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.

While research has found that over the past three years most angels would have been better off sinking their money into a stock index fund, every once in awhile (1 out of 14 times, to be precise)lightning struck and the angel investment produced a ten-fold return. And once in a great while, a thousand-fold return. With that kind of success at least possible, members may turn the enthusiasm they once devoted to entrepreneurs toward level-headed CFOs as potential fellow investors. “Any angel group would love to have an experienced financial executive,” says Tim Keane, director of the 70-member Golden Angels Network in Milwaukee. “Their analytical skills can make the difference between a good investment and a bad one.”

Ken Jones, a member of Ohio Tech-Angels, based in Columbus, retired seven years ago from his post as CFO at a maker of fiber-optic components. “I am familiar with the trials and tribulations of a growing company,” says the 60-year-old, who became an angel three years ago. “I’m able to assess three years of financial projections and translate them into something that is meaningful. That is the only way for investors to calibrate whether this is going to be a lucrative venture or not.”

Accent on Youth

Angel investing has matured from its days as a rich man’s hobby more focused on psychic rewards than ROI, and in which investor enthusiasm often trumped business acumen. “Angels wanted to invest,” says Peter A. Birkeland, CFO of RAIN Source Capital, a network of 23 angel funds based in St. Paul, Minnesota, and former CFO of two businesses. “They couldn’t help but see a younger version of themselves in every presenter.”

While venture capitalists routinely ignored $1 million deals on the theory that they weren’t worth the effort it takes to track them, angels happily stepped in, becoming a growth industry in the process. Entrepreneurs with big ideas and scant capital now turn to angels as a first, and often last, resort, and as a result the $26 billion that angels invested in 2007 nearly matched the $29.4 billion put forth by the struggling venture-capital industry. Angels, however, backed 15 times as many deals, with an average group investment of less than $250,000.

Those smaller stakes still represent huge risks. A 2007 study co-sponsored by the Ewing Marion Kaufman Foundation and the Angel Capital Education Foundation looked at the experiences of 86 angel groups exiting 1,137 investments and found that only 48 percent delivered a profit. It also found that due diligence pays off. Angels spend an average of 20 hours on due diligence before going forward. When these investors dug around for less than 20 hours, two in three deals went sour, but when due diligence exceeded the average time, just one deal in three bombed. Checking entrepreneurs’ references, calling potential customers, and, far from least, scouring the financials, counts for a lot. “A CFO can look at the numbers and come up with the relevant questions,” says Ken Jones, who has invested in four companies as a member of Ohio TechAngels.

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