Angels Drawn To Idea of Flying Solo
By Shannon Henry

Thursday, January 30, 2003; Page E01

The granddaddy of Washington "angel" clubs, the Private Investors Network, held its final meeting yesterday in Reston, a sign that this type of investing -- a concept fueled by communal smarts and greed -- has run its course.

The group had been gathering wealthy Washingtonians since 1996 for monthly meetings and investment pitches. At its height, PIN had 130 members -- at its demise, 80. PIN is disappearing simply because even the richest investors have less money to bet, and they're terrified to risk what they have left on start-up technology companies.

Angel investing clubs, one of the hottest boom-time trends, have hit the skids, faced with disgruntled members and portfolios of companies on life support. There's less disposable income to go around, and the thrill of group investing has given way to a desire to control one's own finances more closely.

Some clubs, like the venture capital firms facing tough times, will perish. Others are trying to reinvent themselves to face a more sober economic environment.

John May, who made a national name for himself as the organizer of several angel funds under the umbrella group New Vantage Partners in Vienna, is busy revamping his plans. May was executive director of PIN, which he ran on behalf of the Mid-Atlantic Venture Association. Two of the other clubs he's been managing along with Cal Simmons -- the eMedia Club and the Dinner Club -- have finished making new investments. Another club, the Washington Dinner Club, still has some money left to invest.

But an investor always has to be looking for new deals and planning future funds. May knew that if he wasn't raising a new pool of money, he wasn't expanding his angel network. He tried to get members to commit to investing in a new club but fell short. "I couldn't get enough people to sign up," May says. So instead of closing shop, he decided to try a different model.

He's just launched Active Angel Investors. It's a fund where members gather to hear pitches, but instead of making a group decision, each concludes individually whether to invest.

"This keeps me in the business," May says. "It's a way to stay afloat."

Angel members had begun to complain that they missed a meeting when a key choice was made, or that they disagreed with a vote but had to watch their money go into a company nevertheless. "Some people were not enamored of the one-for-all, all-for-one model," May says.

Active Angels pay a $2,500 initial fee and $2,500 in annual dues on top of whatever they decide to invest. About 2 percent of investments go to management fees on an annual basis. If a portfolio company does well -- if it's sold or goes to an initial public offering, for example -- May will get a cut. May says he has about 20 people signed up and expects the group to eventually number about 50.

These members will have drastically lowered expectations -- no one's counting on instant IPOs. It's what it was like 10 years ago, May warns. But he hopes potential angels will like that they don't have to commit to a pot of money upfront.

Another Washington angel club has changed its model in a similar vein. The Capital Investors, an invitation-only group of some of the best-known names in technology business, such as AOL Time Warner executive Ted Leonsis and former WorldCom chairman John Sidgmore, decided at its December meeting to let members individually choose whether to invest in a deal. When the club began meeting monthly in 1999, it would hear investment pitches and then decide as a group to invest or not, using money that had been pooled and set aside.

Capital Investors, like many angel clubs, has a dismal financial track record, although it recently returned money for the first time on one investment, telecommunications clearinghouse BizTelOne, which was sold. Part of the problem, says Capital Investors' new executive director, Jagtar Narula, was that members didn't feel a personal affinity for the companies they were investing in, especially if they happened to have missed the dinner when the decision was made.

"No one has been there to see the company is being nurtured," Narula says. "If they actively make the decision on their own, they have much more of a vested interest in the company." Most deals the group sees now are brought in by individual members. Previously, the executive director chose most of the businesses invited to present.

Capital Investors' membership has changed in the past year. Some of the highest-profile members, including AOL's Steve Case , MicroStrategy chief executive Michael Saylor and Gov. Mark R. Warner (D-Va.), have dropped out. Dropping in are new members including Bill Walton of Allied Capital; Phillip Merrick, chief executive of WebMethods; and Jack Davies, a former AOL executive.

Some of the full-time, professional venture capitalists were especially put off by the quick decisions.

"In the old days you came to a dinner and in 20 minutes you had a yes or no," Narula says. "There was a difficulty in making a decision in a 20-minute meeting." Capital Investors has been debating whether to make this change for about six or eight months, Narula says, and will reassess the move in another half-year.

Even as they struggle with their identities, there are reasons why angel clubs are needed now more than ever. Most venture capital funds now eschew investing in the earliest stages, preferring to wait until a business has proven itself. That leaves the newest companies with few funding options. And although even the richest have seen their net worth slashed, a growing number of cashed-out executives are looking to play with some of their money.

Whether this individual-driven angel model, known in the investing world as a "pledge fund," is successful will depend on the same things the old angel networks needed: finding great, preferably patented, ideas at companies run by experienced management and investors with realistic expectations.

Shannon Henry's e-mail address is


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