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

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."

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