Angel investors can give wings to young companies

The Tech Valley Angel Network is a group of 24 accredited investors — most veterans of the business
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Starfire Systems President and Chief Executive Officer Richard Saburro remembers the first time he went to see the angels.

“They usually ask very good questions,” Saburro said. “The most basic question is: ‘How are you going to make money and when? How are you going to become profitable, and when?’ ”

Saburro said he’s made several presentations to members of the Tech Valley Angel Network, a group of 24 accredited investors — most veterans of the business world — who risk personal fortunes to be early investors in what they hope will be growth companies.

When Saburro took over the helm at Starfire in 2001, what is now a ceramic polymer manufacturer was a small, cash-strapped research company looking for investment in the harsh economic environment after the dot-com bust and the Sept. 11 terrorist attacks.

“Most of the venture capital funds at the time were created in response to the demand [for capital] driven by information technology-related companies. After the bust, they all became averse to investing, especially at reasonable terms,” Saburro said.

Starfire benefitted from infusions of private investment from angel investors Chet Opalka, the co-founder of Albany Molecular Research Inc., and Walt Robb, a retired senior vice president at General Electric Co.

He said Opalka and Robb helped facilitate Starfire’s access to the entire Tech Valley Angel Network, which he said has invested between $5 million and $10 million in Starfire Systems.

“There are quite a few differences between angel investors and institutional investors and one of the differences is . . . angel investors usually more intimately connect you with the community,” Saburro said. The term “angel investor” is said to originate from the tradition of wealthy individuals in England providing money for theatrical productions. In the U.S., angels are usually accredited investors, defined by the federal government as having a net worth of at least $1 million or an annual income of at least $200,000 for each of the last two years.

Bela Musits is the managing director of Troy-based High Peaks Venture Partners, which administers a $46 million venture capital fund focused on companies in New York state. He said angel investors are essential to building young companies.

“The angels are the ones that invest the money which is fundamentally most at risk. They typically invest in a company in the very early stages, when it’s just two people in a basement working on something,” Musits said.

In the first half of 2007, the latest period for which data is available, angel investors gave $11.9 billion in private investment to 24,000 companies in the United States, according to a study by the Center for Venture Research at the University of New Hampshire.

Angels help start-ups

Opalka said angel investing appeals to him more than venture capital funds or being an active member of the board of directors at a publicly traded company, because he wants to help start businesses in the Capital Region.

“After I retired from Albany Molecular Research, and while we were starting the company, I realized there is a real gap in this region with people who are willing to help [start-up] companies,” Opalka said. “From my perspective, the way you develop a regional economy is not necessarily throwing big bucks at companies like AMD to come into the region. Although that’s beneficial, I think the real road to true economic development is to support the small start-ups who ultimately establish their headquarters in the region.”

Also, he said those other investment models just aren’t as much fun. He said venture capitalists tend to be “only in it for the money” and publicly traded companies are often too beholden to investors to be able to take big gambles.

“The most exciting part of developing a business is at the very beginning. Once they get to the point where they’re sustainable or maybe gone public, things change. Once you have someone else as an investor . . . you’re not willing or allowed to take the kind of risks that you would take if you were making your own decisions,” Opalka said.

One angel investor who gambled big with a company and then started making its decisions is Harry Apkarian, a key figure in the development of many Capital Region businesses, including Mechanical Technology Inc., MapInfo and Plug Power.

Apkarian said he is loosely affiliated with the Tech Valley Angel Network and sometimes attends its forums. Prior to the start of that group he played the part of an angel investor for Schenectady-based TransTech Systems in the mid-1990s.

“I don’t like an investment unless I can contribute something in addition to money,” Apkarian said.

In addition to millions of dollars of his own money, Apkarian provides leadership to TransTech Systems as its president and CEO. He said he got the job after helping the company’s founders develop a business plan to market TransTech’s asphalt density measuring equipment, and recruiting a number of angel investors to put money into the company several times. He said his friends eventually asked that he take over the company before they would agree to put forward any more investment.

“I wasn’t eager to do it at the time, to get that deeply involved, but I felt since my friends and I had invested in the thing, I owed it to them,” he said. “Now we’ve grown into quite an enterprise. Our sales have grown like 50 percent a year for the last two years.”

Opalka said he doesn’t like to get that involved with companies he angel-invests in, which are usually technology-oriented with some link to chemistry. He said he won’t meddle in how the company operates, but will offer business advice.

“Typically these technology folks are great people, brilliant as hell, but they often don’t have an understanding of when to stop already with the R&D and turn it into a business and start making money,” he said.

Tech Valley Angel Network

Peter Pritchard oversees the Tech Valley Angel Network for the Center for Economic Growth. He said Opalka and Apkarian represent two ends of the spectrum as far as angel investors in the network: one mostly hands-off, while the other went deep into the company.

The Tech Valley Angel Network conducts a dinner forum once a month, except in the summer, and evaluates two companies selected by CEG staff from a pipeline of applicants seeking access to the private angel investment. He said companies suitable for angel investment are ones that focus on products or services that have the potential to grow into large-scale markets, if the company is successful.

“If a company isn’t ‘scalable’ it would likely not find the exit that we would suggest that [angels seek for an investment],” Pritchard said.

The “exit” for an angel investor can come at any time the company receives a cash infusion large enough to buy out the original angel investors, although they don’t always have to relinquish their pieces of ownership. Typically if a company is purchased by a bigger company or it goes public, those will be “liquidity events” that buy out the angels.

Angel investors usually invest in amounts of between $25,000 and $100,000 at a time, and may make that investment several times with the same company.

“For that [investment] you get a certain piece of equity and for that you can argue the value of a company, which a typical [venture capitalist] will do, but often angel investors are much more friendly to the entrepreneur,” Opalka said. “When it’s all said and done and this company is successful, does it really matter if you make eight times your investment or 12 times your investment?”

Sometimes angels are bought out by venture capitalists.

“Oftentimes it’s the angel money that helps the company make enough progress that venture capitalists are then willing to make a follow on investment,” Musits said. “Angels are the first [investors], then venture firms like ourselves are second.”

Pritchard said CEG has tried to help angel investors by providing them with information about how to best structure an investment deal so the company they put money into will continue to be attractive to venture capitalists. He said sometimes angels enter into exotic ownership arrangements that could sour a venture capital fund’s desire to invest later on.

Musits said angel investors should avoid terms within their deals that future investors will object to.

“Every once in a great while you’ll come across a term that says ‘my investment in your firm is non-dilutable,’ meaning if I invested . . . in 10 percent of the company then I will forever and ever own 10 percent of the company,” he said. “That doesn’t make a lot of sense because follow-on investors are going to invest in a percentage of the company and it always has to add up to 100 percent.”

Patience pays

Opalka said he has yet to see any of his angel investments result in a liquidity event, but he said he is patient and will continue investing.

“The general rule of thumb for [this type] of risky investment is that out of five investments, one or two will go belly-up, another one or two could be flat, but then there is the one or two that will have phenomenal success and which pays the bills for all of the others,” he said.

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