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Angel investors flood the tech start-up scene

On the prowl for ‘the next big thing’

Roberta Miller, who became an angel investor after a successful career as a consultant to public sector companies, worked with Janos Stone in Newton recently.CHARLIE MAHONEY FOR THE GLOBE

When longtime entrepreneur Beth Marcus set out to raise money for her latest venture she went straight past the traditional underwriters in Boston venture capital community.

Instead she raised small sums each from a chiropractor, marketing consultant, former day-care provider, and a score of other backers not normally thought of as kingmakers in the local technology world. They are angel investors, and their ranks in Boston are swelling fast as the tech economy goes deep into another boom cycle and hot young start-ups are selling for millions of dollars.

“I’ve had several people say to me, ‘Find me the next Instagram.’ That was a joke, but not really,” said Tarlin Ray, referring to the photo-sharing app that sold to Facebook Inc. for more than $700 million last year. He recently helped launch an angel investment group for Boston-area graduates of the Harvard Business School that has 40 members.


There are some two dozen angel investors groups organized around the Boston area. In just a few short weeks last year, Marcus calculates she pitched her new business plan — for a start-up that provides digital content to children called Playrific Inc. — to some 300 angel investors, at venues such as a Boys & Girls Club in Milford, N.H., and a private golf club in Newton. By the end she raised $1.8 million from about 30 angels, some seasoned investors, some entirely new to the business.

Typically, angel investors put up anywhere from $10,000 to $50,000 to back a young start-up, and can fund as many as 10 companies at any given time. The minimum investment at the Harvard group, for example, is $25,000.

Angel investors have long been part of the tech ecosystem. Usually they are successful entrepreneurs themselves, who after making a big score selling their own company, become a grey eminence to the next generation of tech whizzes, doling out money and business wisdom in equal parts.


Now though, as their numbers around Boston multiply, many of the newest angel investors are neophytes when it comes to technology’s undiscovered possibilities. But they bring their own form of experience and acumen to a start-up, as well as the equally crucial ingredients of money and a willingness to bankroll the bleeding edge of the business world.

While hard to quantify on a broad basis, angel investors have indisputably become integral players in the local tech economy, seeding many of the one-, two- and four-person start-ups that are crowding the many innovation centers that provide shared-working spaces to newly born companies.

“The level of start-up activity and the level of angel investing is incredibly good for the economy,” said Harvard Business School professor William Sahlman, who specializes in entrepreneurial investment and advises angel investors. “The economy needs a certain amount of risk-taking behavior.”

Indeed, the Massachusetts Tech Collaborative, a quasi-state agency that publishes an annual report on the local tech economy, considers angel investors such a distinct force that recently it created a separate category to measure their impact. The first tally: funding provided by angels to local companies doubled in just two years, to as much as $100 million in 2011.

Nationally, in the first six months of 2012, angel investors provided about $9.2 billion to fund 27,280 ventures, according to the Center for Venture Research at the University of New Hampshire. Meanwhile, the number of angel investor groups has surged by 10 percent in recent months, according to the Angel Capital Association of Overland Park, Kan.


And many of the newly bankrolled entrepreneurs are fresh college grads who, on the one hand, would likely never get a foot in the door of an established venture funder, and on the other, are still feeling through their ideas and don’t need the big money and stricter controls that usually come with venture capital.

While a venture capitalist will fund some very young companies, write much bigger checks, and typically have more business acumen than angels, their involvement can often come at a price for start-ups: a larger ownership stake, more control, and hands-on management.

“Any company that is in an early stage is totally daft to be raising venture funding,” said Marcus of Playrific.

One of her angels is Roberta Miller, who after a successful career as a consultant to public sector agencies, decided to put a portion of her nest egg to work through a local angel organization, Launchpad Venture Group LLC, which is admitting two new members a month and now counts more than 110.

The 62-year-old Miller has invested in three start-ups. She has also immersed herself in the tech culture, popping into events at the Massachusetts Institute of Technology and attending the trendy South by Southwest Interactive Festival in Austin, Texas, last week.

In addition to money, however, she is also imparting years of management experience to her proteges, one of whom is a young art professor trying to launch a 3-D printing company and has little business experience.


“I feel like I have a small part in building something,” Miller said.

Technically, anyone with enough money can become an angel investor. But most angel groups require their members to be “accredited investors,” which the US Securities and Exchange commission defines as someone with a net worth larger than $1 million — not counting the value of their home — or an annual income of more than $200,000.

Many angels get their start by joining groups such as Launchpad. These aren’t exclusive clubs, but they do screen applicants to ensure they can afford to make investments into risky start-ups, and have the kinds of business credentials that could benefit the young companies.

“There’s no average member. They come from a large variety of backgrounds,” said Ham Lord, managing director of Launchpad. Essentially, he said, they just have to want to work with the most fledgling companies. “That’s got to be a passion.”

But to some veterans of the tech world, the surge in angels has all the hallmarks of an investment bubble — of too many inexperienced investors chasing too many speculative ideas — and will end with huge losses for many.

“Way more companies are getting funded than should get funded,” said a Jim Moran, a partner at the Waltham firm North Bridge Venture Partners, and himself a former angel investor and tech entrepreneur.

“There’s a bit of a pileup of companies that were funded with $1.5 million and don’t have a lot to show for what they’ve built. Angels make a financial decision, but they make an emotional decision, too — they want to feed their own desires, and they may like the entrepreneur,” Moran said.


Miller said she is cognizant of the risks, even “willing to lose some money,” but said she’s not investing more money than she can afford to lose. (Miller declined to provide amounts on her investments.)

Indeed, Sahlman, the Harvard professor, said he is always trying to caution would-be angels about just how risky giving their money to a new-found company is. “I am always quite cautious because I’ve known people who’ve put money in five or six things and they’ve all gone bankrupt,” he said.

Most start-ups do fail, though more angel investors tend to lose money than venture capitalists. Still there is the occasional Instagram-like success story to keep pitch-night presentations by local entrepreneurs crowded with eager new investors.

For example, when Incentive Targeting Inc., a Cambridge online marketing firm, was acquired by Google Inc., the 82 local angels that helped the company raise about $5 million received a very big payday. While the exact terms of the deal weren’t disclosed, it likely sold for many times their original investment.

Cash-outs like the Incentive Targeting contribute to a virtuous circle that propels the local economy onward. Executives of successful tech firms are themselves becoming angel investors in greater numbers, seeding the ground for more even start-ups, said Pamela Goldberg, chief executive officer of the Massachusetts Tech Collaborative.

That type of activity is seeding the ground for more even start-ups, she said. “The more vibrant our start-up community is, the more vibrant our state’s economy will be,” said Goldberg. “We can’t have start-ups without angel investors.”

Michael B. Farrell can be reached at