Crains Cleveland Business, Chuck Soder

Northeast Ohio’s only formal angel investor groups are preparing tostart financing new technology ventures, a good sign for a region thatneeds more early-stage investment, experts say.

Cleveland’sNorthcoast Angel Fund is on the verge of making its first investment,while Akron’s ARCH-Angels group is working to start nonprofit andfor-profit funds. Both eventually hope to invest hundreds of thousandsof dollars in technology companies each year.

Collaborationssuch as these will strengthen Northeast Ohio’s community of angelinvestors, according to Dorothy Baunach, president of Nor-Tech, whichpromotes technology in the region.

Angel investors — people whoprovide startup companies with capital and other assistance — have beeninvesting in promising Northeast Ohio businesses for years withoutforming groups. Now that some of them are, it will be easier forearly-stage businesses to access a greater number of people who canhelp them, Ms. Baunach said.

A 2005 NorTech study estimatedNortheast Ohio would need another $300 million in early-stageinvestment money to meet the demands of young tech companies between2005 and 2010. That lack of early-stage dollars makes it tough foryoung companies to develop sufficiently to obtain money from venturecapitalists, who often focus on later-stage companies.

WhileNorthcoast Angel Fund and the ARCHAngels won’t be able to fix theregion’s capital problems alone, they’re off to a good start, Ms.Baunach said.

“They can be significant players,” she said. “Ithink we’ll get more momentum with groups of angels rather than justindividuals.”

Northcoast Angel Fund plans to finalize its first $200,000investment in a technology company in a few weeks, and four morebusinesses are under serious consideration, according to executivedirector Todd Federman, who declined to identify the companies.

Thegroup plans to make three to five $200,000 investments per year. Thefund stands at $2.5 million, but the organization aims to grow it to $7million, said managing member Clay Rankin, who runs the fund with Mr.Federman.

The group’s 99 members would earn dividends based on how much they contribute to the fund, said

Mr.Federman, who added that the group keeps membership below 100 to avoidextra regulations. Northcoast Angel Fund also encourages members tomake individual investments in any company invested in by the group.

“It’sa terrific opportunity for investors, a terrific opportunity forentrepreneurs and a terrific opportunity for the region,” he said.

TheARCHAngels — or Akron Regional Change Angels — hope to raise $1 millionto start the nonprofit Evergreen Community Fund, according to GordonSchorr and Barry Rosenbaum, senior fellows at the University of AkronResearch Foundation, which assists the group. The organization plans toraise money primarily through area foundations interested in growingthe region’s economy.

That money would be distributed in twoways. The ARCHAngels would invest between $25,000 to $50,000 incompanies that need just a little more money to demonstrate a “criticalcomponent” of their business plan or their technology, Mr. Schorr said.

Thegroup would allocate larger investments, roughly $100,000 to $150,000,to match contributions from members or another Ohio angel group with anapproved process of vetting companies.

All returns on Evergreen investments would go back into the fund.

Individualmembers already have made four or five investments on their own, Mr.Rosenbaum said. The ARCHAngels group plans to start the for-profit fundlater in the year; its size would depend on how much memberscontribute.

Northcoast Angel Fund and the ARCHAngels don’t just makeinvestments. Companies working with them also can tap the experience,connections and resources of the entire group.

Buildingthose links was one of Northcoast Angel Fund’s goals when the groupbegan meeting last October, and it was the main goal for the ARCHAngelswhen it was created a year earlier.

Formed by the University ofAkron, the ARCHAngels originally planned to help businesses simply byputting them in touch with the resources of the group. For instance,MemPro Ceramics owner John Finley said he met several community leadersand university faculty when he visited an ARCHAngels meeting. Theinteraction helped solidify Mr. Finley’s plans to move his company toAkron from Colorado. The filtration distribution business is workingwith the university on new filtration technology, he said.

Noted Mr. Rosenbaum: “Once a company presents to the ARCHAngel group, they’re like family.”

Bothgroups also connect companies with other angel organizations. Angelgroups pass deals to one another because venture capital groups oftenoverlook companies that raise just a few hundred thousand dollars, saidJohn Huston, a founding member of the Ohio TechAngel Fund LLC ofColumbus.

“The angel network and the angels themselves really provide the on-ramp to the venture capital superhighway,” Mr. Huston said.

Angel groups across the United States invested just a fraction of the$23.1 billion that all angels — groups and individuals — investednationwide in 2005. Regardless, the number of organizations is growing,said Marianne Hudson, director of the Angel Capital Foundation, whichpromotes education and research related to angel investing.

Thereare 265 angel groups in the United States today, up 77% from 150 in2002, Ms. Hudson said. A foundation survey estimated that the groups in2005 invested an average of $1.45 million each, or a total of roughly$362 million.

“They are a small piece, but they are an importantpiece,” Ms. Hudson said, adding that several large groups did notrespond to the survey.

The number of angel groups in Ohio is growing as well.

TheOhioTech Angel Fund started three years ago, and other Ohio angelgroups in Cincinnati, Dayton and Toledo are relatively young, Mr.Huston said. The Queen City Angels of Cincinnati, founded seven yearsago, is the oldest, according to Mr. Huston and Ms. Hudson.

“I’venever seen such enthusiasm and momentum in the angel community in Ohioin the last six years I’ve been involved,” Mr. Huston said.

Mr. Rosenbaum said he and others who belong to the ARCHAngels would like to see even more.

“We all try to encourage folks to get into the arena of angel investing,” he said.