CEOs with Angel Wings

What’s behind the allure of investing in startups? (Hint: It’s not always about the money.)

March 4 2013 by John Kador

David Perla, co-founder and co-CEO of Pangea3, the largest legal-process outsourcing provider worldwide, with more than 1,000 employees globally, is a typical angel CEO. Perla, 43, funds an average of two startups per year, investing about $50,000 per transaction. In valuation, the startups tend to be in the $2 million to $4 million range. While he takes a definite interest in the startups, he makes it clear to the founders that his first responsibility is to Pangea3 and they can’t expect him to be on call for routine coaching. “Managing founder expectations is key,” he says.

Perla describes the funds he sets aside for angel investing as discretionary. “This money is not part of my kids’ college fund or my own retirement planning,” he says. “If you take losing money personally, stay away from angel investing.” Diversification is the key to success in any investing program; and with just four startups in the typical CEO angel’s portfolio, meaningful diversification is impossible. Perla suggests that CEOs who want to maximize their odds should consider participating in a VC fund.

“Assume you are going to lose all your money,” agrees Manuel Henriquez, founder and CEO of NYSE-listed Hercules Technology Growth Capital, a specialty financing company that provides debt financing to pre-IPO, venture-backed companies. “Treat success as a complete surprise. The law of small numbers will likely lead to a complete loss on your investments,” he says. “I’m happy to come back at the end of the day at net zero.”

CEOs considering making an angel investment should answer one central question: What’s in it for me? If the answer focuses on what you will receive, you should buy an index fund, suggests New York Angels chairman Cohen. “On the other hand, CEOs who are willing to give first and receive second will be rewarded by organizational wisdom and market insights that will improve their game as CEOs to the organizations they lead,” he adds.

Jacqueline Corbelli, co-founder and CEO of BrightLine, a provider of interactive television solutions for entertainment and advertising, invests in a handful of opportunities every year, typically hearing two dozen pitches before selecting one in which to invest. Corbelli is typical of CEO angels in that she invests less for the monetary return than the charge she gets from ideas that offer new ways to transform an industry through digital technology.

“The marketplace is struggling with the opportunity to jump to a whole new level by utilizing digital technologies,” Corbelli says. “I’ve watched businesses get transformed when they make a deliberate and focused effort to leverage technologies. I look for people who get that and I want to invest in them,” she says. While she does due diligence on the startups, she recognizes that, given the early-stage nature of the businesses, due diligence really comes down to the CEO angel’s instincts. “I want to invest in people who are smarter than me in the area they are investing in,” she says.

Hercules Technology Growth Capital’s Henriquez is a CEO angel investor because he likes being involved with bright young people dedicated to changing the world. “True fishermen cast their lines not because they want the fish, but because they like fishing,” he says. “It’s fascinating to help spawn new technologies, to challenge the status quo; it’s what this country is all about and angel investing allows me to be a small part of it.”

Top Four Reasons for Donning Angel Wings

  1. Mentor and learn from the brightest entrepreneurs
  2. Gain early access to disruptive products and technologies
  3. Improve your own game through fostering startups to market success
  4. The possibility of getting in on the ground floor of the next Google or PayPal