'Angel' investors have nerves of steel, hearts of gold

These venture capitalists are in it for profit – and social change.

Carol Atwood knows the pain that ethical investing can sometimes cause to a person's bank account. But she's not about to start separating money from mission.

Shortly after the dotcom bust of 2000, Ms. Atwood of Sudbury, Mass., helped bankroll a start-up Internet company that promoted wellness among visitors to its website. A couple years later, the struggling firm accepted a "fire sale" buyout offer that brought her new stock, not cash, and underscored a bleak reality: "I could break even at best. I could also lose money."

Her mettle as an "angel" investor in the risky world of socially conscious private equity was about to be tested.

But rather than flee, Atwood has signed on to six more deals. Investors like Atwood typically supply anywhere from $25,000 to $75,000 initially and kick in more cash within a few years. Why does she do it? She says she sees potential in fledgling firms, not only for profit, but also for social change.

Plus, "It's just darn fun to make personal decisions and get to see these companies grow," she says. A lot of investors like her, she says, are prudent people who sometimes "can't help themselves. They meet a manager whom they're really impressed with, and they throw caution to the wind."

Being prepared to lose every penny wagered on a high-minded venture, it turns out, is a defining trait for this breed of ethical investors. It was one of several common attributes on display at the Boston Harbor Hotel earlier this month when about 170 ethically motivated, accredited investors (you had to be worth more than $1 million or earning more than $200,000 per year) gathered for a semiannual venture fair.

The trappings of this rarefied event suggested the power of Investors Circle, a network of angel investors who finance early-stage start-ups. All day, it seemed, signs of investors' social impact were as close and concrete as the nearest refreshments. During breaks, participants drank eight-ounce bottles of Adina strawberry hibiscus juice, a product supported by at least one IC member with a soft spot for preserving an endangered Senegalese tradition. At lunch, they dined on cooked shrimp from an eco-friendly fish farm, served courtesy of cash-seeking entrepreneurs at San Francisco-based CleanFish.

Though most ethical investors lack the deep pockets of this crowd, attendees said many of the attitudes and strategies utilized in this arena are apt to breed success in other domains as well. First rule: On bold ventures with big promise and big risks, invest only as much as you can afford to lose. Second rule: Get familiar with the person who runs the company before putting down a penny.

"You've got to have somebody really good at the top. It's essential," says Willy Osborn, investment manager at Commons Capital, a Boston-based venture capital firm that concentrates on clean energy, education, environment, and healthcare sectors.

Before investing, he asks a battery of questions to assess the CEO's intelligence, knowledge of technical and market considerations, and track record for managing high performers.

That approach has paid off. After getting comfortable with the CEO of solar panel manufacturer Evergreen Solar, Mr. Osborn "got in early" at what is now a $500 million company.

Atwood says she's ready to reap rewards in coming months, to the tune of about 18 percent per year, from a financial services venture that grew from her trust in a manager who impressed her.

John Fullerton, CEO of Alerian Capital Management in New York City and a former banker at J.P. Morgan, looks for more than competence and smarts in an entrepreneur. He likes to see a track record of at least one prior success, but emotional connections count as well.

"I certainly won't invest in an entrepreneur unless I feel a relationship connection that's deeper than just, you know, 'You've got a business. I've got some money. You want my money. I want a certain return. Good luck,' " Mr. Fullerton says. He relies largely on face-to-face meetings to assess whether the entrepreneur shares his values and embodies the attributes of "commitment, passion, dedication, willingness to walk through walls."

"I look to what they've done in their lives," Fullerton continues, "to validate that those characteristics are there."

Fullerton brings his strategy to bear on advancing small-scale agriculture. He's backed Adina, the Senegalese-themed beverage concern, as well as a Quechee, Vt., diner that serves only locally grown food. But ethically driven investing in start-ups constitutes just a fraction of his portfolio – the fraction he can afford to lose. Otherwise, he's diversified and favors the energy sector, including both alternative sources and lots of oil-related ventures, which have served him well in recent years.

Fullerton's approach departs from the philosophy of most socially responsible mutual funds, which argue that investors reap strong returns over the long term by sticking exclusively with social high achievers. In his view, the socially minded enterprise of backing high-risk ventures falls somewhere between investing for profit and philanthropy.

Others here take a more hard-nosed approach.

Osborn, for instance, has no philanthropic intentions in this domain, no matter how lofty a company's vision may be.

"It better make business sense, or we won't invest in it," he says. "I want these companies to be the best businesses they can be." They will need to show profits and good growth prospects, he says, "if they're going to attract more investors down the line," both to buy out his position and also to remain viable in their social missions.

As the three-day event unfolds, investors put their principles into practice. They listen to entrepreneurs' pitches and business plans: The maker of a new wind-turbine system, for instance, stirs a lot of comment as "clean tech" has become the year's hot sector.

After hearing presentations, investors form a circle and discuss: Has anyone seen something like this before? Is the technology solid? Is what they're being told too good to be true?

For Michael Finney of San Francisco, the setting is familiar. He hears about 200 pitches a year and invests in fewer than five. After considering the options here, he says he may invest something – less than 1 percent of his portfolio – in CleanFish.

"I wanted to find something that's going to get big fast," Mr. Finney says. In return for his considerable risk, he's hoping to earn about 20 percent annually. He also feels good about the project because, in his opinion, dwindling fish stocks show "the state of the fishing industry is a real time bomb" and sustainable fish farms, along with a network of family fishing operations, seem to bode well.

When all is said and done, only about 5 percent of meeting attendees will write a check to a presenting company, according to Brian Dunn, a San Francisco-based consultant to investors and an Investors Circle member who directed the organization from 1999 through 2001.

Investors say the rewards begin long before the money starts coming back in, which may take five or more years down the line. In Atwood's case, fun is enhanced by meaningfulness. For instance, by funding IW Financial based in Portland, Maine, she helped develop a software tool that lets financial planners screen companies across a variety of social and environmental criteria.

"I am incredibly proud of the fact that I have invested in a tool that allows people to act on their commitments," Atwood says. "There are fewer polluting big companies because of my small investment."

Osborn likewise feels that by investing early in companies that put positive tools in others' hands, he's heightening his own impact exponentially.

"We're not buying solar panels and putting them on houses," Osborn says. "We're buying shares in companies that are going to scale up and put millions of solar panels on houses."

For smaller investors looking for lessons from this arena, Mr. Dunn suggests thinking like an angel investor or venture capitalist. Growing cities, for example, will need new supplies of clean water.

"Somebody is going to make a lot of money off that, and it might as well be you," Dunn says.

"Start by figuring out what you think is going to happen in macroeconomic trends," Dunn continues. "Then trace that back to specific industries, specific companies, and specific management teams within those industries.... That way, you're still going to make money and get the [psychological] return of knowing that you're money is doing what you want it to do."

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