Southland’s Angel Investors Haven’t Lost Faith Amid Turbulence on Wall Street

It’s a little early to tell for sure, but the recent turmoil in the stock markets seems not to have dampened the enthusiasm of angel investors for the new economy taking shape in Southern California.

Nobody, of course, keeps tabs on angel investors here; the area hosts a thriving angel network, but it is informal and diverse, like the economy of Southern California itself. But the anecdotal evidence seems to show that even if angel investors now hesitate before committing themselves in the private markets, they still back good ideas.

That, at any rate, is the testimony of two people who ought to know, and it’s good news for entrepreneurs who need outside capital to get their new companies up and running.

“Over the short term, angel investors may turn a little cautious,” says Ken Deemer, a leading Southern California angel investor and president of the Tech Coast Angels, one of a handful of angel investor groups active from Santa Barbara south to the Mexican border. “If the public markets deteriorate, they will affect individual spending, especially on big-ticket items--and an angel investment is a big-ticket item.

“I won’t be surprised if we see a little pullback,” he adds. “But institutional investors and angels who have been around a long time understand that there are cycles in the business of investing, and those who perform best invest continually over time.”

David Berkus, a fellow Tech Coast Angel and managing partner of Kodiak Ventures, a small ($2.5 million) Arcadia-based angel investment fund specializing in early-stage Internet and software start-ups, expresses even more optimism.

“We saw six businesses make presentations at the last Tech Coast meeting,” Berkus says, “and there was no talk about anybody becoming less aggressive because of the events in the stock markets. Angel investors see too many opportunities here.

“Our own fund is in the middle of a lot of activity--and happy to be so.”

Angel investors focus on the entrepreneur who needs a relatively small amount of capital--say, $250,000 to $500,000--and they invest far earlier than venture capitalists. Thus, angel investors fill a crucial need in the marketplace for capital backing fledgling businesses; without angel backing, many start-ups would die aborning.

Indeed, angel investors are crucial to the great wave of innovation now underway in Southern California. Not surprisingly, they focus on start-up and early-stage companies meeting the hardware and software needs of the Internet--just as angel investors, who were crucial to the great wave of innovation years ago that created Silicon Valley, focused on the software and hardware needs of the personal computer. Angels do a lot of hand-holding too; many, in fact, get as much satisfaction from mentoring the people they back as they get from seeing their investments grow.

“They take a longer-term view than venture capitalists,” Berkus says, “and they often invest with no clear exit strategy. That puts them at greater risk, but it gives them higher leverage.”

But they fly under the radar; you don’t find them listed in the yellow pages, and they don’t drive around with signs on their cars. You get to them through professionals such as lawyers and accountants, or through bankers, entrepreneurs, established business owners, consultants and wealthy individuals. You get to them, in short, by networking.

That can take doing--and to that end, stay tuned. In the coming weeks, we will take a close look at Southern California’s angel network in this space, identifying some of the main players and exploring in some detail how they work. We will also take a look at some entrepreneurs who, having found their own angels, can help you find yours--detailing what worked for them, what didn’t, how long it took, and so on.

Like anybody who starts a business, these entrepreneurs faced big obstacles. With help from their angels, they overcame the problems, and the lessons they drew from their experience can be very helpful to anybody with a dream and not enough money to make it real.

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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.