Finding angels isn't easy for startups

Pity the poor startup.

Scores of technology startup companies in the Mid-Atlantic region have pitched their ideas to investors over the past year, only to come away with little or no funding. By many accounts, the recession and stock market losses have turned swashbuckling early-stage investors into penny-counting worrywarts.

As a result, more entrepreneurs have relied on so-called bootstrapping - launching a business by funding it themselves along with help from friends and family, and keeping it as lean as possible until they can attract venture capital investment. The few who can lure investors today are regarded as having won a lottery of sorts - one made possible by their own sweat equity, and not by chance.

"It's tough to get funding right now, so we're keeping our day jobs and working on it on nights and weekends," said Brian Tomasette of Baltimore, co-founder of SocialRoster.com, a networking Web site for athletic leagues. "Essentially, we found that VCs [venture capital firms] just aren't investing."

The bad news, for the moment, is that the venture capital industry is in the worst shape since the dot-com bubble burst in the beginning of the decade. Entrepreneurs and leaders of small businesses across Maryland have largely been put on hold as investors became tight-fisted and more demanding, and banks are still stingy with extending credit.

But feisty startups that can attract investors and weather the storm are perfectly positioned for success once the economy emerges from recession.

"Downturns can be good. They wipe out inefficient firms," said Louis P. Galambos, professor of economic and business history at the Johns Hopkins University. "Only the strong are going to survive in this, and they're the ones who are going to get capital."

Before the recession, investment experts said, the cycle of funding startup ventures followed a general pattern: Entrepreneurs with a track record would attract early-stage, or so-called "angel," investors who'd pump vital cash into an enterprise to get it off the ground. The company, perhaps with little more than an idea and a small management team, would get a cash infusion in exchange for handing over a piece of ownership to investors.

But that all changed with the stock market dive. The net worth of affluent, risk-taking investors who normally liked to fund startup ventures dropped with Wall Street's losses. Suddenly, entrepreneurs who were counting on these angels to help them become the next Google or Microsoft were faced with an austerity that hadn't been seen since the start of the decade.

"There haven't been any wealth-creation events - it's all been wealth-destruction," said Sam Medile, an entrepreneur affiliated with the Capital Access Network, a group of angel investors based at the University of Maryland, College Park. "Without having money in your portfolio to take a chance on someone else's dream, it's difficult for some of these deals to get done."

The practice of angel investing is still loosely organized, and figures on its financial impact are not available. Data on the larger venture capital industry show the decline in new business investments. Nationally, for the first two quarters this year, $6.9 billion in venture capital was pumped into companies, according to the National Venture Capital Association. For the same period last year, the investment was $15.3 billion.

The NVCA's survey shows that the Washington metropolitan area, which includes the Baltimore region, had about $170 million in venture capital pumped into new business in the first two quarters of this year - or $300 million less than the similar period last year.

The drought in capital has been acutely felt even at Hopkins, which typically spins out a handful of companies every year based on its researchers' work. In fiscal year 2008, the university spun off 12 companies that attracted $76 million in venture capital financing. In fiscal 2009, which closed at the end of June, the university spun off 10 startup companies - but they attracted only $3.2 million, according to Aris Melissaratos, senior adviser to Hopkins' president.

Despite the rough year, Melissaratos was optimistic about Hopkins' future of turning its research into commercial enterprises. "If you come up with breakthrough technology and demonstrate some results, the money will find its way to you," he said.

A handful of companies in the region, including Oculis Labs and DubMeNow, have defied the odds.

Since the summer, Bill Anderson of Oculis Labs says, he has attracted $325,000 in new investment, including money from a new investor group called the Baltimore Angels. Oculis builds software that prevents prying eyes from stealing information off computer monitors.

With funds he raised from friends and family, Anderson built a prototype and assembled a team to help him bring it to market. The fact that he got so far on his own was attractive to the Baltimore Angels, according to co-founder Dave Troy. Oculis was the first and only one of more than 60 companies that have applied to receive an investment from the Baltimore Angels. To date, Anderson has raised $1.5 million.

"I don't think we would've gotten [the Baltimore Angels'] money if we didn't have the products to show already," Anderson said. "Most companies are in an earlier stage than we are. They may just have a PowerPoint presentation and some good ideas and a track record. But I don't think those guys are getting funded right now. Having our products ready and able to show made a difference."

Manoj Ramnani, founder of DubMeNow Inc. of Tysons Corner, Va., launched his company last year - the third startup in his career. The company makes Dub - a contact-management application for smart phones that can automatically update users' personal information as they change it. In launching it, Ramnani networked with contacts at Microsoft and Research In Motion, the maker of the BlackBerry, and developed a prototype with his own money.

He went on to raise $2 million from early-stage investors last year, and revenue-generating deals are just starting to materialize now, he said.

"This was the easiest money ever raised for me," Ramnani said. "We believe over the next six months, the company will be cash-flow positive. ... The deals are starting to close now."

For Tomasette of SocialRoster.com, the good news for his venture is that he and his partners don't need a lot of money to grow on their own.

The company is in the middle of raising money from friends and family, but its costs remain low - it costs about $200 a month to operate the site.

"We're really looking for an angel," Tomasette said, to help fuel expansion in Baltimore and New York. "Our idea is to build around one or two cities and then expand out."