel, director of the Center for Venture Research at the University of New Hampshire. He says angels invest more than $10 billion a year in 30,000 to 40,000 companies nationwide, twice the amount of money and twice the number of companies five years ago.

Angels are typically entrepreneurs, retired corporate executives, or professionals who have a net worth of more than $1 million and an income of more than $100,000 a year. "They're self-starters," Wetzel says. "And they're trying to perpetuate the system that made them successful."

Investments range from $5,000 to $1 million; they are usually about $100,000. In exchange for high risk and low liquidity, angels expect blazing returns, typically 500 percent on their investments within five years, Wetzel says.

"Everybody hopes they're going to back the next Microsoft," says Bryan Dilworth, director of the Georgia Capital Network, an Atlanta-based regional matchmaker for angels and entrepreneurs.

Because an angel might score real hits only 5 to 10 percent of the time, the ability to liquidate the stakes in those winners is crucial. That means entrepreneurs, if they're successful, must in several years expect to buy out or reward their angels through a public stock offering, a sale of the company, or a large venture-capital infusion.

What sort of entrepreneur can hope to gain an angel's confidence and cash? The answer is someone whose business, even if it is losing money, shows promise to grow. Ownership teams of two or three, with their inherent checks and balances on egos and bad ideas, are attractive to angels. And angels especially like entrepreneurs with new technologies.

"These investors are looking to create jobs for the whole economy," says B.J. Hulen, operations manager of the Technology Capital Network Inc., a Cambridge, Mass., matchmaker affiliated with the Massachusetts Institute of Technology. "Too many entrepreneurs are looking just to get themselves jobs."

Experience is vital. "Everyone's got ideas, patents, and inventions, and everyone lives on the edge," says Douglas Drane, a Nashua, N.H., angel. "But investors want to find survivors, the ones who already have been around a while before they need help. You've got to show some ability to hold something together."

Angels also like an entrepreneur to have some exclusive lock on the business, something related to geography, technology, distribution method, market access, or personal or business relationships, says Dick Morley, an angel who is also president of Flavors Technology Inc., an artificial-intelligence company in Amherst, N.H. "We're looking for someone who's got 100 percent of a zero market," a market that has yet to be tapped, says Morley.

There is also the crucial intangible of character. Angels like people who are as driven as most of them are, people who have, as Morley says, "a missionary complex."

Drane, who has invested in 12 ventures, most related to software, in the last five years, says, "We want to back someone who likes to clear high hurdles, who likes to strain and not take life at a snail's pace. The main thing is commitment."

Entrepreneurs such as Anson Hall appeal to angels. Hall, a retired car dealer, is trying to launch "the second revolution in table settings" with his Neater Eater, a 2-inch-long, disposable utensil rest that he hopes to sell to casual restaurants.

Angels have already invested close to the $240,000 Hall believes he needs to start production at his Exeter, N.H., company, Utensil-Rest Inc. He is hoping for an initial public offering to help him raise additional cash down the road. "This should be a cash cow," the 73-year--old inventor says of his product. "It's a very needed thing. There are no bricks and mortar. And I'm a zealot about it."