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.

“Generally, there’s a correlation between the amount of time you spend asking questions and how it all turns out,” Jones adds. “The more you ask, the more you learn about the entrepreneurs and the opportunity.” Adds former CFO Steve Bennet, board director at Sand Hill Angels, a 60-member group in Menlo Park, California: “A CFO is trained to look for holes.”

Increasingly, the absence of a CFO in an angel group is a hole the members are eager to fill. “Angels have let me know that they’d like to have me,” says Jim McCloskey, former CFO of Red Robin Gourmet Burgers, a 400-unit casual-dining chain based in Greenwood Village, Colorado. But McCloskey hasn’t bitten. Since retiring in 2005, he has resisted overtures from angel groups. Although he does attend some events, he doesn’t think it’s worth paying $2,000 in annual dues to become a full-fledged member.

“CEOs are confident in their ability to think like customers,” says Dave O’Brien, CEO of The Business Catapult, a Boulder, Colorado-based matchmaking service for angel investors. “But CFOs are just what they need: someone who can think like an investor.”

All entrepreneurs project astronomical growth, Wyman says, but they don’t always make sensible assumptions about the structure needed to support it. Can you really grow from $5 million to $20 million in sales while only staffing up from 20 people to 30? Rosy projections routinely overlook indirect costs such as rent and utilities. Schemes for manufacturing overseas ignore such basics as working capital pending deliveries, credit terms, and longer lead times. Will retailers actually pay in 45 days, or is 90 days more likely?

McCloskey recalls one pitch he sat in on from a start-up that was already selling its high-end gun safety-lock to big-box stores. Or so the management team said. After wrestling more-detailed documents from them, McCloskey saw what was really going on: retailers were filling their pipelines with the product, but it wasn’t leaving their shelves.

Since retailers were unlikely to reorder, McCloskey wanted to know what the entrepreneurs had in mind for a second product. The answer: a lower-price version. But as McCloskey pointed out, there were already plenty of those out there. He urged his fellow angels to dodge a bullet by passing on the investment. “I had to say something,” McCloskey says, “as much out of self-preservation as anything else. I didn’t want them all coming back to me and asking, ‘How did you miss that?’”

Wyman readily concedes that “it takes a lot to get a CFO excited,” but angels don’t prize CFOs for their naysaying alone. Rather, it’s their tendency to evaluate investments with an ending in mind. When the initial excitement of a sure-fire product or service wears off, success often rests on stock strategies, liquidation preferences, convertible debt options, or ways to improve working capital — that is, levers that CFOs know how to pull. “A CFO can put everything into play,” says angel Todd Argall, the former CFO for a private-equity firm. “It’s only a good deal if there’s an exit option that offers us the return we want.”

Success may sometimes hinge on being willing to forgo success. When Boston’s CommonAngels group decided to pass on that waste-management firm, another angel group stepped in. So far it seems to be on track, but Wyman sees no cause for second-guessing. “As far as I know, they are doing fine,” he says. “But who knows how long that will last?”

Josh Hyatt is a freelance writer based in Boston.

Getting Your Wings

If you’re interested in becoming an angel investor, here are some steps you can take to join a group:

1. Make sure you’re accredited. Have you got money to lose? Groups want their members to fit the Securities and Exchange Commission’s definition of accredited: have a net worth of $1 million, with an annual salary of $200,000 or more for at least the last two years. Groups will ask about this. If you’re accepted, expect annual dues of about $1,000.

2. Find a nearby angel group. Seven out of 10 angels invest in companies that are within 50 miles of their home or office. To find a group in your orbit, go to

3. Do your own due diligence. Most angel groups are set up as networks, meaning that you decide whether you want to be part of each deal. But 20 percent of groups that belong to the industry’s Angel Capital Association are structured as funds and decide which investments to back by voting. Groups run by professionals tend to be less time-consuming. To find an angel group that fits your style, spend time on its Website and attend at least one meeting. — J.H.

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