Commentary: Angel Investors

What do Facebook, Google, Amazon, Twitter and Starbucks have in common? They owe their existence today to angels private investors willing to invest at the highest risk point in the companys development.

All startups require money to develop products and services before they begin making the products or providing the services. The more successful these companies become, the greater the need for money. This money is mainly provided to startup companies through angels, who buy extremely risky illiquid stock and then hold it for many years. At the time the angels invest, most companies are nascent with good people and ideas, but no real assets or revenues.

Without this early slice of investment, very few companies would get to the point of being mature enough for bigger investments from venture capital firms. These firms generally invest institutional monies in promising companies that have proven products or technologies. But, concurrent with a rise in angel investing has been a pronounced drop in the number of local venture capital firms and investments from them.

The number of active local venture capital firms has dropped from about 20 to five in the past 10 years, with Ignition Partners, Madrona Venture Group, Maveron and Voyager Capital the major players still active here. In boom times, several San Francisco Bay Area venture capital firms opened offices in Seattle, but theyve since closed. This move from a large number of smaller venture capital firms to a small number of larger ones is a national trend, as venture capital firms now chase much larger deals.

Angels are usually private individuals who invest their own money and expertise into promising young companies. They typically have been financially successful in a previous life and have the desire to give back to their communities, engage in highly interactive activities and, yes, make money. Angels provide more than 90 percent of money needed to get startups off the ground.

In recent years, about 1,500 promising Washington state companies have received up to $2 million of funding each from groups of angels. These startups are the primary source of new job growth, both nationally and in Washington state. Here, startups create more than 50,000 new jobs per year, while existing companies lose 20,000 jobs. Startups are and will be the future vitality of our state. Without angels, these startups wont happen.

Washington is blessed with a vibrant angel community, enabled by many highly successful technology companies. It has strong angel support groups, including the Alliance of Angels, the Puget Sound Venture Club, the Zino Society and others. The largest, the Alliance of Angels, has more than 120 members actively investing in local startups. This group has grown its individual membership roster by about 400 percent in the past 10 years, and has a separate $5 million fund that invests alongside its members.

But since angels typically invest a maximum of $2 million, we have a large funding gap that may have profound implications for Washington state. When startup companies get to the point at which they need expansion capital, where is it to come from? Much of it used to be funded by the 15 venture firms that no longer have a presence here. So the truly promising companies move to Silicon Valley, New York, Boston or San Diego, where they can find the capital they need.

Meanwhile, companies that need just a little more proof usually become failed companies. This increased startup failure rate caused by the absence of expansion capital may discourage angels from investing in them in the first place.

Many jurisdictions actively encourage startup investments through tax breaks and government-provided funding. Both Oregon and British Columbia have active programs in this area. Oregon has committed $100 million in state lottery proceeds and has funded more than 80 startups to date. British Columbia has committed $150 million and funded more than 200 startups.

Alas, Washington state has no such program. With a strong, vibrant and expanding angel community, we need to ensure that proven, emerging technologies and services remain in Washington. Otherwise, they will move to where the funding environment is more attractive.

Gregg Bennett is a vice chairman of the Alliance of Angels. He is invested in more than 30 local startups and engaged in a startup of his own.