Local group helps startups take flight
Angel investors put faith in little companies’ big ideas

by Jessica Evans

Typically, angels are more often felt than seen. A group of 25 angels – the majority of whom reside in Whatcom County – is no different.
The Bellingham Angel Group describes “angels” within the investment community as high net worth individuals who fill in the investment gap between initial investors such as friends and family, and traditional venture capitalist investors. The Bellingham Angel Group tends to focus on early-stage companies that need more capital investment than can usually be generated by the entrepreneur, but are not sufficiently developed to attract the interest of today’s average venture capital group.
The Center for Venture Research at the University of New Hampshire, which does research on angel investments, estimates the total investment from angels in the United States is between $20 billion and $50 billion as compared to the $3 to $5 billion per year that the formal venture capital community invests at this stage.
For confidentiality purposes, Bellingham Angel Group members are not publicly identified. In an effort to help the community understand their ambitions, however, three members have agreed to identify themselves and give the public a rare peek into a low-profile group working to improve the economic future of Northwest Washington through targeted local investments.

Atypical angels
Glenn Butler isn’t your typical angel. His wife and three children likely agree. He holds a bachelor’s degree in chemical engineering from Oregon State University and completed the advanced management program at Harvard University’s Graduate School of Business.
Like Butler, the title of angel is at the bottom of a long list of occupational titles for Ralph Bennett. Bennett’s list includes founder, director, vice president, president and CEO – all of which he became at the Vancouver, B.C.-based PMC-Sierra, Inc. (NASDAQ: PMCS), prior to retiring in 1996. Bennett’s acquisition of several titles began with a series of high-tech startups such as Vermont Semiconductor, RSA Security (NASDAQ:RSAS) and Mitel, now called Zarlink Semiconductor (NYSE:ZL), which he founded, invested in and led as CEO.
Butler and Bennett have two things in common: a healthy fiscal profile and a passion for investing a portion of their wealth within the Northwest Washington community to help others achieve success with their business endeavors and livelihoods. These commonalities are the reasons Butler and Bennett helped found the Bellingham Angel Group in 2005 and added one more title to their lists, angel.
Butler and Bennett are unique, but they are not flying solo. In fact, the two are only a couple of many local investors who desire to invest in seed – or early-stage companies in the Bellingham region. To qualify as an angel investor, the U.S. Securities and Exchange Commission requires that the individual have either a net worth exceeding $1 million, individually or with a spouse, or have an individual income of $200,000 or joint income with a spouse exceeding $300,000 in each of the most recent two years and a reasonable expectation of reaching the same level in the coming year. Bellingham Angel Group members engage in the high-risk, high-return practice of “angel investing.”
“One of the things that early-stage companies are missing is the ability to transform excellent ideas into real financial results,” Butler says.

Statewide solutions
The Bellingham Angel Group is part of a wider network of angels in Washington state under the auspices of the Washington Technology Center (WTC) Angel Network and is a member of Angel Capital Association. The group also works with the Alliance of Angels in Seattle, The Puget Sound Venture Group, The Northwest Entrepreneur Network and the Angel Forum in Vancouver, B.C.
“This wide network of angels and investors with whom we share information and opportunities, together with our local Bellingham community relationships will insure that we are a significant and important part of the investment community in our city and state,” Bellingham Angel Group Chair Bruce MacCormack says.
In partnership with the WTC, the Bellingham Angel Group is dovetailing the mission to channel state and federal funding for research and business development and foster mutually beneficial partnerships between technology companies, academic researchers and laboratory facilities across the state. Through the WTC, Washington state channels millions of dollars to high-technology companies.
Although Bellingham experienced a loss of 2 percent in employment this year within two of its leading industries – wireless telecommunications and petroleum/coal products manufacturing – Bellingham placed first in the state for new company starts, according to the WTC report “2006 Washington Index of Innovation and Technology.” It shined in new company creation – capturing the top spot in the state for birth rates on a per capita basis. Bellingham’s 2,569 new company starts were more than double some of its peer regions.
Bellingham reflects many of Washington state’s positive results from the WTC report. Washingtonians are innovators. The state leads the country with the generation of new ideas and the translation of these ideas into commercially successful products and services. Washington had the highest rate of new company formation for five years running until neighboring Idaho recently took the lead. Montana ranks third. This strong performance by Northwest states exemplifies that this region is a clear leader in entrepreneurial growth. As groups like the Bellingham Angel Group invest in this innovation by helping startup companies, more jobs are created and, ultimately, the region benefits from a more robust economy.
According to the Angel Capital Association, the return on startup company investment is huge. For instance, with each dollar the state has invested in the WTC, 14 additional dollars have been invested in the economy. Millions of dollars in funding have allowed local companies to develop new products and create additional jobs, the latter of which Butler and Bennett specifically believe Northwest Washington needs to capitalize on.
MacCormack says applicant companies seek as little as $150,000 to as much as $1.5 million or more and individual angels typically set aside between $50,000 and $500,000 to invest in a given company.
Interestingly, the group itself does not make investments. It is merely a conduit for individual angel investors to enter into discussions with the company’s executives to negotiate the investment.
“It is likely, at least among the Bellingham Angels, that individual investments of around $25,000 to $50,000 would be the norm, bearing in mind that angels may make several different investments in any year,” MacCormack says. “Smaller amounts invested over several opportunities spread the risk/return ratio in what is after all, a high risk environment. It is not uncommon for a number of angels to combine together to invest in a startup company, although their individual participation level may vary.”
WTC Angel Network Manager Nate Silverman emphasizes that although a successful angel investor can expect to average a 20- to 30-percent return on their investment, angel investing is extremely high risk.
“Angels should expect to lose everything on a number of investments, do OK on others and do really well on very few — maybe 10 to 20 percent,” Silverman says. “That means only one or two out of 10 investments are ‘home runs’ and have to compensate for the losses to make the average portfolio return on investment acceptable. Considering the risk/return ratio, it is understandable that investors expect a higher return than the stock market, which averages about 10 percent return per year.”
MacCormack says economic growth is spurred by “private motivations with public results.”
“At the most basic level, investors invest in companies they think will grow large quickly,” MacCormack says. “Growth can thus be measured in market value, but also in revenue and size such as the number of employees.”
Despite its relatively fast high-tech employment rate within the aircraft manufacturing industry, Bellingham isn’t exactly a hotbed of early-stage investment activity. Butler says the creation of the Bellingham Angel Group was the logical solution to helping entrepreneurs with big ideas and little money when the banks shied away from shouldering above-average risk.
The primary advantage for the group is that it provides an efficient means of gaining access to the best investment opportunities while the community benefits in that the angels offer a focal point for early-stage investing with a simple, streamlined process for engagement.
“I expect the group to make several million dollars in investments over the next few years,” Bennett says.
MacCormack warns, however, that angel investing isn’t for most startups. Simply asking will not do for companies seeking angel investors. A few hurdles exist in the group’s formally established investment opportunity review process.
Since its creation, the group has received more than 50 applications from companies. After the next quarterly meeting, only 15 of the 50 companies will have been allowed to present to the group.
“Preceding our next member meeting, 13 companies were reviewed and three have been selected to present,” MacCormack says. “At this point it is estimated that about 20 percent of companies either have some funding in place or are in the process of term sheets or due diligence to that end.”
Potential opportunities are based on depth of management team, strength of technology or service offerings and potential for high returns.
Bennett says his criteria for deciding what companies to invest in comprises the following three areas: technology viability, market opportunities and capabilities of the principals involved.

Here’s how
Companies seeking to present their business proposition to the angels must apply to the screening committee. This five-member committee reviews the applications and determines which companies they want to invite to a screening committee presentation. Those invited are allowed to make a one-hour presentation about their company and its investment needs. If the committee approves, only then is the company allowed to make a 10-minute presentation at a Bellingham Angel Group quarterly meeting.
As a member of the Bellingham Angel Group screening committee, Butler explains the secret of achieving a successful pitch is adhering to the tough criteria.
“Keep it short; don’t spend all your time trying to convince me you have invented the best mousetrap,” Butler says. “Convince me you actually own the rights to the mousetrap; have the management expertise to commercialize the mousetrap; understand the potential market and your competition in the mousetrap arena; scale up to a level that piques my interest; and finally, convince me that there is an exit strategy for me to get my money out of your company.”
Scoring one or more angels frequently brings more than just a direct, personal investment between $10,000 and $100,000 to an early-stage company or business idea. Most often, angels are corporate executives, entrepreneurs, venture capitalists or have family wealth. Diverse experiences within these backgrounds often provide counsel, strategic direction and management accountability as added values to the company.
Butler, for example, is a business consultant specializing in the fields of energy, environment, safety and public affairs. He is the former plant manager for the Cherry Point Refinery. Prior to starting his own consulting business in May 2000, Butler’s career involved more than 20 years with Atlantic Richfield Company (ARCO).
“I have been part of turning around a failing business, improving an already successful business, developing additional profit lines, and acquiring and divesting business segments,” Butler says. “Hopefully this varied level of experience will be valuable to both the Bellingham Angel Group and early-stage companies.”

Forward focus
Angel investing is a proven economic tool. Communities with strong angel networks such as Wenatchee, Port Angeles and Seattle are able to foster the development of entrepreneurial ventures and new startup companies.
“I have three kids all nearing adulthood and right now, Bellingham doesn’t have a lot of opportunities for them in the job area,” Butler says. “I’d like to make that at least a possibility.”
Butler and Bennett say the true power of the Bellingham Angel Group is that angel investing combines self-interest of the investors with their desire to help build a strong economic future for the community.
“It’s all about helping others in the community,” Bennett says.
MacCormack agrees that although angels are seeking a high return on their investment in what is a high risk/high return environment, the group’s motives can also be philanthropically based.
“Angels tend to be retired or semi-retired businessmen who want to somehow stay involved in their community, necessarily have an ‘affection’ for entrepreneurs and want to ‘give back’ something to the community from which they have gained so much,” MacCormack says.
Like other angel investors, Butler will count himself successful with at least one angel investment per year. Although he says the group is looking for companies that have the potential to yield a high return, the ultimate goal is to strengthen the cities of Northwest Washington.
“A city doesn’t lose its soul when it grows,” Butler says. “It will almost certainly lose that soul if it is not renewed with the energy of new ideas, new people and new opportunities for all of us.”
Bennett agrees that as the base of economics, fiscal growth is integral to the state’s success.
“A community, like a country, relies on monies coming from outside itself for continued growth, jobs and prosperity,” Bennett says. “Any community needs companies which develop and build products and services to exchange for such monies.”
In regard to additional jobs, the group has forecasted potentially major economic impacts in Washington state communities, Bennett says.
“For example, at Mitel, we started with a group of about 15 in 1976 and by 1983 we had over 5,000 employees,” Bennett says. “At PMC-Sierra we started with 29 in 1992, and today there are over 600 employees in the same local area.”
To those in Washington who disapprove of creating additional jobs and fear overcrowding, Bennett says change is inevitable, but proactively initiating positive growth is optional and feasible through the Bellingham Angel Group.
“From my viewpoint, as long as there is space like Whatcom County available, it will continue to fill, either with good, enterprising people who are helpful to one another, or others not so helpful,” Bennett says. “A community – like everything else – either grows or it decays. There is just no staying even. That is the law of the universe.”
The touch of these angels may not be a typical one, but Northwest Washington is sure to feel the investment in angelic ideas, including those proposed so far that promise breakthroughs in medicine, reduce energy consumption or solve environmental problems.
“Maybe one of the companies we help start up right here in Bellingham will make ours and our children’s lives better,” Butler says.