Band of Angels Plays Small Ball

Even angels are downsizing their funding plans.

Silicon Valley’s oldest seed funding organization, the Band of Angels, has raised $5 million for its third formal venture capital fund from a coterie of angel investors. That’s less than it raised for its second fund ($10 million) and its debut fund ($50 million). The fund invests selectively alongside the individual members of the group.

The angel group raised the capital from small, individual investors, each contributing about $300,000. About two-thirds of the fund’s investors are members of the Menlo Park, Calif.-based angel investment group.

The fund is a departure from the Band’s previous funds. The Band’s first institutional fund, a $50 million vehicle raised in 1999, collected commitments from the Ontario Municipal Employees Retirement System, Siemens Venture Capital GmbH, SVC Fund-in-Fund, The Permanent University Fund and the University of Texas Investment Management Co., according to Capital IQ. And the Band’s second fund was a joint effort with Labrador Ventures.

Band of Angels CEO Ian Sobieski says that the smaller size of fund III isn’t the product of tough times. In fact, activity remains robust for the group, he maintains. The angel investors in the group have seen between 50 and 60 investment opportunities each month and have invested in nine startups, as of the end of November. That’s only slightly off the 11 startups that the members of the Band of Angels funded throughout 2008, Sobieski says.

The Band also added five members this year to top out at 125. That’s compared to a membership of 93 investors in 2004. To have growth in membership is pretty remarkable, says Sobieski, “considering that we were in a financial calamity, and this is an organization where you have to pay financial dues that are not trivial.”

There are plenty of entrepreneurs who have a better chip, for example, where the net enterprise value after two years is $10 million. It may not mean much to VCs, but to a guy with $500,000 net worth, taking home $5 million in two years is going to change his life.

Ian Sobieski

Also, Sobieski says that the smaller fund is the product of a new financing strategy that Sobieski and his team are looking to implement. Instead of focusing on industry-defining startups, the Band wants to invest on what he calls “iterative improvements,” or technology that is a little better than existing technology.

“It’s targeted on the observation that most entrepreneurs start with a better mousetrap,” explains Sobieski. “They’re excited about it, but then they’re told that the idea isn’t big enough and maybe the best they can hope for is a $10 million exit years from now.”

He adds: “There are plenty of entrepreneurs who have a better chip, for example, where the net enterprise value after two years is $10 million. It may not mean much to VCs, but to a guy with $500,000 net worth, taking home $5 million in two years is going to change his life.”

Toward that end, the Band of Angels has been meeting with business development executives from strategic acquirers, trying to learn what types of innovations they’re looking to buy.

“The goal of our fund is to make the entrepreneurs millionaires in two to three years, and we want to make 10x, too,” Sobieski says. “It’s a super scrappy model.”

Similar to many funds raised during the dot-com boom, the Band of Angels’ first fund has not been successful. It has failed to return any money to its investors and carries a portfolio value of just over one-third of the capital it called down from investors, public documents show. —Alexander Haislip