Angels Investors clip wings of entrepreneurs

Angels Investors clip wings of entrepreneurs

Acting more like VCs; usual source of seed money disappearing

Angel investors are increasingly funding more mature companies, making life hard for the early-stage ventures that have historically relied on them.

Last year angel investments totaled $25.6 billion nationally, a growth of 10 percent over the previous year, according to the University of New Hampshire.

As the market grows, angels -- especially angel investor groups -- are moving upstream, looking to dole out more money and take fewer risks. Meanwhile venture capital firms anchored by huge funds are increasingly looking to invest larger rounds of cash. Entrepreneurs say that combination has made tapping into angel capital, once fertile ground for early-stage funding, trickier in recent years.

"It's a very bizarre process," said Christopher LaFarge, president and CEO of Sensors for Medicine Inc. in Boston. "I've been trying to figure out and understand the dynamic, but it has made it damn near impossible for entrepreneurs to raise capital in a reasonable time frame and with any kind of reasonable probability."

LaFarge spent two years looking for investors to fund the $2.5 million round he is about to close.

LaFarge plans to use the cash to take his company's first product, a medical device that measures prostate size, from the prototype stage to a manufacturable product. After a year of having no luck with local investors, LaFarge ended up cobbling together a group that includes one Boston-based angel and four venture capitalists based in Atlanta; Baton Rouge, La.; Boston and New Orleans. LaFarge talked to a total of 30 investor groups during the process.

"We had angels saying 'it's a VC deal' and the VC's saying 'it's an angel deal,' " said LaFarge. "We were right in between."

Historically, prime angel territory has been investments from $100,000 to $1 million, but as VC investments swell, angel groups have begun syndicating deals and investment sizes have gone up.

It's an increasingly common route for angels to take. In 1998 there were three angel groups in New England compared to 20 today. Some entrepreneurs compare these groups to small VCs.

"I found working with angel groups in New Hampshire and Vermont to be very positive," said Jean-Marie Vogel, CEO and founder of Pluromed Inc. in Woburn. "Some angel groups in Boston are trying to evolve and become mini-VCs. They become difficult, because they tend to be a little more conservative."

Initially, Vogel was unable to secure financing for his three-year-old medical device startup that makes injectable plugs to control bleeding during surgery.

So Vogel dipped into his own money and borrowed $250,000 for a convertible loan from a friend. It took Vogel a year to raise $1.6 million in startup capital from angel groups.

He recently closed another round of $2.4 million in angel funding. After speaking to about 500 investors during the process, Vogel said he thinks it might be easier to raise money from individual angels, who don't have to vote in large groups on whether to invest.

The tough climate will likely force more entrepreneurs to dip into their own savings, ask friends and family for money, pitch corporations or seek out federal funding such as Small Business Innovation Research grants.

"For entrepreneurs, it's a tough problem," said Jeffrey Sohl, director of the University of New Hampshire's Center for Venture Research. "An entrepreneur is forced to bootstrap a lot more and ring up some nasty credit card debt."

Hub Investment Management Group LLC, a Boston-based angel investing group with two funds of $12 million each and raising its third fund, has become cautious, often investing in companies that are ramping up operations, not starting them up. The process of securing funds has gotten slower as well, with the time it takes for due diligence at a high of more than four months. Once a company is in, however, the firm is committed to follow-on investments.

"Companies we are seeing have been around one to three years, whereas previously it was three months," said Charlie Cameron, founder and managing director. "The market doesn't pay us to take that early-stage risk anymore. I let friends, family and fools take the early stage risk."

Harry Mitchell, CFO of Sontra Medical Corp. in Franklin, tried to secure angel funding for a medical device startup in 2006 before he joined Sontra. Mitchell, unable to convince a room full of investors, scrapped the idea.

"I realize from talking to people that the days when people were looking for a good concept (to fund) ... that doesn't happen as much anymore," he said.

James Geshwiler, managing director of Common Angels in Lexington, which invests out of a pair of $10 million funds, disagrees that it's gotten any harder for entrepreneurs. He says it's always been hard. If anything, the increased amount of groups means that angels are more visible. But the average Common Angels round has gone up to $500,000 by themselves and $2.5 million when investing with other groups. Geshwiler acknowledges the business of angel investing is changing.

"What large angel groups do with money under management is they have created the reach and deal flow of a very big VC while having the more favorable economics of a small fund," said Geshwiler. "My dirty little secret is that I'm a venture capitalist."