US angels are treading fearlessly, says John Thackray, where fund providers are hestiating.
One reason why British entrepreneurialism failed under Thatcher was the lack of 'angels'. Angels in America (which is also the title of a current Broadway hit) are the backbone of small company start-up capital. Angels is the term used for private investors who will collectively plonk down an estimated $20 to $30 billion of enterprise capital this year. They are quite distinct from showbiz angels, the few hundred suicidal fat cats who in any Broadway season lose a few million in exchange for propinquity with glamour. Compared to entrepreneurial angels, the amount of capital raised by the venture capital investing community is chicken feed, about $4 billion in the best of years and lately running at no better than $2 billion as institutions have been soured by ventures in the early stages. While the moods of these well-suited managers, often connected to prestigious banks, are regularly covered in the media (are they sanguine or bearish? do they smile or do they frown?) the ubiquitous yet elusive angels are, like the heavenly kind, almost invisible.
William Wetzel, the Forbes Professor of Management at the University of New Hampshire's Whittemore School of Business, has made a lifetime study of them. 'Angels are the invisible providers of capital, who never make the headlines,' he says. 'They are primarily self-made, high-net-worth individuals who are unaffiliated either in a family or a managerial sense with the ventures they back.' Although the research is skimpy, he reckons there are about a quarter of a million active angels, helping to fund the companies and technologies of the future. The number of companies getting assistance from angels is between 80,000 to 100,000, as against about 1,000 from the professional venture managers. According to Federal Reserve data, half the individuals with incomes over $100,000 own at least a partial interest in a private business - either by inheritance, start-up or 'angeling'.
Angels have several characteristics: they each invest relatively small amounts; they have long-term staying power; they like start-ups - which most professional venture managers don't - and they do not have exorbitant rate of return expectations. 'It is this group of individuals, not the institutional venture funds, who are the farmers of American industry,' Wetzel avers.
Every country's economy has some angels, to be sure. What's different in the US is their number and scope. Studies at the US Small Business Administration have found, according to its chief economist, Thomas Gray, that 85% of angels are themselves entrepreneurs and that, 'In the angel venture market, investors not only provide capital but also their own expertise. Their willingness to commit depends on their own industry-specific knowledge, or on their familiarity with the particular marketplace that the venture is aimed at.' Don Chew, editor of the Journal of Applied Corporate Finance says: 'Many times the angels either know the entrepreneurs personally, or they understand the business of start-ups because they've done it themselves.' Wetzel is probably right in thinking there is still a large amount of untapped angel potential. 'However it is a very inefficient marketplace. There is nothing available that amounts to any kind of a guide,' he says. 'They are scattered all over the country, often in places where there are high concentrations of successful entrepreneurs like Route 128 in Boston and the San Francisco Bay area.' Finding clues to their whereabouts has been a sometimes quixotic venture. Wetzel has sampled lists of Mercedes Benz owners, and of high net worth individuals, which was a 'colossal mistake'. He had better luck, believe it or not, finding angels among private airline pilots. 'It may seem bizarre, but it comes from years of experience with lists of members of the Aircraft Owners and Pilots Association. These angels are not bungee jumpers. But they know about pressing the edge of the envelope. They like controlled risk.' One way a budding entrepreneur can find an angel in some part of the country is through a contact exchange, which operates very much like a dating service. Wetzel has played godfather to several. The prototype is the Technology Capital Network, now attached to the Massachusetts Institute of Technology (MIT). TCN offers two services: a computerised confidential matching service for would-be investors and entrepreneurs to swap data about one another; and occasional staged presentations by entrepreneurs to a hand-picked audience of angels. At these talent shows a dozen entrepreneurs line up to make a 10-minute pitch. Should a presentation run into overtime, a gong is sounded, and if the presenter still won't quit, there is an ear-splitting buzzer, and one capital-starved entrepreneur then gives way to the next. After a light lunch, angels and entrepreneurs network in the early afternoon. 'We have found that the entrepreneur has a 40% chance of getting money from this kind of live, person-to-person contact,' says Bill Wolf, executive director of the TCN. The Austin-based Texas Capital Network runs similar 'venture fairs', where introductions have resulted in $18 million worth of investments by angels - many of these 'smaller and less sophisticated investors, who want to go out and kick the tyres', says its executive director, David Gerhardt.
Angels are often a second source of money, after the entrepreneur has borrowed all he or she can from that other great pool of venture capital - friends and relations. Last year a Massachusetts start-up, Dark to Light Inc, which makes a photo-electric switch, raised $600,000 from its managers' private sources, but went to TCN for an additional $400,000, which it got by assembling a partnership of 10 angels, thanks to TCN.
Angels, however, are only one thread in the broad tapestry of the entrepreneurial economy. To a degree that it is hard for Europeans to imagine, there are dozens of different support systems, discussion teams, networking clusters and groups, publications and electronic forums offering rudimentary management education that small business people, young and old, have access to. One fairly typical networking group is the Alternative Board, the creation of consultant and business author Allen Fishman, which meets monthly for a four-hour period when business owners discuss a wide range of problems with their peers. The Alternative Board has operations in 13 cities and hopes to plant its escutcheon in Britain soon. Says Dick Klein, president of St Louis-based Atlas Iron Works: 'I have found the group very beneficial. I run this business by myself. I don't have a partner to bounce ideas off. The Alternative Board has been like a sounding board. I've had some good suggestions from them - some I've put into practice.' He adds: 'It is not just ideas I go for, but support. Most of our board is suffering still from the recession. It's good to know that we are all in the same boat. One of our members jokingly said, "It is cheaper than therapy."' On a more pragmatic level, many entrepreneurs join networks that promise to actually help ring the cash register. One of these is the San Diego-based LeTip International, which currently has 250 chapters with a total membership of 6,000, who pay an annual fee of $200. Each chapter has a member from a different line of business or profession. At weekly breakfast meetings where attendance is compulsory, each member is expected to bring four tips that others can use. Failure to produce a tip incurs a token fine of one dollar in some chapters. And if members don't generate a healthy stream of referrals, they are kicked out. 'We don't play games. We have only dedicated professionals and business people who want to help each other through an exchange of tips and to make more money,' says LeTip's founder, Ken Peterson.
Another essential ingredient of entrepreneurialism is the relative ease with which small companies are bought and sold in the US. This liquidity comes from two sources: initial public offerings (IPOs) and private sales arranged by thousands of small company brokers active in most cities and industries. The existence of a well-developed US initial public offering market is the magnet for angels who think they might get a ride on Federal Express, Digital Equipment or Apple - companies created in the last two decades by venture investors.
The recent recession has decimated the private small company mergers and acquisition market. Both the number of transactions and deal prices and numbers of brokers have fallen dramatically. Even so, hundreds of middlemen are bloodied but unbowed and hoping for a turnabout. 'I think that the fundamentals of traditional small company acquisitions are coming back,' says Alan Wells, president of Bolinger, Wells, Lett and Co, a New York-based business broker. 'But it is too early to say they are back. Give it a year - minimum.' That small company valuations today should be far below their late '80s highs, while the stock market averages are breaking new highs, only underscores the chief obstacle besetting the entrepreneur: the unfair distribution of credit. Falling interest rates pump up equity prices of blue chip companies while a lack of expansion and growth in the economy makes bankers shy of small business loans. The skimpy loans that are available are at least twice as expensive as the money costs of Standard and Poors' 500 companies. Not surprisingly, polls conducted by the National Federation of Independent Business and other small business lobbying/trade groups all describe widespread resentment at the inaccessibility of bank credit.
What compensates for the entrepreneurs' high cost of funds is the fertility of innovation in the small business economy - quite aside from such evident advantages of smallness such as flexibility and quick responses to customer needs. One example of such innovation is the growth in the last decade of small businesses barter. There are about 400 barter exchanges today, reportedly serving about 200,000 businesses where enterprises with unsold goods, or service companies with underutilised capacity, can swap their excess. During bad times the access to barter can make all the difference between survival and extinction. There are retailers, hairdressers, dentists, carpenters, consultants of all stripes, landscape services, hotels, lawyers, accountants, restaurants, radio and TV stations all bartering value to the tune, trade sources say, of slightly under a billion a year. A Connecticut exchange with 2,200 members will arrange trades for weddings, divorces, an astrology session, or children's books. 'After the average businessman has done everything possible to generate sales and still has excess capacity, then what? That's where bartering fits in: he can increase sales at no cost, or only small incremental costs,' says Matthew O'Hayer, president of the Austin-based Barter Exchange.
Another thing that's distinctive about the US entrepreneurial scene is the degree to which state and local governments - in the belief that small business is a vital force in job creation - nurture small business. About 10 states have technology assistance programmes for small business, where experts make field visits to pass on vital know-how to small manufacturers. Another dozen or so actually have set aside pools of capital for start-up investments. And still other states have programmes that persuade local corporate giants to throw the odd bone to local small guys, so as to spur employment.
The entrepreneur is a folk hero anyone can dream of becoming. And millions do. Which is why there is a public appetite for most-likely-to-succeed traits. A recent popular entrepreneurial quiz put out by an insurance company, Northwestern Mutual Life, presents the classic entrepreneur as a child of immigrants, not a high achiever in school, not a lover of group activities, but one who showed business initiative as a teenager.
Who cares? Well 3,000 franchisers in 60-odd industries with sales of $750 billion a year do. So also do the micro-entrepreneurs involved in multi-level marketing. This $12 billion industry involves one freelancer peddling consumer goods like vitamins and beauty products, plus recruitment of new salespeople to the product line - who then pay their recruiter a commission on their volume. Among the big multi-level marketed products are those of Avon, Shaklee Vitamins, Nuskin, Mary Kay Cosmetics, Fuller Brush, Colgate Palmolive. Once dominated by women and retirees seeking part-time employment, multi-level marketing now attracts a younger, and more educated and affluent opportunity seeker.
The existence of so many putative and real entrepreneurs out there has not gone unnoticed in the media. Arguably the most successful business magazine start-ups of the last two decades is Inc which has around 500,000 loyal readers enthralled with the publication's account of pathways to entrepreneurial success. It has spawned several imitators, like Small Business Opportunities whose latest issue carries the feature stories: 'Floor cleaning specialist now offers franchising opportunities'; 'Set up a shop in your own front yard'; 'Let the good time - and big bucks - roll with your own skating rink';'You can start a business that helps curtail crime in your community while you make money'.
Entrepreneurship requires a heavy dose of faith and fantasy to get and keep people motivated. About two-thirds of the 50,000 new ventures of 1993 will disappear in the next five years. Many survivors just limp along. Of firms with fewer than 100 employees, only 18% added any new jobs in the 1987-92 period - while only a modest 5% of this category grew significantly.
There is yet another vital ingredient of American entrepreneurialism and that's the culture's toleration of failure, the perception in the law that bankruptcy bears no shame - hurt creditors be dammed. Few other countries are so quick to forgive and forget entrepreneurial flops, because of the perception that successes are so beneficial.
In short, the country could do with more angels. Wetzel reckons that 'The active angels in the US are out-numbered by what I call "virgin angels" - namely potential venture investors who are sitting on their hands - by about five to one. And thus a very pressing issue in terms of investment growth and job growth is: how do we convert these virgin angels into streetwalkers?'.