TechThursday The Post's expanded Thursday Business section debuts.

Third of three parts

By Shannon Henry
Washington Post Staff Writer
Tuesday, December 8, 1998; Page A1

By day, these 18 men run the companies and investment groups that are most important to the growth of the Washington area technology scene: Steve Case of America Online, Alex Mandl of Teligent, Michael Saylor of MicroStrategy, Rajendra Singh of LCC International and others.

Once a month for the past year, quietly until now, these multimillionaires have met for dinner, swapping shop talk and vacation tips.

Then the entertainment begins.

An entrepreneur who can't help but want to be just like them is ushered into the private dining room at one of the local hotels or restaurants the group has met in. The CEO hopeful delivers a 15-minute pitch about his start-up company and why this group should fund it.

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It seems like a plea for divine intervention. And, in fact, the men around the tables are known as "angels," high-net-worth individual investors. The 18 members of the Capital Investors group share common goals: They are hoping both to spot the next hot local company whose returns will add to their millions and to fuel the region's economy with their money and connections.

Each made his fortune in Washington and is now putting at least a chunk of it back in, instead of investing in California or Boston companies or the stock market. The formation of this and other local angel networks marks a coming of age for Washington's technology community. There are now enough "cashed-out" executives and successful entrepreneurs who are now lifting their eyes up from building their own companies to focus on building the whole region.

Members of Capital Investors are not of the old guard – government contractors – but the newer millionaires whose wealth tends to come from the Internet and other competitive technology industries.

With more than a quarter million technology employees in the area it's clear the region has arrived as a technology center. But how growth will be sustained rests heavily on these people who jump in to fuel a company after the point at which its founder has run up her credit cards to the limit and before the professional investors known as venture capitalists move in.

"Wealth has been created and is now being recycled," says John May, an area investor who manages two other angel groups in Washington. "These people haven't moved away, they have kids in school, they're young and they are looking for places to put their money."

Really in its infancy as a group, Capital Investors so far has heard about 20 dinner-time pitches and has made just one investment, in an Alexandria Internet firm called Cyveillance Inc. Each member has ponied up an initial $100,000, though the pot could grow later. The group plans to make fairly small commitments – from $50,000 to $500,000 – in companies, with each member putting in an equal amount to the deal.

"We're looking for people who are smart and passionate," says angel John Burton, managing director of Updata Capital. "We want 10 more MicroStrategies," he adds, invoking the name of Saylor's Vienna-based company, whose shares skyrocketed as much as 100 percent on the first day of trading after it sold its first shares to the public in June.

The United States has about 300,000 angels, who invest about $30 billion a year, according to Gerald Benjamin, president of International Capital Resources, a San Francisco company that links investors to companies. The best-known group, Silicon Valley's Band of Angels, includes Sun Microsystems founder Owen Brown and Compaq Computer Chairman Ben Rosen.

There are few easy roads from start-up to technology blockbuster, but there is a money path many hope to follow.

The scenario goes like this: The techie gets a great idea and starts a company with cash from selling another business, charging on credit cards or liquidating a handy trust fund or 401(k) retirement savings accounts. Some then turn to what's known as "friends, family and fools," who kick in because they love the entrepreneur and want him to succeed.

First Outside Money

That outsider money can then coax millions more from a venture capital firm – a professionally managed investment complex that pools money from such sources as pension funds and university endowments to channel into small companies.

Many companies go through several rounds of venture financing, and the venture firm usually appoints someone to the company's board of directors. The next step to success is a public offering of stock. That's where early investors can make their killing – if they're lucky.

Origin of the Idea

They all saw that companies were having trouble getting an initial infusion of cash, often called "seed" capital and otherwise known as a start-up's first big break.

"It's always the toughest capital to secure," Ramsey says.

Three years ago, Ramsey notes, this angel group couldn't have existed because the angels' net worth and connections had not yet materialized. But things have changed fast. "It's hard for some people to appreciate the lightening speed of how this region has grown," he says.

"The Capital Investors can propel a company a year forward in a matter of a couple of phone calls," says Brandy Thomas, chief executive of Cyveillance. He should know. Cyveillance, which uses its software to find illegal uses of a company's information on the Internet, is so far the only company the group has funded.

It's not an easy crowd. "These are people who are unreserved," says Burton. "There are a lot of strong egos in the room."

Another of the group, Steve Walker, who recently sold his company, Trusted Information Systems, to software security firm Network Associates and now runs his own venture fund, compares his angel work to being a grandfather. "We get to offer advice but then don't have to make all the details happen," Walker says. "For me, for where I'm at, that's cool. I don't want to start another company."

While the Capital Investors are the wealthiest of cherubs, they aren't the only angels in town. Fran Witzel of the Morino Institute, the a nonprofit think tank the Morino Institute of in Reston, spends most of his time matching private investors to investees. He jokes that there must be a bathroom frequented by entrepreneurs somewhere in the area somewhere that has the electronic-mail address fwitzel@morino.org scrawled across the wall.

Witzel organized an "Angels and Revolutionaries" evening in November that drew 1,000 area would-be area givers and takers to the McLean Hilton. Many in the audience were trying to figure out just how to get that seed money.

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