Mass. IPOs don’t create many angel investors
This month’s initial public offering of Facebook will mint a lot of new multimillionaires. No doubt they will spend some of their wealth on fast cars, private jets, jumbo-size boats, and stunning vacation spreads in Hawaii.
But as is the Silicon Valley tradition, they’ll also put some of it into a new generation of start-ups. Hundreds of Facebook employees will have enough money to become “accredited investors’’ in private companies - aka angels. The Valley already has so-called mafias of rich alumni from companies like Google and PayPal supporting new ventures. (The very first investors in Facebook, in fact, were members of the PayPal mafia.) And the money invested by Facebook employees and veterans over the coming years will be another energizing espresso drip into the Valley’s economy.
So where does that leave Boston? Angels are vital to any region’s innovation economy since they often back ideas that venture capitalists won’t, or first-time entrepreneurs they know and trust. And while the Facebook IPO is so enormous it defies comparisons, it will be the latest in a string of Silicon Valley companies to attain multibillion-dollar market capitalizations, and produce scads of new angels.
I wanted to understand whether our region is keeping pace, since it often seems to me that the bulk of Boston’s angels made their money in the 1980s and 1990s, at companies like Lotus Development Corp. and Avid Technology.
First, some data. The Center for Venture Research at the University of New Hampshire found there were about 318,000 active angel investors in the United States last year, up 20 percent from the prior year, and they invested $22.5 billion in companies. Of that money, 30 percent of it went to California companies, according to the Halo Report, which covers US angel activity. New England was in third place, after the Southeast, attracting 13.5 percent of angel investment.
When I went to hunt for people making angel investments after recent IPOs and acquisitions of Boston companies, I discovered that a successful company around these parts seems to yield a pretty small flock of angels. Netezza, a maker of hardware and software for managing huge databases, went public in 2007 and then was bought three years later by IBM for $1.7 billion. Founder Jit Saxena is now making investments in start-ups, as are three other Netezza veterans.
Jennifer Lum started making angel investments after Apple acquired her last employer, Quattro Wireless, for $275 million. She said she knows of six angels, including herself, created by that deal - but only two are still in Massachusetts. Ric Fulop, a founder of Waltham battery maker A123 Systems, left that company to join a venture capital firm in 2010, but said he didn’t know of any active angels produced by A123’s IPO in 2009.
Steve Papa, chief executive of Cambridge business software company Endeca Technologies, seems to be the sole person making start-up investments after that company was acquired last year by Oracle for $1 billion. At BzzAgent, a Boston digital marketing firm acquired last year by UK retailer Tesco for a reported $60 million, founder Dave Balter is the lone angel so far. Constant Contact, which sells marketing services to small businesses, has yielded two in the five years since its IPO.
Jim Pitkow, a Bay Area angel who sold a company to Google in 2001, observes, “The number of folks investing in the Valley on an ad hoc basis has definitely gone up, and that has really helped bolster the Valley.’’ He added that with entrepreneurs starting companies during or immediately after college, “there are younger angels than have ever been out there.’’
But Pitkow also notes that most angel investors, by putting money into companies at the earliest stages, “tend to either lose money or not make much money, so a lot of them don’t do it for very long.’’
In Boston, there’s no group of new angels from any particular company that you could call a mafia - at least with a straight face. The closest thing is probably a clan of investors with ties to Harmonix Music Systems. Three current and former executives of the Cambridge video game company have become angels. But there are efforts locally to encourage more angel investing.
This week in Cambridge, angel investor Jean Hammond holds another of her periodic workshops about investing in start-ups. In the past 2 1/2 years, she says, 240 people have participated. Earlier this month, Jon Pierce held the latest edition of his annual “Angel Bootcamp’’ dinners, which help new investors meet and learn from more experienced ones. He plans to hold them more frequently. Pierce says about 20 of this month’s participants were new angels who hadn’t yet made an investment, or had made only a few.
“We’re trying to cultivate a sense of wanting to give back and reinvest in the community,’’ Pierce says. “When you can see your peers doing it, you can relate to it, and you can lean on them for advice.’’
But creating more rich people is the best way to ensure that our town will have an ample angel population, says Chris Lynch. “That’s the way you really move the needle, by producing more people with maybe $5 million in the bank,’’ he said. “I’m a start-up guy, and while my stock portfolio probably looks like your grandma’s, I feel that I know how to invest in start-ups, and I’d rather do that with my money than go to Foxwoods and put money on black.’’
Lynch is the former chief executive of Vertica Systems, a database company acquired by Hewlett-Packard last year for $350 million. He says he plans to invest in 20 start-ups, but he’s the only angel, so far, to come out of that deal.