"Two or three years ago, you couldn't not be an angel investor," asserts Marshall Geller, founder of merchant banker shop Geller and Friend Capital Partners in Beverly Hills.

A veteran of the local investment scene since 1961, Geller watched as friends and associates flew to wrap their wings around Internet startups. Geller himself was an early financial backer and board member of iMall, an online retailer that was sold for boodles of money to Excite@Home in 1998.

"Those were the days," said Geller.

Of course, the good e-times were short-lived. In a stunning series of reversals, angels and venture funds first learned that advertising-supported Web sites panned out rarely, and then that "B2C," or online retailing of goods and services, was also a tough sell. Soon, it became apparent that "B2B" and business exchanges (such as online brokering of agricultural goods) were a hard way to make a buck, too.

And that was hardly the only bad news for seraphic financiers, who reach into their own pockets to fund start-ups. With Web ventures floundering, the stock-buying public wised up. That resulted in the initial public offering window being slammed shut last year, followed closely by a 60 percent slide in the Nasdaq index. It's not a wonder that so many angels have had their wings sheared off.

Perhaps emblematic of the changed realities for angels is John Morris, president of Tech Coast Angels, an angel group. Three years ago, Morris left Sutro & Co. Inc., the brokerage, to work full time in the angel world, from his home. But last October he rejoined the investment banking circuit, taking a managing director slot with the Gerard Klauer Mattison brokerage in West Los Angeles.

"Yeah, 18 months ago, everybody wanted to be an angel investor; absolutely, it has changed," said Morris. "Now everyone is being a lot more cautious, and a lot more thoughtful."

Even the most enthusiastic angel today is grounded by financial realities. "We certainly haven't had any winners in the last 12 months," said Morris, describing various startups with which he is familiar.

Hanging in there

However, Morris insists there is still a lot to being an angel, and that the financial genre has hardly given up the ghost.

"In January, we sent out our new (membership) bills for the year (for Tech Coast Angels), and we had a minimal amount of people saying, 'We gotta stop.' So people still want to be angels. They are just not financing anything," Morris said.

Other angel groups are becoming quiet as well. With no public notice, the Westside-based Jump Investors, an angel-venture group founded by Randy Kaplan, has stopped funding new outfits, after having put money into 30 startups in the last two years. Kaplan recently stated that private family matters, not the "harsh environment," put the lid down on new investing. But it is sensible to wonder if somebody else wouldn't step in and pick up the ball, if market conditions were like they were in 1999.

But they aren't, of course.

Some more-established venture capitalists say they are actually finding a clear field, when they are approached by startups seeking seed money, so complete has been the retreat of angel investors. James Montgomery, founder of Santa Monica-based Digital Coast Partners, is one such financier. Montgomery's shop has within it what used to be called an "incubator," by the name of Digital Coast Ventures, and run by Tom Heymann, managing director. The incubator-like entity, with a $35 million war chest, will fund deals as small as $250,000 traditional angel territory.

"We are looking at 20 deals right now," said Heymann. "I would say 80 percent of the angel money has dried up, but these startups still need financing."

Adding to the picture, with angels under the weather, the cost to financiers of getting into a deal are much lower, said Heymann. "The valuations are much lower now. If you have money, it is a great time to invest."

But as experienced venture capitalists, Montgomery and Heymann said they know how to stick with an investment, until it matures.

Making it work

Said Montgomery, "What a lot of angels found out is that putting money into an investment is only a small part of the equation. You have to build the management team, and revise business plans, make introductions, generate business, and seek new capital and know when to cut back. In this market, angels are just getting hammered."

To be sure, angel investing hasn't gone the way of the dodo bird. While the number of neophytes backing startups has markedly decreased, the true angels have held their ground, said Massoud Entekhabi, partner with TL Ventures in West Los Angeles, and frequent commentator on the local VC scene. "Sure, you had a lot of people become angel investors two or three years ago," said Entekhabi. "Now, it is more back to the professional angels, the ones who understand there are economic cycles, and the ones who have the financial horsepower to ride through the cycles."

Entekhabi doesn't see the change as necessarily black-and-white. Angel investors come in all stripes, from those who participate rarely, or only in certain industries, to those who make a living being angels. "There are different courses for different horses," he said.

While many angels have had their wings clipped, that doesn't mean they are gone forever. "Angels in Los Angeles are still becoming more and more organized as a group, and they are vital, and add to the vibrancy of the venture scene here," said Entekhabi. "They are a wide cross-section of people, from entrepreneurs to CEOs to dentists and lawyers. Some are on the sidelines now, but they will step forward when the cycle changes again."

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