Colorado Springs entrepreneurs looking for angel money

A lack of venture capital funding in Colorado Springs is prompting many startup companies to look to angel investors.

Venture capital firms generally are private partnerships or closely held corporations, that invest in rapidly growing companies that have the potential to develop into significant economic contributors.

Angel investors are individuals who invest in companies at an early stage of growth in exchange for an equity share of the business. They sometimes form angel networks or angel groups and pool their investment capital.

"We don't have a lot of venture capital support," said Loren Lancaster, managing director of the local merger and acquisition advisory firm, Core Capital Group. "What we have done is learn how to build businesses without venture capital."

An angel investor usually provides a few hundred thousand dollars to startup companies, Lancaster said.

Venture capital investments usually range between $3 million and $5 million, and private equity investments are $10 million or more, he said.

"Most businesses in Colorado Springs are funded by angels or some form of corporate partnering investment and few are venture capital funded," Lancaster said.

While it's not certain how many angel investors there are in the Pikes Peak region, Lancaster estimates that there are as many as 20 deals made a year. According to the Center for Venture Research, angels invested $24 billion in 55,000 start-up businesses in 2004, the most recent statistics available.

Marianne Hudson, executive director of the Kansas-basedAngel Capital Association, said in 2006 the average angel group had 41 member angels and invested on average 1.8 million in seven-and-a- half deals. Software and medical device technology companies are the preferred type of company for angel investors.

The Angel Capital Association has 155 members and affiliate groups from the United States and Canada, which is about 6,000 angels, she said.

There are also an estimated 20 million prospective angels nationwide, but only as many as 350,000 angels are actively investing.

Hudson said that as angel investments become more common in Colorado Springs, a local association could emerge. She said most angel groups are less than five years old and are popping up where there is no venture capital funding.

Marc Fey found angel investors easier to find in the Springs.

He built his five-year-old Colorado Springs software company BlueFolder Inc with angel investment money, but he also founded a software company in Silicon Valley with venture capital money.

"It depends on the strategy for growing the company as well as the amount of venture capital you need to raise," Fey said. "Angel investment is only appropriate if they need to raise a million dollars or less. And venture you need to be raising three million for the venture capital and have to have a business that justifies raising that amount of money."

Still, a lack of local venture capital funding companies appears to be the main force contributing to the popularity of angel investment.

"Most of the funds are located on the coast. We have no real local fund," said Frank Ricotta, founded the Springs-based Innerwall Inc. which he later sold to a Dayton, Ohio-based Enterprise Information Management.

"Most venture capitalists, particularly in Colorado, like to invest in companies that are in close proximity, at least in the early stages for tech companies, he said.

He has helped with the startup of three companies and has worked with both angel and venture capital funding models.

The funding route is not always simply a matter of preference, and they each have their pros and cons.

Angel investors

In Colorado Springs, angel funding can be attained quickly, between six and 12 months, Ricotta said.

However, he said finding a suitable angel investor might take a while.

The primary challenge with angel investors is that finding them is a matter of networking, Fey said.

But once they're found they're much more accommodating than venture capital firms.

"They will step in earlier," he said. "They tend to help you a lot more."

Lancaster agreed, saying that angel capital usually comes into the company under much more friendly terms.

Ricotta noted, however, that the down side of angels is that they don't have as much of the staying power as a venture capital company, Ricotta said.

Venture capital

Venture capitalists have a long-term perspective and only invest in a small percentage of businesses they review, according to the National Venture Capital Association.

Large companies such as Apple, Federal Express, Microsoft and Intel received venture capital early in their development.

Lancaster said sometimes venture capitalists can be too domineering.

"Venture capital can become the behind-the-scenes driving factor and often control the company," he said.

Many venture capital firms like to take active roles in the board or management teams of investment companies.