New York Angels Play Fast but Tough in the City’s Startup Scene

The New York Angels is a group of 61 individual investors who have invested more than $40 million in more than 70 startups ever since the group launched in 1997. The organization’s vice chairman is Brian Cohen, who himself has a long history of entrepreneurship—the lessons from which he tries to pass along to the new class of young companies.

Cohen was the founding publisher of Computer Systems News and InformationWeek, both published by CMP Publications. In 1983, he founded Technology Solutions Inc., New York’s first marketing and PR agency focused entirely on science and technology. He sold the company to The McCann Erickson World Group (owned by Interpublic Group) in 1997.

Among the New York Angels are some of the best-known figures in the city’s startup scene, including Esther Dyson (also an Xconomist), and First Round Capital founders Josh Kopelman and Howard Morgan.

Xconomy recently sat down for breakfast with Cohen in the heart of Times Square to chat about the New York startup scene, angel investing, and that nagging question that’s on every Big Apple techie’s mind: Are we in a tech bubble?

Xconomy: You are looking for new angels to join your group. Why?
Brian Cohen: We always limited ourselves, but now I’m increasing it dramatically. Generally speaking, the least amount an angel invests in a company is $25,000. If you look at the number of angels that actually write checks and you look at the number of startups that are scalable, there are not enough angel investors. The more smart angel investors we create the better.

X: You make a distinction between angels and smart angels. Explain.
BC: The Angel Capital Association had a conference recently where Scott Case, CEO of Startup America, got up to speak, looked around the room, and said “We need more of you.” One of the bright old angels got up and said “No you don’t. You need smarter angels.” That’s right. If you just have more angels, you’re going to have more bad deals, which leads to more down rounds. If you start with too much enthusiasm, the first round is price pooling—it’s frothiness. The valuation of some of the companies will not be rational.

X: What are the risks of having too many angel investors jumping in to fund startups?
BC: There’s something I call angel exhaustion. It happens when you spend your money too fast. The average amount of time that angels do due diligence is about 14 hours. Measure that against VCs and its not even comparable. But 90 percent of the seed money companies raise comes from angels. Angel investing without due diligence is like unsafe sex.

There are 450 or so angel groups in the country. Some of them confuse what they’re doing with urban development—they want to help the community. But it has to be about making money. That’s where the angel exhaustion comes in. If it’s not about smart money going after smart deals, bad deals happen, and there are no exits. Then a couple years in, the angels sit back and say, “What’s going on here? I’m not getting anything from this.”

X: How does your group avoid angel exhaustion?
BC: Better due diligence. But it’s competitive. To get the best deal, sometimes we have to move faster, which sometimes precludes rational, logical, good analysis. We can get challenged by that.

X: Also angels get disillusioned because they may have to put more money in to a company to keep it afloat, and then when VCs come in for the next round, the angels get diluted. How can angels avoid that?
BC: There’s a whole new thing called early exits. Generally when you consider investing in a company you always think it’s like marriage—it’s for the long term. But logically many entrepreneurs are saying, “Maybe we can build a technology, act as an innovation lab for another company, and … Next Page »

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