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Startups face shorter list of angel investors

They're risk-takers, putting thousands of their own dollars into unproven ideas for the thrill of turning startups into successful businesses.

Called angel investors, these wealthy individuals are the financial saviors who step in after entrepreneurs have raised all the cash they can from friends and family.

The problem is, there aren't enough of them.

Wealthy individuals who finance startups across the country are cutting back because the deals have gotten less attractive. Several investors said they can make the same or more money without taking nearly as much risk.

The number of active U.S. angel investors declined by 11 percent, to 125,100, in the first half of 2010, compared with a year earlier, according to the University of New Hampshire's Center for Venture Research. Those who remain are becoming more cautious, with the lowest percentage of angel investors funding startups at the idea or concept stage in at least 15 years.

"If we don't have the acorns, we're not going to have the trees," said Jeffrey E. Sohl, director for the University of New Hampshire's Center for Venture Research.

Without the money, entrepreneurs such as Joel Ackerman are having a tougher time building their businesses and creating jobs. Ackerman, a former UnitedHealth Group executive, needs $2 million to build his startup, River Systems, which is developing software to help senior citizens communicate with their doctors, family and pastors from home.

He has had more than 20 meetings with angel investors. They say he has a great idea, but they want to wait until there is a product that brings in revenue.

"The traditional role of an angel investor is about dead right now," Ackerman said, who has nearly used up his retirement savings and taken a second mortgage on his house to fund River Systems. "We have the great potential to create jobs. Once we get the ball rolling, it will happen."

Many angel investors say they would invest more money into startups, if they had it. The problem is, their money is tied up in earlier investments, some of which have been in their portfolios for more than a decade.

One way for investors to get their money out of a startup is for it to go public on the stock market. But a weak market has mostly cut off that pathway.

"We're just waiting for some of our investments that we've been in for 10 years to come through," angel investor Steve Wirth said. "We want to see some liquidity events, so that we can plow proceeds back into the community again and again."

David J. Colligan, a local attorney who is chairman of the Buffalo Angels, a group of Buffalo Niagara region investors affiliated with the Western New York Venture Association, said the trend has been tying the hands of some of the region's angels.

But he also believes that the amount of angel funding available locally has been holding up, partly because more wealthy investors have joined groups such as the Buffalo Angels to seek potential investments in startups.

"I think we're in a sweet spot here in Buffalo," Colligan said, pointing to the medical research being conducted at the Buffalo Niagara Medical Campus as a fertile source of products and technology that could be developed commercially.

"The Buffalo Niagara Medical Campus is the real deal. You're going to have a lot of commercialization ideas," he said.

The Buffalo Angels group has been working to bring more openness to angel investing in Buffalo Niagara, which previously had kept fairly tight-lipped about angel investments and who was making them.

In contrast, the Buffalo Angels group openly courts potential investments at regular meetings where companies can make a pitch for funding. The group, which has 20 to 30 active members, generally can give the startup an answer about whether the angel group is interested in funding in a month or so, Colligan said.

"There's always been a shortage of angels," said Daniel P. Penberthy, the Rand Capital Corp. executive vice president who also is vice president of the Upstate Venture Association of New York. "There still needs to be a lot more, but there is a lot going on."

To broaden the pool of potential investment capital, the Buffalo angel group has been building ties with angel investors in Rochester and Syracuse, with the idea of sharing opportunities, said Jack McGowan, a project manager at Insyte Consulting and a director of the Western New York Venture Association.

Visiam, a Minnesota company that supplies processing technology for municipal solid waste management groups, said the $75,000 that it received through the angel tax credit program last year helped the company save three full-time jobs, hire consultants and bring its technology to commercialization. "It allowed a company to stay in business," said Scott Hughes, chief operating officer.

Angels say that part of the problem is they aren't getting rewarded enough for the risk in investing in unproven business ideas. In the past, angels would often get more favorable deal terms than later investors. But that has changed, and later-stage investors can often make as much money or more.

News Business Reporter David Robinson contributed to this report.

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