Angel Investors Get Picky

Competition for startup cash is tougher than ever, and companies that might have sought venture capital in the past are turning to angels

By Amy Barrett

Software provider TowerCare Technologies’ Donna Myers. David Schrott, Jr.

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Meet the new breed of angel-backed entrepreneur. Donna Myers, president of software provider TowerCare Technologies, is in the process of securing $2 million in angel funding. But she’s no newbie: Her 22-person Wexford (Pa.) company has 160 customers and last year generated $500,000 in sales.

In years past, a firm of Myers’ size might have sought venture capital. But as venture capital funds have moved upstream, doing larger deals, angel investors are being pitched by much more established companies. Now it’s not just first-time entrepreneurs or those whose companies are in their infancy who are winning cash from angels, although those entrepreneurs are still pitching. Increasingly, successful candidates, like Myers, boast impressive experience and a significant customer base.

“The bar has been raised,” says Catherine Mott, who runs Pittsburgh’s BlueTree Allied Angels, which expects to put $2.8 million to work in about a dozen transactions this year, up from $1.8 million in eight deals last year. Her group plans to fund three more deals by yearend and has the enviable problem of picking among a half-dozen promising companies. “We are seeing such great quality deals,” Mott says. “Those six are going to be difficult to choose from.”

More Pitches

Mott’s isn’t the only group being courted more fiercely. The Atlanta Technology Angels are seeing about 50% more pitches than they did a year ago, says Knox Massey, the group’s managing director. James Geshwiler, managing director of CommonAngels in Lexington, Mass., says the number of proposals making it through his first cut jumped 36% in the first half of this year. Other groups are seeing smaller jumps: 10% at Wisconsin Investment Partners in Madison, 7% at Seattle’s Alliance of Angels.

Angel groups are linking up to do bigger deals. According to Jeffrey Sohl, director of the University of New Hampshire’s Center for Venture Research, the average angel deal in the first half of 2008 was about $540,000, up 8% from the same period in 2007. At the same time, some angels, rather than investing just in new companies, are also continuing to make big bets on companies they invested in earlier, says Sohl. That makes true startup dollars even harder to come by.

With the number of active angels jumping 10% in 2007, to 258,200, you might think relief is on the way. But the amount invested last year rose just 1.8%, to $26 billion, Sohl’s research shows. And he expects the dollars invested to hold steady this year. So the pursuit of angel dollars will only get tougher.

To hear what angel investors across the country say they are looking to invest in now, flip through this slide show.

Barrett is a senior correspondent for BusinessWeek SmallBiz. For more information, visit http://www.businessweek.com.