"Angel investors came back to life in 2005.
The Alliance of Angels – a network of venture capitalists and high-net-worth individuals – has pumped $7 million into 20 Washington state companies so far this year. That’s more than double the number of deals last year and triple the number in 2002, a low point for the organization.
It’s also an all-time high for the 8-year-old investment group – surpassing the dollars and number of deals at the height of the dot.com boom in 1999.
“We are optimistic, we definitely believe that it is a healthy market, but we still (have) caution based on the mistakes that we learned in the bubble time,” said Artour Baganov, an angel investor who backed two start-up companies through the organization this year.
Frazier Technology Ventures general partner Dan Rosen, who serves as chairman of the Alliance of Angels, said the new-found enthusiasm is being driven by experienced entrepreneurs who now see opportunities to take advantage of changes in the technology landscape. Angel investors, Rosen said, are tapping into those new entrepreneurial projects.
“We are getting a confluence of the angels, plus the exciting new technologies and businesses coming together,” said Rosen.
In the grand scheme of things, $7 million is not a lot of money. After all, some Seattle companies raise that much in one venture capital round.
But Rosen said angel investments, which typically are smaller and involve early-stage companies, serve as an important feeder system to the venture capitalists. And the fact that 20 companies raised money through the Alliance of Angels speaks to the optimism now surging through the Seattle start-up community.
“As we have said a number of times, the angel investments are, we believe, a leading indicator of what is going to happen in the venture market,” said Rosen.
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Venture capital investments in the state were down 8 percent for the first nine months of this year, though many venture capitalists have expressed optimism about the current climate. Some large venture financings have occurred in recent weeks, including $32 million for Light Sciences Oncology and $24 million for Revenue Science.
After enduring the pain of the dot.com bust, angel investors also appear to be re-energized. The Alliance of Angels, which holds meetings 10 times a year in which entrepreneurs present business plans to investors, typically invests in about 25 percent of the presenting companies. But this year, just over half of the presenting companies scored financing through the organization.
“It’s hard to say that that would be sustainable,” Rosen said.
But he said it does speak to the strong entrepreneurial and investment climate in the Seattle area right now.
“It just says that we are seeing great deals, in great areas that have prospect and that the angels recognize that and are taking out their checkbooks and writing checks,” he said.
There’s even more evidence that angel investing is making a comeback. Two new angel groups – The Keiretsu Forum and Zino Society – recently formed in the Seattle area.
The energy has some concerned that valuations at early-stage companies are starting to move too high. That’s a worry of Baganov, a former Internet entrepreneur who joined the Alliance of Angels in 1997. In some cases, he said there are “crazy valuations.”
“They are starting to come up, not necessarily in the same way as it was in late 1999 or early 2000 but sometimes we do” see them, he said. “The first questions we are asking ourselves when we are evaluating these deals is: remember the old days.”
Rosen said valuations are in check at the angel level, but he said venture capitalists are sometimes participating in bidding wars for later-stage deals.
“You are seeing multiple term sheets on some VC deals,” he said. “But I am not in a position to tell you right now whether I think that will be maintained in 2006 or not.”
A diverse range of startups received financing through the Alliance of Angels in 2005, including seven companies that have a physical product, four life sciences companies and nine consumer/lifestyle companies. Eleven of the companies have either developed a product or generated revenue – a trend that Alliance of Angels program manager Ed Hansen said runs counter to the traditional idea of angel investing.
“We are seeing that companies are typically further along on the pathway,” said Hansen, adding that entrepreneurs should note the importance of gaining that first customer."
