By Allan Maurer

DURHAM, NC—Angel and venture investors bet their cash on people even more than on innovative ideas. That’s one reason conferences such as the North Carolina Council for Entrepreneurial Development’s Venture 2007 in Durham next week can be effective matchmakers, says an authority on angel investment trends who will speak at the event.

Jeffery E. Sohl, Ph.D., director of the Center for Venture Research at the Whittemore School of Business at the University of New Hampshire says of angel investors, “It’s such a face-to-face phenomenon. It’s a touch and feel business in that sense. In essence, they’re betting on the jockey, not the horse.”

Sohl, who will speak at the conference’s angel retreat on Tuesday morning, is one of the nation’s leading authorities on angel investing trends. He has presented his research findings in forums worldwide and has appeared on CNBC, MSNBC, NPR, and is widely quoted in the national and international press. Sohl’s research identified the early-stage investment gap that hobbles many good ideas due to a lack of seed stage capital.

Marriage without divorce
Sohl says one of the reasons angel investors prefer meeting entrepreneurs face-to-face is that “In these investments, especially at the early seed stage, they’re in a marriage without divorce for five to seven years. A divorce would mean bankruptcy.”

That means an entrepreneur’s “entire vision” needs to be in line with an investor’s and visa versa, Sohl adds.

He notes that investors often like venture conferences because it allows them to “screen a lot of deals at one time. The presenting companies have been scrubbed and vetted a little.

“Angel investors work from a referral network,” he says. The conferences act somewhat like those referral networks. “That’s why they like these things. They’re one step above what comes in over the transom. They take some of the heavy lifting off the work, although there’s still plenty of heavy lifting to do.”

Jumping the gun
Sohl says the mistake entrepreneurs make most often is going to the markets too early. “They’re not investor ready,” he says. “They have to do their homework and understand what their markets are, understand angel investor metrics and how they put a valuation on a company.

“One of the key problems is the valuation of the company.” Sohl says discussing the assumptions that go into the valuation can keep discussions “on a more pleasant tone.”

Sohl advises early stage entrepreneurs to attend these conferences and “watch, learn, make contacts. They need to understand how the market thinks and feels, how it makes investments. So coming in as an observer is helpful in the beginning.”

He also suggests that entrepreneurs get coaching before making a pitch. “They won’t get that many opportunities to pitch,” he adds.

Angel investing a $25 billion market
A smart entrepreneur with a technical background who isn’t a particularly good speaker should consider hiring a CEO who is to make the pitch at these events, he suggests. “That shows two things. The entrepreneur knows what he’s good at and knows what he isn’t good at. It shows a willingness to work with a management team, which is critical.”

He notes that some entrepreneurs want equity capital but “don’t want to give up any equity to get it.” He points out that “Ten percent of a $300 million company is better than 100 percent of a $2 million company. Sometimes you’re better off as a minority investor.”

Sohl says that people who talk to him after his presentations often express surprise at how large the angel investing market actually is. His research shows it’s over $25 billion, bigger than the venture market, which puts its money in mostly later stage companies. VCs invest only 6 or 7 percent of their funds in start-up seed investments. Angels invest 45 to 50 percent in seed deals.

Angel investing is not “for the faint of heart,” Sohl notes. Out of ten start-ups, he says, “three or four die completely with no return on investment. Another three or four limp along.”

The investor may get his or her money back but no gain commensurate with the risk. Another two or three have reasonable exits, usually via mergers or acquisitions, sometimes an IPO.” Only the later provide a substantial return on investment.

The current angel investing market is steady, he says. “Our research shows a disciplined, healthy market, and we expect to see robust growth in 2007.” He cautions, however, “The market always swings through ups and downs. We’ve seen three market corrections since we started doing our research in 1986.”

The North Carolina Council for Entrepreneurial Development’s Venture 2007 event is Tuesday and Wednesday April 24 and 25 at the Washington Duke Inn in Durham.

For more information see: http://www.cednc.org/conferences/venture/2007/

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