Angels dare to venture into capital

Venture capital investments have stayed pretty consistent over the past few years in Colorado and nationwide, with a lot of minor dips and gains but nothing nearing the monumental peak in 2000 – and subsequent drop.

According to the PriceWaterHouseCoopers Money Tree Report, Colorado saw 24 deals and $197 million in the third quarter of 2007, down from the 27 deals and $229 million in the third quarter of 2006. Experts don’t expect this stagnant climate to change much in 2008, but the wealth of entrepreneurial opportunities in the area coupled with new avenues for angel investors may even out the picture.

John Greff, a partner and co-founder of Sequel Venture Partners in Boulder, said the environment for early stage venture capital funding in 2007 was consistent with 2006, and he expects 2008 to be another comparable year.

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“The environment is still pretty good with early stage,” he said.

Mark Lupa, a partner in Boulder’s High Country Venture, expects the market for venture capital funding to be very competitive in 2008, just like last year and the year before that and the year before that. He says Colorado is always a tough place to get funding because the epicenters of venture capital are on the east and west coasts.

“We have limited venture capital money here in Colorado,” he explained. “There’s a small handful of venture capitalists that make consistent investments. You try to get those first, but end up having to get coastal venture capital firms to invest in Colorado, which is difficult. We are doing fairly well.”

That’s thanks to the innovation coming out of Colorado.

“The place it all starts is with the universities, and we have solid universities,” Lupa says. “They all are putting out some very good technology. The challenge is to take it from the lab and turn it into business and they’re all working on it very hard.”

Mark Forsyth, who works with tech startups as executive director of the Rocky Mountain Innovation Initiative based in Fort Collins, says venture funding has been slow for the last three or four years. In 2007, for example, none of his clients received any venture funding.

“Where we’re starting to see activity pick up is in angel investing,” he said. “We’ve seen a couple of companies successfully raise first-round angel funding, and we’re also seeing some signs of interest from venture capitalists in state, getting in touch with us and asking for information. We’re hopeful that’s a good sign.”

Angels in NoCo

Angel is another name for private investors who typically provide first-round funding in amounts of less than $1 million.

“Usually, the seed funding for a startup will be composed of contributions from a number of angel investors that may contribute $25,000 to $75,000,” Forsyth said.

Firefly Medical in Fort Collins is one example of a company that was able to successfully raise seed money from angels in 2007. Founder Steve Schmutzer says there’s no defined process for finding angels; it’s long, hard work.

“It’s all about networking and learning as you go,” he said. “Occasionally, we’ll get the call from an interested party that has heard of us, but for the most part investors are earned relationships. Perseverance, patience and professionalism set the stage for opportunities which follow.”

While most entrepreneurs find their angels by being savvy and connected to members of the financial community, Forsyth has founded a new organization – the nonprofit Northern Colorado Capital Network – that will help facilitate those connections. Like networks in other states, the new Fort Collins group, which had two local companies pitch to investors at its first meeting in December, will screen companies to find those worthy of investment and then facilitate meeting with interested investors.

“We have quite a bit of wealth in Northern Colorado and a lot of investors with a desire to help the business community and see startups get going,” Forsyth said. “What we may be lacking is the education and organized networks for them to take the risk out of investing in tech companies. So, that was the purpose of this new network: to basically take the risk out by educating investors on how it works and help them manage deals, help provide the due diligence and also screen the companies.”

Forsyth said the companies that pitched in December – Sprig Toys and Livengood Engineering – are “two very good companies both looking for about $1 million” and he believes interest was generated by the meeting. He knows of several other tech startups that will be looking for funding in ’08, and says they are optimistic.

Mentorship available

Another new organization that may make the daunting task of finding funding a little easier in 2008 is the Colorado Capital Group LLC – the new name for the Boulder funding group recently announced as Mountain Angel Capital.

Marc Silverman resigned as director of CTEK’s Boulder Venture Center to start the group. The seed-stage, $2 million fund already has a relationship with one of the local venture capital firms, which Silverman declined to name.

“It’s early,” he said. “We’re just getting started. We’re looking at companies and hope to make our first investment in the first quarter of 2008.”

What’s different about Colorado Capital is the hands-on management, guidance and mentorship companies will get from its investors.

“It’s very important with companies in that kind of transitional stage that they really have access to good vested advisers, advisers that don’t drop in every once in awhile but are really involved and bring a specific skill set,” Silverman says,

Colorado Capital is interested in clean energy, medial devices, software and medical informatics. Silverman sees a niche for companies that have borrowed from friends and family and scattered angels and have yet to seek venture capital investment.

“The kind of companies that we’re interested in are companies that have been around for a year or two, with functioning prototypes,” he said. “They have some customers, or they have end users, people that are using the product and see real benefit to it. It’s out there, it’s providing value to a modest customer base. And so our money goes to developing that market traction and taking them to the next step.”

Silverman said Fort Collins is right within the group’s “investment window,” with one company already being looked at.

While he says he’s no expert on the venture capital climate, Silverman does see that the region’s entrepreneurial community is more vibrant than ever, which is why he thought the timing was right for this venture.