More Guardian, Less Angel

When CFOs join the clubby world of angel investing, they don't spoil the party so much as ensure it goes on.

Some angel investors are more down to earth than others. When former CFO Mead Wyman joined CommonAngels, a Boston-area group of private investors interested in helping fledgling businesses get their start, he was soon confronted with a challenge: an eco-friendly hazardous-waste-disposal business that the group had high hopes for seemed, to him, like a doomed proposition. The company’s sketchy business plan lacked concrete milestones for completing a prototype or achieving positive cash flow. In fact, there was scant evidence that the concept, though innovative, could work. “Everyone said the deal looked good,” recalls Wyman, 67, “but I turned them away from it.”

The world of angel investors (so named for the well-heeled individuals whose generosity was often tapped to finance Broadway shows) has historically not been characterized by the sort of no-nonsense analysis that Wyman embodies. Then again, times have changed. The number of angel groups has tripled since 1999, but their average return trails that of garden-variety common stocks. Scarcer capital, less-forgiving markets, and trickier exit strategies call for more rigor. And who better to provide that than former CFOs, who are increasingly valued by networks such as CommonAngels, which are dominated by cashed-out CEOs. “CFOs have a special expertise,” says Marianne Hudson, executive director of Angel Capital Association in Lenexa, Kansas. “They can put a critical eye to the analysis of the business model.”

To Back or Not to Back

Among the 75 members of CommonAngels are several who have launched their own successful start-ups. Aside from Wyman, one or two others may have some CFO experience, but he spent his career in finance, helping to bring three companies public. Time spent sifting fact from fiction helped him to see that the waste-management company would burn through $1 million in projected seed money just to learn if it might be viable, and total start-up costs could run as high as $20 million, which could wipe the angels out. At best, getting off the ground might mean surrendering all or most of the upside to venture capitalists.

“We could be building a bridge to nowhere,” Wyman warned his fellow angels. They listened and, reluctantly but thankfully, steered clear. “Everybody expects me to be more pragmatic,” says Wyman, a three-year veteran of the group.

Ironically, a balloon-popping CFO may provide some comfort to angels, who have been rattled by the current economic environment. “Their net worth has been whacked, just like everybody else’s,” says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. Instead of retreating, they have adjusted by casting a wider net. Angels invested about $26 billion in 2007, a slight uptick from the year before, while boosting the number of deals they backed by 12 percent and growing their own ranks by 10 percent.

“There is a long list of skills that CFOs bring to the table,” says Peter Rosenblum, a Boston lawyer who serves as counsel to the CommonAngels. “A lot of them came through the boom with money to invest. They may have been part of a [management] team that cashed out, but they are not ready to retire.”

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