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  •   Start-Ups Make Pitch for Cash, Counsel at Private Investor Club

    By Elizabeth Corcoran
    Washington Post Staff Writer
    Saturday, December 27, 1997; Page C01

    LOS ALTOS, Calif.óLike kids everywhere, children in Silicon Valley still send their Christmas wish lists to Santa Claus. But fledgling companies here count on a different sort of benefactor – a group of investors known as the "Band of Angels."

    These angels aren't exactly in it for charity. Instead, they consist of some of high-technology's most successful executives, many now retired, who have plenty of money to invest and some advice to bestow.

    The Band of Angels made their fortunes in high-tech industries from computer chips to biotechnology. Now they want to help up-and-coming entrepreneurs, back a few new winners and keep a hand in the fiery world of high tech. What's more, they want to have a good time.

    On the third Wednesday of every month, the group gathers at the Los Altos Golf & Country Club, a luxurious lodge filled with hand-crafted furniture and cozy fireplaces. No one wears a name tag. "You're supposed to know everyone else," said Hans Severiens, the group's unofficial archangel and co-founder.

    Cocktails begin at 6:30, with dinner an hour or so later. Along with the main course, Severiens serves up three entrepreneurs at each session who describe their companies and try to win the enthusiasm of the angels. The rewards can include much needed venture funding.

    Over the three years that the Band of Angels has met, the group has heard presentations from more than 100 entrepreneurs, Severiens said, and funded about two-thirds of them. About half of those investments top half a million dollars.

    Individual angels typically invest about $50,000 each time they join a deal, Severiens said. All together, the group has invested $29 million over three years. Some angels invest in several deals a year, others don't. "It would be wonderful if everyone invested in at least four deals a year," Severiens said.

    For entrepreneurs, calling on these angels is a bit like entering a talent audition at Harlem's renowned Apollo Theater. It helps to be a relentless optimist who can keep smiling even when things go wrong.

    While the entrepreneurs themselves may champion state-of-the-art technologies, the most advanced gear in the room is usually an overhead projector. Dinner waits for no one, and the angels routinely interrupt presenters.

    "You get 10 minutes [to explain your company] – and they're serving food," said Melissa Prince, co-founder of Alere Medical Inc., a San Francisco start-up.

    But it can be worth it. On a rainy Wednesday night about a week before Christmas, nearly 80 angels gathered for their monthly dinner. Even excluding a few special guests, such as Gordon Moore, co-founder of Intel and now a billionaire, the combined net worth of the flock was probably close to $1 billion, one angel said. What's more, many of the executives are still running companies that could do deals with the start-ups. They have friends, outside the band, who are in the business. It is the ultimate Silicon Valley old-boy network.

    The featured entrepreneurs shared little other than their interest in wooing the angels. One represented an Internet company that hopes to go public in 1998 but needs cash to tide it over until then. Another designs the core elements of sophisticated computer chips and is talking with professional venture capitalists, but could use the peace of mind that angel financing would bring. The third builds software tools for making multimedia presentations for advanced data-storage devices called digital video disks.

    Each entrepreneur had about 15 minutes to describe company, product, market opportunity and management team. Between mouthfuls of roast beef and salad, the angels shouted questions from their tables. How much had the company already spent? What was its valuation? What about the competition? Dishes clinked. Waitresses cleared the tables. The next entrepreneur stood up.

    The presentations are essentially teasers. If any of the investors is interested in a company, he is invited to a luncheon hosted by the company the following Friday. There, in the course of about two hours, the start-up executives provide more details and demonstrations of their products.

    Raising money "is a great poker game," said Scanlon Taylor, chief executive of Virtual Silicon Technology Inc. of Sunnyvale, one of the presenters at the dinner. Investors want to know that other investors think a deal is sound, but "nobody wants to show their hand," he said. Entrepreneurs consequently need to gather as much support and momentum as they can, he said.

    Along with investing, angels are also responsible for inviting promising entrepreneurs to dine with the club. Ideally, an angel already is backing the entrepreneur and may serve on the start-up's board. Severiens is reluctant to list how many deals have been hits and which have soured. In the early days, many of the deals presented to the club "were not so great," he conceded. But as the club has grown, the deals they've found have become more interesting, he said. "We haven't had a big starburst yet," he said, but he's optimistic.

    Alere is one of the band's hot deals. It has received about $500,000 from the angels since Prince first addressed the group about a year ago. Now Alere, which makes a system that helps doctors keep daily tabs on people who have had heart failure by sending electronic updates, has funding from a well-known venture capital fund and is poised to roll out its product nationwide early in 1998. "The angels are all highly respected, sophisticated investors," Prince said.

    Similarly, Znyx Corp., in Fremont, Calif., which makes technology to help keep sophisticated corporate electronic networks running flawlessly, has raised about $2.3 million from angels, including a "good portion" from the band, said chief executive Connie Austin. Znyx benefited from the angels' expertise, as well. When she was looking for a specialist in quality control, she called an angel who was a pioneer in the field. "He got a resource here the next day," she said.

    Such angel investors are filling a key role in the ecosystem of Silicon Valley. Over the past few years, billions of dollars have poured into the coffers of venture capitalists. But any one VC, as the venture capitalists are known, can only manage about 10 deals at a time. That means that most VCs are looking for companies in which they can invest millions – which means they're typically past the garage-shop phase.

    The system often ignores the raw start-ups – the 10-person company, for example, started with savings from the founders and their friends, pointed out Dave Davison, a member of the band who has started a half dozen companies over the years. That's where individual investors, such as those in the band, come in. Investing in these deals at the "seed" phase is "a return to the early days of venture capital," Davison said.

    The band isn't the only angel clan in town. Carol Sands, who has made her fortune in public relations, is starting a group she calls the "Angels Forum." It will be a group of no more than 20 investors, half of whom will be women, who want to invest their money and expertise in helping small companies. And private investors abound.

    Three years ago, Severiens, who has spent 30 years as a professional high-tech investor, was among them. Like many wealthy individuals here, he often got calls from entrepreneurs looking for seed financing. "If it's an area you know, it's fairly easy" to help someone raise money, Severiens said. "If it's a new area [for you] then you have to do a lot of checking. . . . It can take weeks and weeks and weeks before you know if it's worth pursuing," he said.

    Along with friends Jack Carsten (one of the first executives at Intel) and Fred Hoar (who headed up marketing at Apple Computer in the days when the company paid far more in stock than in salary to its executives), Severiens decided to start a club. "We thought, wouldn't it be nice to have a club . . . where you could look at private deals and experts can tell you whether these deals are worth investing in or not," Severiens recalled. "We do due diligence. We're not just investing on a whim."

    The next time they saw a couple of interesting venture ideas, they invited the entrepreneurs to explain the work to them and a dozen or so friends, over dinner. And the Band of Angels was formed.

    "They wanted to call it the Ramona Club," Hoar recalled, based on the name of the street in Palo Alto where they met for their first dinners. But Hoar felt that Band of Angels had more cache. "I said, `Trust me on this.' "

    Since then, the group has grown like a start-up. Severiens now counts about 100 angels in his band – and has had to turn down some aspiring angels. "It's always difficult to say no," he said. But "we avoid `just money people,' those who made fortunes in say, real estate or retailing," he said. Most of the angels have been high-tech executives, who might be willing to spend time with start-ups and serve on a board of directors.

    For the entrepreneurs who presented before Christmas, the following weeks were filled with good cheer. All three had promises of funding from the angels. Scanlon, of Virtual Silicon, inadvertently found a new business ally as well – an executive of a chip company who invited Scanlon to do business with him rather than deal exclusively with the angels' arch competitor.

    "So far, I'm real delighted with these people," Scanlon said.

    FINDING THE MONEY

    CEOs turned to the following sources of funding to start up companies, according to a recent Inc. magazine survey:

    Personal savings 79%

    Family members 16

    Partners 14

    Personal charge cards 10

    Friends 7

    Bank loans 7

    Angel investors 5

    Mortgaged property 4

    Venture capital 3

    Other 8

    Note: Based on responses from 396 CEOs. Figures add up to more than 100 percent because some CEOs listed more than one source of fund.

    SOURCE: Inc. magazine, October 1997

    © Copyright 1998 The Washington Post Company

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