Investing in Dreams: Northwest Programs Educate New Angels

4/14/14Follow @bromano

Desney Tan is a decorated computer scientist and principal researcher at Microsoft Research where he works on mobile and wearable devices. He’s done well enough to have “a couple extra dollars to toss around,” he says, and he wanted to take his passion for technology up another notch by investing some of those dollars in early-stage companies. But he didn’t know how to get started.

“There’s always been, to some degree, a perceived high barrier to entry for getting in either at the entrepreneur side or the investing side,” says Tan, who has spent most of his career at large companies.

Last year, he attended the Seattle Angel Conference, one of a growing number of programs designed to educate wealthy individuals on the basics of angel investing. Now Tan, 37, is participating again, this time committing $5,000 to a pooled investment fund, plus an additional $500 to cover legal, accounting, and other costs.

“If you look at the investment commitment at this level, it’s actually quite low-cost tuition to really get your toes wet in this space, and to learn from fairly seasoned investors,” Tan says.

After evaluating more than 40 local startup companies, Tan and the other conference participants will select a group of finalists and pick one for an investment of about $150,000 at the fifth Seattle Angel Conference next month. Tan is hooked and plans to stick with angel investing for the foreseeable future. It not only dangles the lure of a future payoff, he says, it also makes him feel like he is helping the whole tech sector in the region grow. “The community gets built as a result of people engaging deeply over a longer period of time,” Tan says.

Tan

Tan

Recruiting new angel investors and growing the community was what John Sechrest, a software developer and angel investor, had in mind when he organized the Seattle Angel Conference (SAC) in late 2011. Modeled on similar programs in Oregon, SAC has helped introduce nearly 80 investors to angel investing, Sechrest says. The winning company selected at the culmination of each 12-week program receives a relatively modest investment, ranging from $100,000 to $205,000 through the first four SAC programs. But the point is to help would-be investors get comfortable making risky, early bets on local startup companies, while also providing nascent businesses a source of exposure and very early capital.

The United States already has hundreds of angel groups—and many have always worked hard to educate potential investors. What’s new is that a few groups with the explicit intent to educate newcomers have taken root, particularly in the Pacific Northwest. “These are rare,” says Robert Wiltbank, a professor at Willamette University who studies angel investing and is a board member at the Angel Resource Institute. “This is actually kind of a Northwest thing.”

Another new one coming to the Seattle area is the Pipeline Fellowship. Begun three years ago in New York, it is an angel investing boot camp for women that is expanding to Seattle this fall. The aim is to be “a launch pad into angel investing” for women, with a specific focus on women-owned social enterprises, says founder and CEO Natalia Oberti Noguera.

These new efforts are helping to meet a growing demand for education about angel investing, driven by media coverage, awareness of the JOBS Act and crowd-funding platforms like Kickstarter, and shows like Shark Tank, says Marianne Hudson, executive director of the Angel Capital Association, a national trade group with 12,000 members.

“More people are thinking, ‘Hey, I could be an angel,’ and realizing they need to get a good grounding in being a good investor, or they’re going to lose their money,” she says.

That good grounding may be particularly needed in Seattle, which has a reputation for punching below its weight-class when it comes to entrepreneurship and angel investing. New data from the Kauffman Foundation on entrepreneurial activity found just 220 entrepreneurs per 100,000 people in the Seattle-Tacoma-Bellevue area, despite the presence of major technology companies like Microsoft and Amazon, and the region’s depth of technology talent. That’s a lower rate per capita than all of the 15 largest U.S. metropolitan statistical areas, except Chicago (200 entrepreneurs per 100,000 people) and Philadelphia (180 per 100,000). San Francisco led the pack with 570 entrepreneurs per 100,000 people. In addition, Northwest-based angel groups accounted for only 7.7 percent of 2013 deals nationwide tracked in the latest report on angel investing trends from the Angel Resource Institute, CB Insights, and Silicon Valley Bank. Most of the deals—18.6 percent—are done by California groups.

One common explanation for the perceived dearth of angel investors in Seattle is that many people here followed a more conservative path to wealth, such as working at a big, established tech company such as Microsoft or Amazon.

“Most of the Microsoft and Amazon millionaires didn’t start Microsoft and Amazon and weren’t there when it was a young company,” says Michael “Luni” Libes, a serial technology entrepreneur and angel investor. “They’re wealthy now, but they’re not entrepreneurs, and so their first thought isn’t to turn around to be angels and feed the next generation of entrepreneurs.”

In contrast, Wiltbank points out, the typical angel investor is someone who has built and sold a business.

“They cashed-out as entrepreneurs,” he says. “Cashed-out entrepreneurs know that you actually can make money doing entrepreneurship. Rich people who’ve never done entrepreneurship are much more skeptical of that fact. … If you’re a multimillionaire from Weyerhaeuser, you’ve spent your whole working life watching startups come and go.”

But with the right encouragement and training, people like John Sechrest believe, more of these millionaires could become enthusiastic angel investors—defined as people who put their own money into start-ups, in contrast to venture capitalists who typically invest others’ money. An active community of early stage, risk-tolerant investors is widely considered a key ingredient to a healthy innovation economy.

Who can be an angel?

An angel investor must be an individual accredited investor, meaning that he or she earns at least $200,000 a year ($300,000 for a married couple), or has a net worth, not including primary residence, of at least $1 million.

There were more than 9.6 million U.S. households with a net worth of … Next Page »

Benjamin Romano is editor of Xconomy Seattle. Email him at bromano [at] xconomy.com. Follow @bromano

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