Some high-tech companies are so risky that even venture capitalists quiver. That's when they turn to angels, who aren't afraid to fly to the rescue of cash-strapped innovators with chancy yet possibly lucrative ideas.
Last year, two dozen of central Indiana's most successful business veterans decided to intercede on behalf of Hoosier entrepreneurs. They formed HALO Capital Group, a network of angel investors who seek to speculate on promising Indiana startups.
Every other month, the HALO group meets at a member's home to watch a pair of promising young companies pitch their business plans.
There's a great deal at stake. If HALO members like what they see, they might offer enough cash to take plans off the drawing board. And, more important, the angels may share their expertise, as advisers or board members.
"We're calling it 'mentor capital.' We're hoping the money will bring along with it some expertise," said IT veteran David Becker, an angel in the HALO group. "We really expect to take a role in helping the companies get off the ground, not just help them with funds."
HALO originated last summer, when Becker and his friend, fellow Indiana IT veteran Mark Hill, were lamenting their angel-investing opportunities. They've both been regularly solicited by would-be IT entrepreneurs ever since they sold their own banking software companies, re:Member Data Services and Baker-Hill Inc., respectively.
It would be great, they agreed, if an expert organization could prescreen business plans and weed out the best from the rest. What's more, they wanted to see businesses from other high-tech areas outside IT, such as life sciences and advanced manufacturing.
So they began recruiting fellow angels who had successfully cashed out of other industries. And they asked technology initiative Techpoint to serve as HALO's first point of contact for the public.
HALO, which stands for Hoosier Angels Looking for Opportunities, has now met three times. Although it hasn't done a deal yet, it has created a Web site: www.halocapitalgroup.com.
In addition to Becker and Hill, it includes wellknown Indiana business names like Autobase CEO Scott Webber, former WellPoint Vice President Jane Niederberger, Hatworld co-founder Scott Molander, and Ron Henriksen, chairman of life sciences startup Semafore Pharmaceuticals.
Most of HALO's members asked that their names not be disclosed.
HALO will consider speculating only on companies with Hoosier roots. Because the backgrounds of its members are so diverse, Becker said, it can contemplate investments in a vast spectrum of high-tech businesses. And if HALO's individual angels aren't familiar with a particular area, they likely know someone who is.
"Every deal, every opportunity we've looked at, somebody knows someone who can lend a hand and help us out. That's where the energy of the group is coming from," Becker said. "We really do look to each other for expertise."
HALO is not unique. According to Marianne Hudson, executive director of the Lexena, Kan.-based Angel Capital Association, there are no reliable statistics about how many angel investors currently reside in the United States. To become one, an individual must simply show the Securities and Exchange Commission he or she has a net worth of at least $1 million, or compensation of at least $200,000 annually for the last two years. Angels' investment activities aren't formally tracked as a group.
But increasingly, Hudson said, angels are joining together. She said ACA is now aware of 265 U.S. angel groups.
"And I find out about new ones all the time," she said. While their concentrations are still highest in technology hotbeds like Silicon Valley, she said there is now at least one in nearly every state. On average, they invest $300,000 per deal, as opposed to the $7 million per deal venture capitalists risk. The key difference: Most venture capitalists want a company to have an established track record, employees and perhaps a sales pipeline. Angels invest at a much earlier stage of development.
Angel success stories
A great many companies that are now household names began with angel money, Hudson said, including Yahoo!, Google, Starbucks, PayPal, Amazon.com, Cisco Systems and Best Buy. On average, angels earn 2.6 times the money they invest, or a 27-percent internal rate of return. But a handful of blockbuster companies are responsible for most of those gains. She said 8 percent of all angel investments are responsible for more than half the category's returns.
Of course, it's incredibly difficult for even the most experienced investors to identify the next Google. That's why angels look first and foremost for talent. HALO's Hill said it's a better bet to identify the team who can build the better mousetrap than to invest in the mousetrap itself.
"Angel investing and early-stage investing is all about the people you're investing in," Hill said. "Most people think it's about the idea. 'Geez, if I have a good idea, somebody will invest in that.' The reality of early-stage company development is they tend to change and morph from the original idea. So it's very important that you have a management team that can execute on those changes that inevitably come."
Other angel groups
HALO isn't Indiana's only angel group. More than a decade ago, Indiana Economic Development Corp. Director of Small Business and Entrepreneurship Bruce Kidd attempted to form an angel network called AngelNet. But in the years since, he said, angel groups have formed in every one of Indiana's major urban areas, including Fort Wayne, Evansville, Bloomington, Lafayette, Kokomo and Anderson. Kidd regularly suggests promising companies to each of the various angel groups.
That kind of "warm introduction" makes a huge difference. Angels seldom invest in cold calls that originate from someone they don't know and trust. Kidd said most angels also seek entrepreneurs who want the benefit of their wisdom.
"They want to build companies. That is a key component. They want to be engaged," he said. "This is not about the rich getting richer. This is about people who want to be engaged with companies at a critical stage, provide contacts and prepare them for a bigger opportunity."
Jim Larkin, president of Grangerbased Scientific Methods Inc., is just that sort of angel. He's one of the most active members of Irish Angels, a group of investors affiliated with the University of Notre Dame. Larkin didn't attend school there, but his son did. He got involved with Irish Angels after his son won Notre Dame's annual business plan competition.
Speculating on startups isn't for everyone, Larkin said. But affiliation with an organized group makes it a lot easier.
"If angel investing wasn't risky, banks would be doing it," he said. "You have to be willing to take a chance."