Technology entrepreneurs are having a devil of a time finding angels.
In the midst of a punishing economic downturn that is sparing few companies, angel investors, the optimistic financiers who give entrepreneurs their crucial first infusions of cash, are cutting back on their bets and threatening the very foundation of the technology economy.
Unlike venture capitalists, angels invest small amounts of their own money — as little as $10,000 and usually less than $1 million – in very young companies. But like all investors, many angels were drenched with losses when the market plunged last fall.
That has left them skittish, investing in fewer technology start- ups and demanding more of those they do consider, leaving founders struggling to find money at the stage they need it most. The slowdown, entrepreneurs and investors say, could stunt the growth of new companies and have long-term effects on innovation.
“Crashes make liquidity vanish, and venture investing – especially angel investing — runs on liquidity,” said Steven McGeady, an angel investor and former executive at Intel. “When the markets go wonky, everyone sits on cash until the situation resolves itself. This makes capital hard to find, and if a company is caught unprepared or at the wrong time, that can be the end.”
For Two Smart Dogs, an Internet start-up in Los Angeles that was building an online hub for adult education classes, the sudden pullback was disastrous.
In 2007, the company raised $715,000 from eight investors in its first round of angel financing. When the co-founders approached current and new investors for more capital in September, they were met with silence. “There was real interest,” said Rose Ors, the company founder. “But the economic meltdown ended all conversation.”
Unable to raise money, Ors and her partners decided to shut down the company and look for new jobs.
The angels who…