More Companies Are Being Touched by Angels

The lights dimmed in the swanky dining room of the Balboa Bay Club in Newport Beach, and Scott Zimmerman strode briskly to the podium. Surveying the gray and blue suits before him, the entrepreneur humbly asked the assembled angels for a little bit of heaven.

Zimmerman, 37, chief executive of StoragePoint, a San Diego start-up, was speaking to the Tech Coast Angels, a 2-year-old Orange County network of 89 entrepreneurs, venture capitalists and businessmen that, along with a growing number of similar outfits in the region, helps transform cash-starved fledgling firms into thriving companies.

On this particular evening, Zimmerman was asking for $640,000 for StoragePoint, whose technology allows computer users to access their personal files from any PC in the world.

During his 15-minute presentation, the audience listened raptly as he described StoragePoint’s potential market and sales and, most important, noted that companies such as Yahoo, Microsoft and Alta Vista could one day be interested in acquiring StoragePoint for its technology.

For the angels, who make their money when the companies in which they invest go public or are snapped up, Zimmerman’s presentation struck a responsive chord and opened up some wallets.

Two angels said they were ready to make five-figure investments, and several others expressed interest. “I’ve gotten some real good feedback,” Zimmerman said. “I’m really excited.”

Like Zimmerman, entrepreneurs elsewhere are feeling a bit more upbeat as new angel networks spring up “all over the country, from very small towns to large cities,” said Dan Loague of the National Assn. of State Venture Funds in Oklahoma City. Networks have appeared or are being formed in Baltimore, Phoenix and Cedar Rapids, Iowa.

Now groups of angels--the term originally referred to financial investors who backed shows on Broadway--are spreading their wings throughout the Southland. Angels, both individually and in groups, are investing more money here than ever before. A new angel network has sprung up in Beverly Hills, and others are thriving in Orange County and San Diego. They, along with the Band of Angels, Sacramento Angels and Sierra Angels up north, have made the state the cherub capital of America.

Last year, private angel investors poured an estimated $20 billion into 30,000 businesses, twice the dollar amount of a decade earlier, said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.

Typically, angels and angel networks are the first source of outside money for a company, contributing $50,000 to $2 million for an ownership stake of 20% to 40%. Angels expect the firms they fund to go public or get acquired in five to seven years.

The money, which helps promising young companies get off the ground, goes toward such things as the development of product prototypes. Venture capital dollars, if they come at all, usually involve larger investments that help growing businesses beef up their sales and marketing teams, recruit key executives and expand production capabilities, among other things.

Angel networks are proliferating, in part because of the booming economy and the wealth it has created. Many angel investors, both those flying solo and flocking together, are high-tech entrepreneurs who have recently sold their companies. These freshly minted millionaires “like the game and want to be part of it without having to work 18 hours a day or be CEO,” Band of Angels founder Hans Severiens said.

In Beverly Hills, the Acorn Angels--a network with 30 members, including CEOs, venture capitalists and a couple of Tech Coast Angels--holds quarterly meetings to hear pitches from high-tech start-ups. The group, which was founded in September, has yet to make an investment but is on the verge of two deals, said Acorn Angels co-founder and securities lawyer Leib Orlanski. The San Diego Band of Angels has 120 members and has invested in more than a dozen deals. In Los Angeles, Los Angeles Regional Technology Alliance is considering creating an angel network.

Money is flowing to Southern California, in part because investors are becoming aware of the quality of the companies here. Another reason is the growing disenchantment with Silicon Valley. Booming real estate prices, coupled with high salaries for computer programmers, engineers and executives, have made it difficult for start-ups to find reasonably priced offices and personnel there.

To be sure, Silicon Valley is still king, but Southern California and other high-tech hot spots are attracting ever more attention from both investors and entrepreneurs, said Elton Sherwin Jr., author of the entrepreneurship book “The Silicon Valley Way.”

Despite the increased flow of investor money into Southern California, fledgling businesses still have difficulty getting funded. A recent state study concluded there was a $5.4-billion funding shortfall for fast-growth “gazelle” firms in Los Angeles and Orange counties. These companies are usually small and young, with sales growth of at least 20% a year.

Venture capitalists have poured record amounts of money into Southland businesses, but only a fraction of that money has gone to early-stage start-ups in need of modest amounts of cash.

“The venture capitalists are looking for the grand slam,” said Eric Flamholtz, a professor of management at UCLA’s Anderson School. “That makes it hard for the little guy to get some funding.”

That’s where Tech Coast Angels and similar outfits come in. In addition to providing sorely needed funds for young companies, they can pave the way for larger infusions of cash from venture capitalists. The Tech Coast Angels, for instance, have invested nearly $6.8 million in 10 Southland start-ups, which in turn have raised $17.3 million more in venture and private placement money.

“Good angels can increase the chances of a company becoming venture capital-funded by maybe tenfold,” Tech Coast Angels founder Luis Villalobos said.

Being touched by an angel, especially a Tech Coast Angel, can bring a fledgling firm credibility it might otherwise lack, said Jim Armstrong, a principal at Idealab Capital Partners in Pasadena, the venture capital wing of business technology incubator Idealab.

“If I have two business plans come in and one of the companies has been funded by the Tech Coast Angels, I’m going to take a closer look at it,” he said.

Companies that receive Tech Coast money also gain Tech Coast expertise.

Like other angels, Tech Coast members often mentor the firms in which they invest. The two Tech Coast members sitting on the board of Wazzu Corp., which builds Web sites and online stores for small companies, have introduced company executives to venture capitalists and helped negotiate an increase in its line of credit, said Wazzu Chief Executive Jayme Amirie, 34. The Fountain Valley-based company now has 107 employees and monthly sales of $1 million.

The Tech Coast Angels “are going to take us to the next level,” Amirie said.

At Wedding Referral Services Inc., which does business as 1-800-Wedding, 27 Tech Coast members have invested $1.2 million in the company in two rounds. In addition to giving money, angels helped the Anaheim company recruit a new chief financial officer and introduced its executives to the venture capital community.

“We would not be where we are today without the Tech Coast Angels,” said Chief Executive Donne Kerestic, 27. “The company would be little more than a good idea.”

Not every angel works miracles. Indeed, Severiens of the Band of Angels--which was founded in January 1995 and counts former executives from Intel and Hewlett-Packard among its membership--thinks neophyte investors and networks might play only a limited role in helping new companies soar, because some angels lack mentoring skills.

“There’s lots of people who call themselves angels and groups of guys meeting for breakfast who throw money at companies without much analysis and then forget about them,” he said.

The Tech Coast Angels has tried to emulate Severiens’ group. Like the Band of Angels, the Orange County network holds monthly dinner meetings where carefully screened entrepreneurs introduce their companies to investors. Members of the Tech Coast Angels also are well-heeled. All are accredited investors who promise to chip in at least $50,000 per year in Tech Coast-sponsored deals.

The Tech Coast Angels have generated so much interest from budding entrepreneurs that they plan to open a Los Angeles chapter within a year.

The appearance of Tech Coast Angels, Acorn Angels and the San Diego Band of Angels notwithstanding, Southern California still has a way to go before catching up to Northern California.

“They know the drill up there: how to raise money, use stock options to attract good people,” said Fred Haney, a venture capitalist and Tech Coast member. “Down here, it’s not that people aren’t as good at those things; it’s just that they haven’t had as much experience going through the start-up process.”