'Business angels' bless Southland entrepreneurs with start-up funds.

Conventional wisdom is that venture capital funds are the primary source of seed money for start-up entrepreneurial companies in the United States.

But that conventional wisdom is wrong, according to research by William Wetzel Jr., director of the Center for Venture Research at the University of New Hampshire.

Wetzel's research reveals that "business angels" are far important funding sources for entrepreneurial, start-up companies.

A business angel is "a private, wealthy individual who makes an investment in your business, usually in the range of $10,000 to $100,000," writes Patricia Ayres, an assistant vice president at Wells Fargo Bank, in her 1994 book "Thanks, But No Banks."

Wetzel, in his research, determined that business angels as a group invest more than $10 billion annually in 30,000 to 40,000 companies throughout the United States.

In a March 2, 1995 speech to a subcommittee of the U.S. House of Representatives, Wetzel said, "In addition to entrepreneurs themselves, business angels turn out to be the real venture capitalists (who fund early-stage U.S. companies)."

So who are the business angels in L.A. County?

"I don't think anybody really knows who they are, and I don't know of anyone who's been able to systematically tap into them," said Fred Haney, president of Venture Management, a company in Palos Verdes Estates that helps small companies get started.

Mike Danzi, managing director of Newport Beach-based Danzi & Associates, an investment banking firm that specializes in small-company financing, echoed Haney's comments. "In my experience, the (business) angel community is a shimmery, ghostly thing. It's something that just happens," he said.

Personal networks

Jon Goodman, developer of the Los Angeles Venture Network, a venture capital network run by the University of Southern California, said business angels most commonly find investment opportunities through personal networks.

"For the most part, they have their own networks. They tend to work with their own lawyers and accountants, for example, to hear about deals," she said.

Goodman pointed out that business angels typically like to be close to their investments - both geographically and managerially. She also said business angels tend to trust their own judgment over industry analysts'. "More likely than not, these are people who made it (became successful) themselves," she said.

While the matching of start-up companies with business angels in L.A. may be largely informal now, organizations such as Goodman's Los Angeles Venture Network are working to systematize the process and thereby increase its efficiency.

Established about 18 months ago, LAVN is a computer-based network that attempts to match start-up companies in L.A. County with business angels. Goodman said LAVN has succeeded in initiating 18 one-on-one negotiations between start-up companies and business angels in its brief history, for an average of one a month. However, Goodman noted, the network has yet to produce its first deal.

"A network like LAVN usually takes about three years" to produce a constant stream of results, said Goodman.

Tested in Texas

She said there are currently about 30 networks like LAVN in the United States. One such network - Austin, Texas-based Texas Capital Network, founded in the mid-1980s - didn't produce a deal until its second year in operation, Goodman pointed out.

"It took them about three years to ramp up, and last year they did around $23 million in successful deals," she said.

Another Southland network similar to LAVN and Texas Capital Network is the Pacific Venture Capital Network, also known as Pacnet. It is a confidential computerized database set up by the University of California at Irvine to match entrepreneurs with interested investors. Pacnet was established in 1990 and had produced 57 face-to-face meetings as of June 1995.

One L.A.-area private network of wealthy individuals with all the markings of business angels is downtown-based G-2 Holdings.

President John Geer explained that G-2 is a syndicate of 35 high-net-worth individuals with a pool of up to $100 million available to invest. He explained that G-2, which was established a year ago, is attempting to identify fast-growing companies that are ready to make the transition from entrepreneurial operations to more professional management.

"It's easy for an entrepreneur who's talented and energetic to perform many managerial functions himself. But after a while, (they) have to learn to delegate," said Geer.

He explained that G-2 investors are seeking to help promising entrepreneurs develop the professional-style management necessary to build their companies beyond the small-business stage. Toward that goal, G-2 investors would look to serve on the entrepreneurial company's board of directors or otherwise provide managerial input.

He said most companies considered for G-2 funding so far have come through referrals from members of the syndicate.

Geer acknowledged that, despite several promising leads, G-2 has yet to close a deal after a year of operation.

"We've looked at, analyzed and reviewed well over 100 opportunities so far. That's not unusual. We're looking for opportunities where we can add value," he said, noting that G-2 realistically expects to become involved in two or three promising start-ups by the end of this year.