Earning Your Wings

You've probably heard the rumors: Angel investors aren't as angelic as they used to be. Such investors, generally wealthy individuals, have been essential to American entrepreneurs, betting on early-stage ventures that frighten most other investors. But angels are getting a lot harder to please. And that has implications for any entrepreneur seeking seed funding.

The good news is that angels are picking up much of the slack from venture capital funds, which are increasingly focusing on later-stage outfits. Last year alone, 42,000 angels plowed $18.1 billion into early-stage companies, compared with a mere $304 million plunked down by VCs, according to a recent study by the University of New Hampshire's Center for Venture Research.

But while angels have always had high hopes for the companies they invest in, these days they rely a lot less on their guts than they do on the facts, says David Rose, chairman of the New York Angels, a 50-member group in Manhattan.

Not surprisingly, the shift dates back to the dot-com crash -- which made all investors more risk-averse. As a result, most angels are interested only in companies that are likely to post positive cash flow within 12 to 18 months. "I want to know if I can double, quadruple, or increase my investment tenfold in five years," Rose says. Unless you already have a service or product, a few customers, and an exit plan, that's not likely to happen.

Rudy Prince learned that lesson last year when he began drumming up financing for Always On Wireless, the telecom start-up he founded in Houston in 2003. Back in 1988, Prince had landed $500,000 from angels for his first company, JetFax, so he thought he knew what to expect. JetFax's product -- software that lets users send faxes over the Web -- was little more than an idea on paper. But the angels had no problem signing on.

This time around, Prince had a fully developed product -- the WiFlyer, a gadget that lets dial-up users connect to the Internet without wires. What's more, Prince and his partners had already ponied up about $200,000 in seed money, so they were asking angels to participate in a first round of investing, which is considered less risky than standard angel deals. Nonetheless, he says, the angels he talked to were extremely skeptical. "They're no longer relying as much on leaps of faith when it comes to investing," he says.