HITTING the BOOKS Angel Investors, Not Immune to the Ongoing Economic Turmoil, Are

20090323-A--11-NAT-CCI-CL_-- 3/19/2009 2:47 PM Page 1 MARCH 23-29, 2009 CRAIN’S CLEVELAND BUSINESS 11 INSIDE 13 SMALL BUSINESSES FIND POTENTIAL INVESTORS ARE LOOKING FOR FINANCE EVEN MORE CAPITAL. ANGELINVESTING By JOHN BOOTH [email protected] hrinking money pies, cloudy crystal balls and equations in which flat equals good. Turns out that the angel investing HITTING Spicture, despite its ties to cutting-edge technologies and emerging companies, has a lot in common with most economic sectors these days. THE BOOKS According to the regionally focused Venture Capital Advisory Task Force, Northeast Ohio saw $259 million invested Angel investors, not in 73 companies in 2008, though that immune to the ongoing figure reflects both angel investors and venture capital contributions. economic turmoil, That total is down from $318 million invested in 71 companies in 2007. On the are doing more bright side, however, the number of pre-investment companies receiving money is the highest since the task force, which is a group of homework to area venture community members, started its tracking four years ago. determine targets’ One sign of the economic times, said long-term financial Clay Rankin, managing member of the North Coast Angel Fund, is that there are viability more group efforts and less individual investments. See HOMEWORK Page 12 But there’s a reason his most Q: What benefits do angel investors between the individuals and the recent book is called “Fool’s Gold?: provide to the economy? groups? THEINTERVIEW The Truth Behind Angel Investing in America.” Dr. Shane said few A: Some angels provide financing A: From a public policy perspective, SCOTT SHANE angels make money on their for high-potential new businesses. probably not. There are many A. Malachi Mixon III professor investments. It sometimes appears Those who focus on making equity deals that are worth being done of entrepreneurial studies otherwise, however, because the investments in potentially high- because they have a decent Case Western Reserve University extremely successful ones get all growth companies are important chance of creating jobs and gener- the attention. because there are not a lot of ways ating wealth that aren’t being By CHUCK SODER “A small number are really that these companies could obtain done because of a lack of capital. [email protected] successful,” Dr. Shane said. “Most equity investments larger than But from an individual investor aren’t.” what the founders can invest. perspective, we probably have n Scott Shane’s view, angel Then again, he is a member of Without sophisticated angels, it enough angels. If we had a lot investing is important. It’s just the North Coast Angel Fund, a would be much harder to get these more, they would compete for the not the panacea some people Mayfield Heights-based group of companies the capital that they good deals, drive up the valuations make it out to be. angel investors from throughout need, hindering their growth. In of the companies and dry up the IAngel investors — individuals the region. He’s a big believer in short, sophisticated angels are opportunities. other than an entrepreneur’s family such groups, which screen deals beneficial the way venture Q: and friends who invest their own for their members and share their capitalists are; they don’t help a lot What’s the biggest mistake that money into a business — play an collective knowledge with the of companies, but they provide a individual angel investors tend to make? important role in getting early stage companies they finance. valuable source of capital to a FILE PHOTO/MARC GOLUB companies off the ground, said Dr. “It’s an incredibly efficient way small number of companies that Scott Shane, the A. Malachi Mixon III A: Shane, the A. Malachi Mixon III to do this,” Dr. Shane said. need external equity. Not thinking about how high professor of entrepreneurial studies at professor of entrepreneurial Dr. Shane recently answered their return expectations need to Case Western Reserve University, be- studies at Case Western Reserve some questions regarding the Q: Do we have enough angel be to make money. We are talking lieves angel investing is important, University. practice of angel investing: investors in Northeast Ohio, See SHANE Page 13 though he says it’s not easy. 20090323-A--12-NAT-CCI-CL_-- 3/19/2009 3:47 PM Page 1 12 CRAIN’S CLEVELAND BUSINESS WWW.CRAINSCLEVELAND.COM MARCH 23-29, 2009 FINANCE Return only part of angel equation Homework: Recession “Looking beyond North Coast, Chance to help fuel individual angel investors are creating an opportune time for a strong and robust entrepreneurial young companies’ environment in the region,” Mr. Rankin said. “Ohio is starting to get angels to fund startups success plays a part on the map.” Ray Yoder, chief financial officer continued from PAGE 11 By ARIELLE KASS of Western DataCom in Westlake, ON A WING AND A PRAYER “The fund continues to invest, [email protected] said he has been on both sides of and we are actively looking at many There are angels among us the angel investing phenomenon. deals. But we have also seen a who are helping to push ventures ary Mays wrote a check for Twice, Mr. Yoder has put up pullback on the part of our member forward and add to the economy. a $25,000 investment with money for companies he believed investors in doing what we call Consider the following: the assumption that as in but with which he was not ‘sidecar investments,’” he said, soon as he let go of it, he’d involved. In other investments, he ■ Angel investments contributed to referring to the opportunity that Gnever see the money again. has sought out angels for companies the creation of 200,000 new jobs in fund members have to throw in The angel investor and senior he was a part of and invested along the United States in 2007, or 3.3 additional money along with what adviser for MarketAccess Group with them. jobs per angel investment. they’ve put into the collective. doesn’t regret his decision for a While he has invested on his ■ In Northeast Ohio, from 2004 to moment, though. Like many other own, Mr. Yoder said it’s safer to do Due diligence 2008, the health care sector was angel investors, he would love to so as part of a group. The economy also has spurred the biggest recipient of investments, make millions from choosing to “You have to be unafraid of risk investors not only to huddle and in terms of angel or venture funds. finance the right startup at the right to be an angel,” he said. pool their financial resources, but time. But making money is only 44% of investments went to A spray-and-pray guy their networking, researching and part of the possible reward. FILE PHOTO/JANET CENTURY ventures specializing in health support. Pre-investment homework Mr. Mays — who has yet to see Since 2006, the North Coast Angel In his investments, Mr. Yoder care (medical devices and equip- has become much more valuable, whether his investment will be Fund and managing member Clay said he tends to focus his resources ment; biopharmaceuticals; and observers say, both in terms of successful monetarily — said it’s Rankin have raised $5.5 million and in one place. John Huston, manager health care services, medical in- knowing the company that’s the chance to influence a startup distributed money to eight companies. of the Ohio Tech Angels in Columbus formation systems and other) seeking funds and looking down business or encourage economic and chairman of the national Angel the road in terms of its overall 21% were in information development that draws his interest connect potential investors with Capital Association, said angel financial stability. technology in angel investing as much as the entrepreneurs who need the money. investors generally are marked by “We are probably dramatically 18% were in clean technology potential for high returns. Companies are checked out and one of two investing strategies. more conscious about the full (advanced materials and chemi- “I walked into it not expecting to filtered through the ARCHAngels, “Angels are either sharpshooters, amount of funding that is going to cals, energy and environmental) see my money back,” Mr. Mays said but it’s up to individuals or informal and focus on a handful of deals they come into a company,” Mr. Rankin of the check he wrote to the Cleve- groups of investors to decide which really like, or they use the spray- 17% were retail and consumer said. “We were not as sensitive to land-based North Coast Angel Fund endeavors they want to fund. and-pray approach,” Mr. Huston that a year ago, when it was easier ■ The number of active investors in at its founding. “I thought I was said. Only for the fearless for companies to find funding.”’ 2007 was 258,200 individuals, an contributing to the development of Himself a member of the spray- Investors ask far more questions increase of 10.3% over 2006. a new mindset, to a new section of North Coast Angel Fund raises and-pray crowd, Mr. Huston said he these days about other sources of a the economy in the state of Ohio.” money from its 99 member entities has made 41 investments in 31 SOURCE: THE CENTER FOR VENTURE company’s funding and how long RESEARCH AND THE VENTURE CAPITAL Angel investors, of course, are as a whole and divvies it up among companies. He said his attraction to it’s likely to take a startup to reach ADVISORY TASK FORCE motivated by the possibility of high startups as it sees fit.

Load more