The investors behind New York’s new tech boom

Suzanne Rheault wouldn’t be where she is without angel investors. When she launched her company in 2009, she landed a $100,000 seed round from an angel investor. Less than a year later, a pitch to the New York Angels earned her another $150,000 on the spot. In total, she has banked nearly $500,000 from angels in New York.

“I thought I died and went to heaven,” says Ms. Rheault, chief executive of Aristotle’s Circle, an online service that connects students with school and college admissions advisers. “Angel investors put us a year ahead of our plan.”

She’s one of hundreds of New York City entrepreneurs benefiting from a newly resurgent angel investor community, a varied crew of serial entrepreneurs, Wall Streeters and other well-to-do New Yorkers who are taking personal stakes in early-stage companies. The angels are a big force behind New York’s new tech boom.

Individually, the angels are sinking money into dozens of small startups in exchange for equity, and at the same time, organizing as groups to help vet companies and network among themselves. Angels are even being welcomed by venture capitalists and investing alongside them, a phenomenon barely heard of until recently.

“[A few years ago] there was not a lot of seed or angel funding in New York City,” says Brandon Kessler, who has angel backing for his company, Challenge Post, a two-year-old online marketplace where people create and solve problems. “That was before it was hip to be a seed or angel investor. Now they’re all over the place.”

The New York Angels, which got its start in 2004, has grown to 75 members from 30. Similarly, the Long Island Angel Network, which is stepping up its visibility, has 50 members and is looking for more.

Angels have emerged in New York as a few key trends have converged. For one thing, the Silicon Alley years—despite a litany of failures—spawned a generation of serial entrepreneurs who are now sinking their spoils into other people’s startups. At the same time, investors are finding refuge from the vagaries of the stock market in alternative investments, such as backing technology startups.

“The stock market to me is untrustworthy,” says Michael Yavonditte, an entrepreneur and angel investor who is the former CEO of Quigo, an advertising business sold to AOL in 2007 for $300 million. “The one sector still shining brightly is the tech sector. That’s the sector I understand and have been successful at.”

Technology has also changed the investment game, making it cheaper to start a company. In turn, that’s opened the door to smaller investors who can ante up $20,000 or $30,000 or $50,000 and get in the game.

“Now you can start a company for less than $200,000, get product out there and get feedback from the market,” says Jeff Stewart, an entrepreneur who is on his third company and an angel investor with stakes in about two dozen.

At the same time, many venture capital funds have struggled to generate returns in the near lifeless IPO market. Structured to make much larger investments—and generate bigger returns—the VCs have left a gap for angel investors and funds specializing in early-stage, smaller dollar rounds.

Angel investing, of course, is not for the weak-kneed or the risk-averse. To qualify under SEC rules for making high-risk investments, angel investors have to have at least $1 million in net worth or a yearly income of $200,000.

Angels typically take stakes in 10, 20 or more companies in the hope that one will make it big. Even that’s a long shot, since the companies they back often have little more than an idea and a website. In the meantime, they can lose plenty of money before even one investment pans out.

“It takes time,” says David Rose, an angel investor and chairman of the New York Angels, who has stakes in more than 50 companies. “It’s not for the faint of heart or those who want to get rich quick.”
So powerful is the trend that some angels are reinventing themselves as super angels, raising money from individuals and often playing a hands-on role in the companies they back. They are blurring the line between themselves and VCs, investing $25,000 to as much as $1 million in early-stage companies.

The $40 million Founder Collective, for example, calls itself a seed-stage venture fund, and a significant portion of its stash comes from active entrepreneurs. Similarly, another group, ARC Angel Fund, calls itself a hybrid run by members instead of a professional manager. It boasts money from entrepreneurs, successful executives and venture capitalists investing their own wealth. Investors buy into a fund rather than make individual investments.

“We’re trying to fill a gap in early-stage funding,” says Edward Reitler, a co-founder and senior partner of law firm Reitler Kailas & Rosenblatt.

Sensitive to the new competition, some venture capital funds are starting smaller seed funds, the better to get a foot in the door early. Also, in a sign of the changing gestalt, they are viewing angels as partners. Roger Ehrenberg, managing partner of IA Venture Partners and himself a former angel, says he often brings strategic angels into his rounds. Venture capitalist Steve Brotman says angels help his business.

“The more companies that get seeded and funded, it’s to the benefit of later-stage funds,” says Mr. Brotman, co-head of venture fund Greenhill SAVP. “It begets more opportunity for everyone, and the ecosystem replenishes itself.”
As for the entrepreneurs themselves, they more and more like having angels at their back.

“Five years ago, you wouldn’t even think of funding your company with just angel investors; it would be viewed as oddball,” says Mr. Yavonditte, whose business networking site Tracked.com has its share of angel investors. “Now it’s an acceptable approach.”

Especially valued are those who can provide advice and key contacts in their industries. Richard Fine, founder and CEO of Help Remedies, a startup that sells over-the-counter remedies online and in drugstores, counts as an angel an investor whose business is in green materials. He provided advice on Help Remedies’ packaging.

“You’re able to bring in more directly and quite consciously people that will help you,” says Mr. Fine.

Judith Messina is a reporter at sister publication Crain’s New York Business.