MINNEAPOLIS — They’re risk-takers, putting thousands of their own dollars into unproven ideas for the thrill of turning startups into successful businesses.
Called angel investors, these wealthy individuals are the financial saviors who step in after entrepreneurs have raised all the cash they can from friends and family.
The problem is, there aren’t enough of them.
Wealthy individuals who finance startups around the country are cutting back because the deals have gotten less attractive. Several investors said they can make the same or more money without taking nearly so much risk.
The number of active U.S. angel investors declined 11 percent to 125,100 people in the first half of 2010, compared with a year earlier, according to the University of New Hampshire’s Center for Venture Research. Those who remain are becoming more cautious, with the lowest percentage of angel investors funding startups at the idea or concept stage in at least 15 years.
“If we don’t have the acorns, we’re not going to have the trees,” said Jeffrey Sohl, director for the University of New Hampshire’s Center for Venture Research.
Without the money, entrepreneurs like Joel Ackerman are having a tougher time building their businesses and creating jobs. Ackerman, a former UnitedHealth Group executive, needs $2 million to build his startup, River Systems, which is developing software to help senior citizens communicate with their doctors, family and pastors from home.
He’s had more than 20 meetings with angel investors. They say he has a great idea, but they want to wait until there is a product that brings in revenue.
“The traditional role of an angel investor is about dead right now,” said Ackerman, who has nearly used up his retirement savings and taken a second mortgage on his house to fund River Systems. “We have the great potential to create jobs. Once we get the ball rolling, it will happen.”
Many angel investors say they would invest more money into startups, if they had it. The problem is, their money is tied up in earlier investments, some of which have been in their portfolios for more than a decade.
One way for investors to get their money out of a startup is for it to go public on the stock market. But a weak market has mostly cut off that pathway.
“We’re just waiting for some of our investments that we’ve been in for 10 years to come through,” angel investor Steve Wirth said. “We want to see some liquidity events, so that we can plow proceeds back into the community again and again.”
Investors are also concerned about medical device companies. Uncertainty about approval processes at the Food and Drug Administration makes investors nervous.
Andy LaFrence, who invests in clean tech and life sciences companies, said he’s generally not interested in startups that need more than 18 to 24 months to get products for the market. It’s too risky, he said.
Angel investors say part of the problem is they aren’t being rewarded enough for the risk in investing in unproven business ideas.
In the past, angels would often get more favorable deal terms than later investors. But that has changed, and later-stage investors can often make as much money or more.
The financial burden on angel investors has also increased. In the past, a promising startup could move on to funding from venture capital firms after it started with raised money from angel investors. However, venture capital firms are shifting toward later-stage companies, requiring angel investors to provide multiple rounds of funding.
“If this is the new normal, there is not enough money to fund things to get further enough along to a (venture capital firm),” said Paula Skjefte, president and CEO of Waterford Consulting.
Visiam, which supplies processing technology for municipal solid waste management groups, said the $75,000 it received through the angel tax credit program last year helped the company save three full-time jobs, hire outside consultants and bring its technology to commercialization.
“It allowed a company to stay in business,” said Scott Hughes, chief operating officer.
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