In the months following the dot-com bubble burst, Utah companies were feeling abandoned as their search for funding led to more dead ends than ever before. In a market that was already considered lukewarm for investor dollars, Utah deals started drying up faster than Lake Powell during a decade-long drought.

But according to many local angel investors, venture capitalists and entrepreneurs, it’s finally raining again, and with a little cooperation, the state could be in for some much desired flooding.

Local angel investor John Richards says the turnaround started in April 2003. As the economy continues to improve, both startups and more mature companies can look to new funding to take them to the next level.

“In the last four to six quarters, deal flow has increased noticeably,” says Greg Warnock, an active private equity investor and a founding managing director of local venture capital firm, vSpring Capital. “Not only has deal flow quality improved, but there are more investment dollars in the market seeking these deals.”

For vSpring Capital, one of the most active VCs in the region, the immediate post-bubble period meant little competition for deals. “This year, most good deals we find are being investigated concurrently by two or more investors,” Warnock says — a good sign for the economy.

The Power of Angels
In his October 2004 column for connect, entrepreneur and investor Paul Allen wrote, “Angel investors are the unsung heroes of the entrepreneurial economy.”

Due to the high publicity of many VC deals, it is often misconstrued that venture capital funding is commonplace. But in reality, angel investing is far more prevalent — especially for startups. Nationally, about 1 percent of all business plans submitted to VCs ever get approved for funding, while around 25 percent of opportunities presented to angel investors receive funding. Although VCs are an essential piece of the funding puzzle, many companies will never have the opportunity to approach a VC if they don’t find seed capital first from an angel.

No one can officially track angel deals, especially because many of these investors prefer to remain anonymous, giving money to friends, family and colleagues locally. “Angel investors are not obligated to report results to limited partners as venture funds do,” Warnock explains. “They are free to pursue investments based on personal interests, philanthropy or other considerations.”

Many VCs prefer to work with established companies due to the high-risk, aggressive nature of their investments. When selecting whom they will fund, VCs consider such factors as prior management experience, barriers to competitive entry, intellectual property and product differentiation. VCs are investing other people’s money and are held accountable for poor decisions. Since angel investors generally invest their own money, they often don’t have such strict requirements and are more willing to invest in projects that interest them on a personal level.

“As a board member of the Utah Valley Entrepreneurial Forum and an instructor at UVSC school of business last year, I found virtually every entrepreneur asking the same question: How do I raise money?” says Allen. “Few, if any of them, are ready for venture capital, but all could benefit from some seed capital from angel investors.”

T. Craig Bott, president and CEO of Grow Utah Ventures says, “I feel strongly that more funds at this stage will enable more entrepreneurs to have a chance to realize their vision and to ultimately achieve success.”

With a plethora of entrepreneurs and viable business plans, Utah could be on the verge of stirring up more investor dollars. “I think Utah is ripe for a step forward in entrepreneurship,” Warnock notes. “The infrastructure, deal flow, service providers and capital access are poised for growth.” And, Warnock admits, the angel capital investment network is under-developed and remains an under-utilized resource. But that’s about to change.

Banding Together
Until recently, the Utah Angels (www.utahangels.org) has been the only organized group of angel investors in the state. The group is comprised of 17 experienced investors. They meet monthly in Orem to hear funding requests from local entrepreneurs.

Managing Partner Scott Fraizer reports that since its founding in 1998, the Utah Angels have invested $13 million into 32 Utah ventures. Of those, four have ceased operation and four have been sold. Of the remaining 24, five are among Utah’s fastest growing companies, including MyFamily.com, Omniture, TruVision, CORDA Technologies and Infopia. “We’re pleased because we stuck with some of the companies where investments happened at the tail end of the dot-com era,” Richards says.

The Utah Angels will soon lose their status as the only kid on the block with the formation of a new angel group, the Top of Utah Angels. Grow Utah Ventures, a relatively new organization created by Alan Hall that prides itself on facilitating smaller investments into newer companies, has decided to spearhead the group. As a “philanthropic” entity that aims to educate and encourage local entrepreneurs, Grow Utah Ventures sees the promotion of angel investing as part of its overall mission.

“The members of Top of Utah Angels will work as a group to review promising business opportunities across the Wasatch Front with an emphasis on businesses in Salt Lake County north and Cache County,” explains Bott, who views the Utah Angels as more Utah Valley-focused. However, the new group will consider all investment opportunities, no matter the entrepreneur’s geographic location.

Unlike the Utah Angels, the Top of Utah Angels plans to operate as a “managed angel group” with a staff to manage its operations. The Utah Angels self-manage by rotating the chairmen of its monthly meetings between members. The Angel Capital Association (www.angelcapitalassociation.org), a national professional alliance of angel groups, provided the Top of Utah Angels with its operational model through its membership (Utah Angels is also a member).

At present, the Top of Utah Angels is comprised of a core group of entrepreneurs, and is actively seeking members. Hopes are for a group of 30 to 50 investors. Bott says the group plans to start meeting in mid-December once they’ve assembled enough angels. In January, the group will host a Kaufmann Foundations workshop, featuring speaker Bill Payne, designed to instruct investors on how to become angels.

Experienced investors understand the benefits of bringing angels together to function en masse. “Individual investing can be very time consuming and fraught with a lot of risks because all the work and decision-making is left to one individual,” Bott says. “Angel groups help spread that risk by combining the funds so there is more to invest in a wider number of business deals.” In addition, the group’s decisions are based on the experience of many, which theoretically should positively affect return rates.

Looking to the Future
It’s obvious to most investors and entrepreneurs that everyone benefits from angel investors. For example, the 32 companies funded by the Utah Angels have attracted approximately $200 million in follow-on investments from VC firms and strategic partners.

Ned Maxfield, founder of the Utah Angel Network Web portal (see sidebar below), says that VCs and angels should recognize that they are working toward the same goals. “We’re not competing with VCs,” he says. “They should consider us a ‘farm club’ for future VC deals.” Through angel dollars, startups evolve to reach VC funding levels.

Inspiring today’s successful entrepreneurs to become angels will help Utah’s economy become stronger and create new jobs, according to Bott. And someday, the entrepreneurs they helped will hopefully feel a need to give back by becoming angels themselves.

Two new organizations have recently surfaced that will help local angels and entrepreneurs find each other — Utah Angel Network (utahangelnetwork.com) and FundingUtah.com.

The Utah Angel Network (not affiliated with the Utah Angels) is the brainchild of founder Ned Maxfield. FundingUtah.com is headed up by local entrepreneur, Paul Allen.

Each site offers an online matching service where investors and entrepreneurs register and then interact online in a fashion somewhat similar to a dating Web site.

The services allow entrepreneurs to post business plans and angels to register and anonymously peruse listings of Utah companies seeking funding. First-time investors are welcome to join as long as they are accredited.

“I read the book ‘Angel Investing’ earlier this year and learned about angel matching services,” Allen says. “I thought we could use this in Utah, which is the best place to start a new company in the country, but not always the easiest place to find capital.”

The sites strive to make investing deals easier. “We’re basically facilitating the information flow,” says Maxfield. “There’s been a vacuum in the state as far as a coordinated effort, and we think it’s time to change that.” And as a Web portal, the services will be available 24/7. “Entrepreneurs won’t have to wait for months to get invited to present, and angels can login any time to see the latest business ideas and teams,” Allen says.

These services are similar to vFinance.com, a site that provides a forum for the same type of investor/company matching on a national level. “vFinance.com doesn’t work well because a lot of the deals aren’t in a certain geographic location,” says John Richards. “Angel investors very much prefer something that flows to their geography.”

That fact, combined with the resurgence of local investment dollars, has propelled Utah Angel Network to think big. The site will host listings for local service providers, such as law firms, to further expand the scope of Utah-specific business information. The model could work in other markets, but for now, Maxfield says Utah is the only focus. He predicts that thousands of local companies and entrepreneurs will eventually post profiles on the site.

The site won’t post details from deals, but will “celebrate” them, says Maxfield. The site will post the numbers of deals created through the site, as well as general deal amounts, without giving away the identity of anonymous angels. And, the site may print a supplemental newsletter to increase awareness of its activities.

“I think the online matching services will be valuable to many angels who need some encouragement and perhaps are unsure how to get started,” says Greg Warnock, a founding managing director of vSpring Capital. “These efforts will raise awareness of the important role of angel investing as a driver of economic growth.”

Utah Angel Network is partnering with local colleges and universities. By working with students in the business and MBA programs, Maxfield says they hope to help educate new businesspeople about the benefits of information sharing, which he says will increase the spirit of collaboration. Many private and government entities have expressed interest in partnering and helping develop the site.