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.

Those smaller stakes still represent huge risks. A 2007 study co-sponsored by the Ewing Marion Kaufman Foundation and the Angel Capital Education Foundation looked at the experiences of 86 angel groups exiting 1,137 investments and found that only 48 percent delivered a profit. It also found that due diligence pays off. Angels spend an average of 20 hours on due diligence before going forward. When these investors dug around for less than 20 hours, two in three deals went sour, but when due diligence exceeded the average time, just one deal in three bombed. Checking entrepreneurs’ references, calling potential customers, and, far from least, scouring the financials, counts for a lot. “A CFO can look at the numbers and come up with the relevant questions,” says Ken Jones, who has invested in four companies as a member of Ohio TechAngels.

“Generally, there’s a correlation between the amount of time you spend asking questions and how it all turns out,” Jones adds. “The more you ask, the more you learn about the entrepreneurs and the opportunity.” Adds former CFO Steve Bennet, board director at Sand Hill Angels, a 60-member group in Menlo Park, California: “A CFO is trained to look for holes.”

Increasingly, the absence of a CFO in an angel group is a hole the members are eager to fill. “Angels have let me know that they’d like to have me,” says Jim McCloskey, former CFO of Red Robin Gourmet Burgers, a 400-unit casual-dining chain based in Greenwood Village, Colorado. But McCloskey hasn’t bitten. Since retiring in 2005, he has resisted overtures from angel groups. Although he does attend some events, he doesn’t think it’s worth paying $2,000 in annual dues to become a full-fledged member.

“CEOs are confident in their ability to think like customers,” says Dave O’Brien, CEO of The Business Catapult, a Boulder, Colorado-based matchmaking service for angel investors. “But CFOs are just what they need: someone who can think like an investor.”

All entrepreneurs project astronomical growth, Wyman says, but they don’t always make sensible assumptions about the structure needed to support it. Can you really grow from $5 million to $20 million in sales while only staffing up from 20 people to 30? Rosy projections routinely overlook indirect costs such as rent and utilities. Schemes for manufacturing overseas ignore such basics as working capital pending deliveries, credit terms, and longer lead times. Will retailers actually pay in 45 days, or is 90 days more likely?

McCloskey recalls one pitch he sat in on from a start-up that was already selling its high-end gun safety-lock to big-box stores. Or so the management team said. After wrestling more-detailed documents from them, McCloskey saw what was really going on: retailers were filling their pipelines with the product, but it wasn’t leaving their shelves.

Since retailers were unlikely to reorder, McCloskey wanted to know what the entrepreneurs had in mind for a second product. The answer: a lower-price version. But as McCloskey pointed out, there were already plenty of those out there. He urged his fellow angels to dodge a bullet by passing on the investment. “I had to say something,” McCloskey says, “as much out of self-preservation as anything else. I didn’t want them all coming back to me and asking, ‘How did you miss that?'”

Wyman readily concedes that “it takes a lot to get a CFO excited,” but angels don’t prize CFOs for their naysaying alone. Rather, it’s their tendency to evaluate investments with an ending in mind. When the initial excitement of a sure-fire product or service wears off, success often rests on stock strategies, liquidation preferences, convertible debt options, or ways to improve working capital — that is, levers that CFOs know how to pull. “A CFO can put everything into play,” says angel Todd Argall, the former CFO for a private-equity firm. “It’s only a good deal if there’s an exit option that offers us the return we want.”

Success may sometimes hinge on being willing to forgo success. When Boston’s CommonAngels group decided to pass on that waste-management firm, another angel group stepped in. So far it seems to be on track, but Wyman sees no cause for second-guessing. “As far as I know, they are doing fine,” he says. “But who knows how long that will last?”

Josh Hyatt is a freelance writer based in Boston.

Getting Your Wings

If you’re interested in becoming an angel investor, here are some steps you can take to join a group:

1. Make sure you’re accredited. Have you got money to lose? Groups want their members to fit the Securities and Exchange Commission’s definition of accredited: have a net worth of $1 million, with an annual salary of $200,000 or more for at least the last two years. Groups will ask about this. If you’re accepted, expect annual dues of about $1,000.

2. Find a nearby angel group. Seven out of 10 angels invest in companies that are within 50 miles of their home or office. To find a group in your orbit, go to www.angelcapitalassociation.org.

3. Do your own due diligence. Most angel groups are set up as networks, meaning that you decide whether you want to be part of each deal. But 20 percent of groups that belong to the industry’s Angel Capital Association are structured as funds and decide which investments to back by voting. Groups run by professionals tend to be less time-consuming. To find an angel group that fits your style, spend time on its Website and attend at least one meeting. — J.H.