'Angels' Give a Lift to Young Companies
March 21, 2005

By Josh Friedman, Times Staff Writer
Reprinted from Los Angeles Times

Investor groups' backing for start-ups is on the rise again amid the economic upswing.

Raulee Marcus figured her audience would be skeptical when she talked about her Spongeables, soap-infused sponges that dish out a rich lather and rinse off cleanly for 30 showers.

They were mostly men, after all.

"One of their key questions was, 'Do you really believe women will pay $15 for these things?' " Marcus recalled with a laugh. "They have no idea how much money is in their wives' and girlfriends' showers."

Now they do. The crowd Marcus appeared before that night last year at the Long Beach Marriott was the Tech Coast Angels, a group of entrepreneurial investors willing to bet their cash on start-up enterprises.

Marcus' presentation persuaded members to kick in money — she won't say how much — to help SpongeTech Inc. launch its products in 1,500 stores.

Marcus, chief executive of the company based near Los Angeles International Airport, said SpongeTech was on track to book $8 million to $10 million in sales this year, at least a fourfold jump from 2004.That kind of success is helping drive investment by Southern California's "angels," who provide coaching as well as early-stage financing to start-up companies.

Members of Tech Coast Angels invested $6.6 million in 2004, a 53% jump from the year before and the highest level since 2000, the group says in a report being released today.

The 250-member group also is announcing the opening of a Westlake-Santa Barbara network, its fourth chapter.

In January a rival angel group, the Keiretsu Forum, launched chapters in Los Angeles and San Diego — its ninth and 10th nationwide. The name "Keiretsu" is borrowed from the Japanese term describing a group of affiliated corporations with broad power and reach.

The angel investment pickup is being fueled by a recovering economy and the return to action of venture capitalists, who often invest in companies a year or two after angels get aboard.

Like traditional venture capitalists, angels buy stakes in risky, developing companies, hoping to cash in on an eventual sale or public stock offering. But angels, many of whom are former entrepreneurs, tend to be more hands-on, make smaller bets and gamble on younger businesses.

Tech Coast Angels funded 17 companies last year, including SpongeTech; Diver Entertainment Systems Inc. of San Diego, which makes waterproof casings and headsets for MP3 players; and Altadena's LeisureLink, which runs an online reservation system for vacation home rentals.

As the U.S. economy continued to grow and the stock market rose for the second straight year, venture capitalists invested $20.9 billion in 2004, an 11% rise from 2003 and a reversal of a three-year slide, according to the MoneyTree survey by Pricewaterhousecoopers, Thomson Venture Economics and the National Venture Capital Assn.

"As venture capitalists put more money into later rounds, it's more comfortable for angels to put money into the early rounds," said John Morris, chairman of Tech Coast Angels.

The most recent data for angel investing nationwide showed a marked increase in the first half of last year. According to the Center for Venture Research at the University of New Hampshire, angels provided about $12.4 billion in financing to 27,500 entrepreneurial businesses through June 30, compared with $18.1 billion for all of 2003.

Entrepreneurs pitch their companies to Tech Coast Angels, whose members grill them with questions and then, behind closed doors, debate the merits of the budding businesses. Members decide individually whether to invest in any deal; in a typical funding round, a dozen members might put in $25,000 to $50,000 apiece, Morris said.

Companies often use angel money to try to reach the next stage of development, such as expanding the product line.

Diver Entertainment co-founder and CEO Kristian Rauhala said his company, which initially targeted the scuba-diving market for its H20Audio brand gear, was using $1 million from two rounds of angel funding to roll out lighter-weight products that could be used by surfers, snowboarders and other "surface sport" enthusiasts, as well as accessories compatible with Apple Computer Inc.'s iPod system.

Rauhala, who started the company with two classmates in the MBA program at San Diego State, described Diver Entertainment as "a school project gone wild."

He said he liked being able to listen to Pink Floyd or Air while surfing — "mellow music that allows you to still feel the elements" — but the angels weren't feeling it when he made his first pitch in 2002. Even so, one member in the audience of 30 was an avid scuba diver who later tried out a product sample and persuaded the group to invite the company back, and by that time Diver Entertainment had gained traction in the market by landing a distribution deal.

Angels are proud of the fact that they offer entrepreneurs more than money.

Bill Collins, a former sales executive and manager at International Rectifier Corp. and Intel Corp., became a board member at two of the companies he funded last year, Santa Monica-based search engine Meaning Master Inc. and Sunnyvale, Calif.-based Luxim Corp., which makes lamps for a new generation of big-screen TVs.

Meaning Master's technology of using linguistic analysis to try to provide relevant database search results sounded promising, Collins said, but experience with product launches taught him that the company would need to focus on a specific customer base. The idea he and other angels helped develop was to sell to legal services companies, establishing that market as a "beachhead."

"With a new business you need to focus on one target market and to start generating money," Collins said. "That's a successful pattern."

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