by Mark Walsh
Glenn Laumeister is beginning to get antsy.
The Manhattan startup he runs, Partsearch Technologies,
has revenue. It has a major customer in Best Buy, the electronics
chain to which it sells replacement parts. It even has backing from
idealab!, the Web incubator from which it was hatched
Yet convincing angel investors, typically high-net-worth
individuals, to ante up for a $1 million financing round in
Partsearch has proven tougher than grabbing a subway seat at
rush hour.
"There's a lot more looking and a lot less commitment than
there was a year ago," says Mr. Laumeister. "We're just trying
to be more patient."
Startups suffering
Mr. Laumeister's frustration is hardly unique these days.
While the technology crash has depressed venture funding at
every level, private equity has become especially scarce at
the earliest phase, or seed stage, where angel investors can
play a critical role in getting a fledgling business off the
ground.
Burned by bad dot-com investments and wary of an uncertain
technology sector, many of the high-profile financiers who
emerged in New York have retreated to the sidelines. That
high-powered group of professional investors and retired
executives includes Wit SoundView Group Chairman Robert
Lessin, former e-citi Chief Executive Ed Horowitz, former
Liz Claiborne Chairman Jerome Chazen of Chazen Capital Partners,
and venture capital mogul Alan Patricof.
The few who are still investing are looking for more than a
couple of guys with a good idea. Due diligence has replaced the
just-do-it mentality. "My perception is that there is almost a
fear of making a decision," says Mr. Patricof, whose firm last
year earmarked about $20 million for seed investments but has
yet to close on a deal. As a result, angel investors are still
gun-shy more than a year after the Internet bubble burst.
Early jump-starter
No one exemplifies the rise of high-net-worth New Yorkers
who eagerly banked their own money on dot-com dreams better
than Mr. Lessin, the veteran Wall Street dealmaker who joined
then-upstart Wit Capital three years ago. Taking stakes in as
many as 100 Internet ventures in the last several years, Mr. Lessin
almost singlehandedly sought to jump-start the region's angel
funding activity.
Today, with half of his Internet bets having gone bust, he's
turned off the spigot. "I'm very negative on angel investing
right now," says Mr. Lessin, who has not made any new angel
deals this year.
He says his reluctance stems mainly from a lack of later-
stage financing needed to sustain a company's development
beyond the startup phase. And he doesn't expect conditions
to improve until early next year. In the meantime, he is
focusing on shoring up his existing portfolio.
Although half of his Internet investments have gone bankrupt
or folded, including makehisday.com and PredictIt.com, Mr. Lessin
says several "home runs" in the remaining 50 or so ventures have
yielded overall returns exceeding the benchmark 30% for angel
investors. Among those he lists in the win column are GoTo.com,
1-800-Flowers.com, Register.com and VerticalNet.
Securities records indicate that in 1999, for instance,
Mr. Lessin filed to sell shares in VerticalNet worth an estimated
$9.2 million, and that last year he filed to sell a stake valued
at $7.9 million in GoTo.com. His stakes typically range from
$100,000 to $2 million.
Many angels weren't as lucky. They didn't get to enjoy the
benefit of the feverish initial public offering market for dot-coms
before last year's crash ended the IPO parade.
Bruce Bockmann, a co-founder of TechSpace Inc. and a former
colleague of Mr. Lessin's at Morgan Stanley, avoided Mr. Lessin's
shotgun approach by putting his own money in just four Web startups.
Two were sold, one was shut down and the other is TechSpace, which
provides plug-and-play space to tech startups and has recently
benefited from an influx of downsized dot-coms.
"No one is really sure of what business plans will work, and
people are just sitting tight," says Mr. Bockmann.
Nationwide, angel investing is expected to fall this year to
less than half the $60 billion that was pumped in during 2000,
according to Chris Mutkowski, who heads Angel Alliance, a nonprofit
group consisting of 23 U.S. and foreign-based angel investing
organizations.
Greater sophistication
Those who haven't bailed out are getting more sophisticated about
how and where they spread their wealth.
"The kinds of ideas getting funded at the angel level are ones in
which development has been completed," notes Ed Horowitz, former CEO
of e-citi, Citigroup's e-commerce division, who began investing in
startups full-time last year. Besides having a product developed,
investors increasingly want to see a sales pipeline and experienced
entrepreneurs or managers at the helm.
So far, Mr. Horowitz has made investments in a handful of firms,
including Consumer Direct Link, a mobile commerce firm in Irvine,
Calif., and UnPlugged Games, a Manhattan startup led by Silicon
Alley veteran Eric Goldberg that creates multiplayer wireless games.
Typically, Mr. Horowitz takes a 20% stake in companies seeking to
raise between $500,000 and $1 million.
The more rigorous approach by angel investors has left entrepreneurs
scrambling to find other sources of financing. Partsearch Technologies'
Mr. Laumeister is negotiating a $2 million strategic investment from
Best Buy, for which it supplies original parts for everything from cell
phones to ovens.
Another company, Silicon Alley's 7thOnline, is pushing to line up more
retail customers for its fashion industry business-to-business exchange
as it tries to raise a $4 million round. The 2-year-old venture has
investment commitments from Mr. Patricof and Mr. Chazen, but CEO Max Ma
says the going has been slow.
Valuations back to earth
Despite the pall hanging over angel investing, there's some reason
for optimism. For one thing, Mr. Mutkowski says angels are more active
now than six months ago, as valuations have come back to earth. The same
company that would have had a preinvestment valuation of $15 to $20 million
18 months ago is now valued at something like $3 to $4 million, he says.
Locally, the rise of organizations including the New York New Media
Association's angel investor group, the Tri-State Private Investors
Network headed by Ellen Sandles, and Tri-State Ventures provide an
institutional framework for angel investing that will help facilitate
a rebound.
Mr. Laumeister, who recently made a pitch before a group of about 40 NYNMA
angels, is still waiting anxiously for the checks to come in. Says the CEO,
"I'm confident, but paranoid."
