More Guardian, Less Angel

Some angel investors are more down to earth than others. When former CFO Mead Wyman joined CommonAngels, a Boston-area group of private investors interested in helping fledgling businesses get their start, he was soon confronted with a challenge: an eco-friendly hazardous-waste-disposal business that the group had high hopes for seemed, to him, like a doomed proposition. The company's sketchy business plan lacked concrete milestones for completing a prototype or achieving positive cash flow. In fact, there was scant evidence that the concept, though innovative, could work. "Everyone said the deal looked good," recalls Wyman, 67, "but I turned them away from it."

The world of angel investors (so named for the well-heeled individuals whose generosity was often tapped to finance Broadway shows) has historically not been characterized by the sort of no-nonsense analysis that Wyman embodies. Then again, times have changed. The number of angel groups has tripled since 1999, but their average return trails that of garden-variety common stocks. Scarcer capital, less-forgiving markets, and trickier exit strategies call for more rigor. And who better to provide that than former CFOs, who are increasingly valued by networks such as CommonAngels, which are dominated by cashed-out CEOs. "CFOs have a special expertise," says Marianne Hudson, executive director of Angel Capital Association in Lenexa, Kansas. "They can put a critical eye to the analysis of the business model."

To Back or Not to Back
Among the 75 members of CommonAngels are several who have launched their own successful start-ups. Aside from Wyman, one or two others may have some CFO experience, but he spent his career in finance, helping to bring three companies public. Time spent sifting fact from fiction helped him to see that the waste-management company would burn through $1 million in projected seed money just to learn if it might be viable, and total start-up costs could run as high as $20 million, which could wipe the angels out. At best, getting off the ground might mean surrendering all or most of the upside to venture capitalists.

"We could be building a bridge to nowhere," Wyman warned his fellow angels. They listened and, reluctantly but thankfully, steered clear. "Everybody expects me to be more pragmatic," says Wyman, a three-year veteran of the group.

Ironically, a balloon-popping CFO may provide some comfort to angels, who have been rattled by the current economic environment. "Their net worth has been whacked, just like everybody else's," says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. Instead of retreating, they have adjusted by casting a wider net. Angels invested about $26 billion in 2007, a slight uptick from the year before, while boosting the number of deals they backed by 12 percent and growing their own ranks by 10 percent.

"There is a long list of skills that CFOs bring to the table," says Peter Rosenblum, a Boston lawyer who serves as counsel to the CommonAngels. "A lot of them came through the boom with money to invest. They may have been part of a [management] team that cashed out, but they are not ready to retire."

While research has found that over the past three years most angels would have been better off sinking their money into a stock index fund, every once in awhile (1 out of 14 times, to be precise)lightning struck and the angel investment produced a ten-fold return. And once in a great while, a thousand-fold return. With that kind of success at least possible, members may turn the enthusiasm they once devoted to entrepreneurs toward level-headed CFOs as potential fellow investors. "Any angel group would love to have an experienced financial executive," says Tim Keane, director of the 70-member Golden Angels Network in Milwaukee. "Their analytical skills can make the difference between a good investment and a bad one."

Ken Jones, a member of Ohio Tech-Angels, based in Columbus, retired seven years ago from his post as CFO at a maker of fiber-optic components. "I am familiar with the trials and tribulations of a growing company," says the 60-year-old, who became an angel three years ago. "I'm able to assess three years of financial projections and translate them into something that is meaningful. That is the only way for investors to calibrate whether this is going to be a lucrative venture or not."

Accent on Youth
Angel investing has matured from its days as a rich man's hobby more focused on psychic rewards than ROI, and in which investor enthusiasm often trumped business acumen. "Angels wanted to invest," says Peter A. Birkeland, CFO of RAIN Source Capital, a network of 23 angel funds based in St. Paul, Minnesota, and former CFO of two businesses. "They couldn't help but see a younger version of themselves in every presenter."

While venture capitalists routinely ignored $1 million deals on the theory that they weren't worth the effort it takes to track them, angels happily stepped in, becoming a growth industry in the process. Entrepreneurs with big ideas and scant capital now turn to angels as a first, and often last, resort, and as a result the $26 billion that angels invested in 2007 nearly matched the $29.4 billion put forth by the struggling venture-capital industry. Angels, however, backed 15 times as many deals, with an average group investment of less than $250,000.

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