WHY ANGELS FEAR TO TREAD.

When Mitch Russo sold his first software company, Timeslips Corp., he decided to reinvest some of the proceeds in "angel" deals--startups that weren't quite ready for professional venture capital funding. Russo joined a group of other angel investors who regularly invite entrepreneurs to present new business ideas. "In the past eight months, I've probably looked at 50 deals," he says. "But so far I've only put money into two--and one of those was a friend's company."

What were the deal-killers? Russo says many of the investment pitches he sees suffer from a basic misunderstanding about what motivates angel investors. "We look for many of the same checklist items as venture capitalists, but there are a few special issues that cause angels to take a walk."

*Boring concepts: Like all investors, angels look for high growth and high profits, says Russo, but they're also attracted by "the thrill of being involved." Angels especially like founders who show up with an exciting big- picture vision, not just product demos or spreadsheet numbers. "I can't tell you how destructive it is for an entrepreneur to drone on during a presentation," Russo says. "The nice thing about angel investing is that we have choices. If it isn't fun, we don't have to play."

*Lack of real-world experience: "Angels are typically entrepreneurs who built their own businesses the old-fashioned way, by creating a unique product and begging for money from friends and family," says Russo. "It's no wonder that we're reluctant to fund youngsters who have no more than a few URLs on a screen." Hands-on experience, tangible products, a few real customers--these are the hot buttons that many angels seek. "Of course, inexperience isn't always fatal," he concedes. "Jeff Bezos of Amazon.com never ran a company in his life."

*Exaggerated valuations: "Many VCs feel that angels overpay for early-stage equity," Russo says. "And it ruffles our feathers a bit when VCs come in later, after there's less risk, at the same price we've paid." A good rule of thumb for first-round valuations, Russo adds, is that an "experienced and credible founder" with a good idea can usually justify a million-dollar valuation for a new company. If he goes one step further, with some proof of concept and maybe a working beta, the valuation doubles. The next step, worth perhaps another million dollars in valuation, is to create an actual business with a real income statement. "Unfortunately, beyond that point you run into a ceiling," says Russo. "You're probably not going to get much more than $3-$4 million, at least from angel investors."

*Wrong deal sizes: As individuals, angels tend to make fairly conservative investments--typically, $20-$50,000 per deal. When a group of angels back a company, says Russo, "the ideal investment is usually in the range of $300- $750,000." Though there are many exceptions, these ranges represent a true comfort zone for early-stage investors. "If you put in more, you end up owning too much of the company," says Russo. "And a smaller investment isn't worthwhile because of the time commitment."

*Leaving the investor on the sidelines: "I want to be thought of as a resource, not just as a checkbook," Russo says. Though some angels prefer to be passive investors, most are eager to help focus the business strategy, serve as mentors, and put their own industry contacts to work. Initially, angels may even volunteer to fill key management jobs on a part-time basis. "I like to feel that I'm adding value to the company at the same time that I'm watching over my investment," he says.

Mitch Russo, 84 Phillips Rd., Sudbury, Mass. 01776; 972/735-8309. E-mail: [e-mail].