Two decades ago, Bill Gates Sr., Tom Alberg and Tom Cable jointly sent a letter to friends and colleagues with an important ask. The trio of prominent Seattle business leaders wanted to stoke the region’s tech economy, building on the success of Microsoft, Starbucks and a promising online bookseller called Amazon.
Their request was well received.
“You don’t turn down Bill Sr.,” said angel investor and former Microsoft executive Dan Rosen. “You also don’t turn down Tom Alberg.”
The call made by Gates, the father of Microsoft co-founder Bill Gates; Alberg, a founder of Madrona Venture Group and board member at Amazon; and Cable, an investment banker and founding investor in Immunex, resulted in the Alliance of Angels.
The nationally prominent group is now the Pacific Northwest’s largest angel investment organization. The Alliance of Angels, or AoA, celebrates its 20th anniversary on Wednesday with a sold-out gala at Seattle’s Four Seasons Hotel. The evening includes talks by Seattle tech luminaries such as Expedia and Zillow co-founder Rich Barton, wireless pioneer John Stanton and other high profile investors.
The concept of forming a team of angel investors was relatively novel in the late 1990s — especially in Seattle where the investment community had not fully gelled. There were individual angel investors and sometimes a few friends would team up and shell out some capital. “It was catch as catch can,” said Rosen, the long-time chairman of the Alliance of Angels.
Initially started under the umbrella of the non-profit Technology Alliance, Alberg, Gates Sr. and Cable saw an opportunity to create a virtuous cycle in which high net-worth individuals would recycle some of the money they’d made back into entrepreneurs, bolstering the tech sector and building a community of startups.
And while angel investing is no longer a foreign a concept, many argue that the Seattle’s startup community today is still very much undercapitalized.
Even still, the Alliance of Angels’ mark on the Seattle startup community is profound.
Since the late 90s, the organization — an affiliation of roughly 140 investors — has pumped $125 million into more than 220 startups, ranging from software to biotech to retail upstarts. It even backed a company making flip-flops out of algae-derived plastic and another selling digital dog tags.
There are some big businesses, too.
- Portland-based Elemental Technologies, a back-end mobile video service, got seed funding through the group, before it was ultimately sold to Amazon for almost $300 million.
- The sweet smells of Theo Chocolate, which waft through Seattle’s Fremont neighborhood, can be traced in part to support from the Alliance of Angels.
- And Insitu, a developer of of unmanned aerial vehicles, raised money from AoA members, before it sold to Boeing for a reported price of $400 million.
In total, the group is responsible for more than $1 billion of returns. It also serves as an important feeder system — cultivating early-stage startups that one day might grab the attention of deep-pocketed venture capitalists or private equity firms.
“The growth has been helped greatly by the AoA which created a structure where angels could be exposed to a screened selection of startups,” Alberg said.
“Since that time, organizations like Techstars and Startup Weekend, the University of Washington’s CoMotion group and others have emerged that bring very new companies through programs that make them more attractive early stage investments,” he added. “There has also been considerable wealth created by tech company successes in our area, empowering more people to be angel investors.”
But as is the case in startup investing, not everything is a glowing success. The group certainly missed its fair share of winners, and lost money on plenty others. The fact is, most startups fail.
Bitcoin aside, “this is the highest-risk investment you maybe can make,” said Geoff Entress, a well known Seattle investor and Alliance of Angels committee member. “You have some sleepless nights.”
And there is the challenge that a legacy investing group faces in keeping up with the times.
“As with everything in tech, the world of startup investing has changed, making AoA less relevant,” said Bill Bryant, a partner with the California-based venture capital firm DFJ.
Other angel groups are in the same situation.
“Angels have largely coalesced into micro and seed investment funds, which can write bigger checks, do stronger diligence, negotiate better terms and help individuals diversify,” said Bryant, also pointing out the rise of startup studios and accelerators that help jump-start new companies.
Strength in numbers
Over its history, the AoA has weathered three boom-and-bust cycles, Rosen said. Member “angels” have bailed out, some even returning to work to rebuild their finances and cycling back into the group as their fortunes rose again.
Through it all, the organization kept going, Rosen said. You just made fewer investments.
“When it’s a bust, it’s really hard to be an entrepreneur,” he said, “and the people who do are really the true entrepreneurs, the people who have no alternative but to be an entrepreneur.”
In part what has kept the group going is its attention to creating an angel investing program that’s bigger than any one person or handful of members. The focus is on investing, as opposed to serving as a social group, and members are expected to be active investors — or face being asked to leave.
After 20 years, Rosen admits that one of AoA’s challenges is staying relevant to the young, up-and-coming entrepreneurs. The AoA works to recruit and mentor new angels. When someone new joins the AoA, Rosen asks them why and says the answer is always the same: They made a bunch of money, quit their job, decided to become an angel investor, backed three companies in three months, and by six months had lost it all.
They tell him, “’Then I came here and saw how you do angel investing,'” he said, “‘I want to get the wisdom that comes from a group like this.’”
Bryant agreed that AoA plays a meaningful role in grooming the next generation of investors.
“It’s a net positive to the startup landscape as the on-ramp training wheels for individuals thinking about startup investing,” said Bryant, adding that the group is an “important anchor to the startup community.”
Each year, AoA provides about $10 million of funding to roughly 20 companies. The group spends about 20 hours on due diligence research for each potential investment.
“Always the most important thing is the quality of the entrepreneur,” Entress said. That person needs to know their own shortcomings and surround themselves with great people.
“If you can show me that you’ve been able to get other great people to come along with you on this crazy idea,” he said, “I and other investors will come along with you.”
AoA members say they try to make fundraising as straightforward and efficient as possible. Each month, AoA managing director Yi-Jian Ngo and a small team prescreen 30 startups and select six entrepreneurs who meet with the AoA screening committee. The committee chooses three startups to make their pitch at the monthly meeting of the entire membership.
The time from application to decision takes about six weeks.
‘Not just about the money’
“I’ve been building games for a long time and I understand the game part and how to market the games,” said Rick Ellis, co-founder of the Bellevue-based startup Sharkbite Games. “But being a brand-new CEO, getting through the legal stuff and learning how to raise money, that is where they really helped out.”
In July 2017, Sharkbite received $1.25 million in funding from AoA, as well as other angel investors. Ellis, who worked as a lead developer at gaming giant Valve, figured he’d get a check from AoA and that would be the end of it.
“I didn’t realize I would suddenly have this large network of people who would be rooting for me,” Ellis said. They’re “super smart, super connected people who can help guide our company going forward.”
Entrepreneurs and AoA members agree that the expertise and support that the group provides are as important as the checks they write.
“It’s not just about the money,” said Colette Courtion, CEO and founder of Joylux, a Seattle-based startup whose products include electronic devices that help women strengthen their pelvic floor muscles, which can weaken with age and pregnancy.
In January, Joylux announced a $5 million Series A round with investments from AoA and others. The startup has raised $9.5 million from investors nationwide, but AoA brings something special, she said.
“The thing that makes them unique is the network of individuals who are members,” Courtion said. They include experienced investors, business executives and entrepreneurs. “They are able to really add a lot of value to the entrepreneurs and the companies they invest in. They have been in similar shoes.”
The world of angel and VC investing is notorious for being male dominated and for funding primarily male-led companies. But AoA earns praise for tipping the scale toward women. More than a quarter of its members are women. Pitchbook, a financial data company, recently ranked the Alliance as the Northwest’s “most active investor in female-founded companies” over the past decade, making 30 deals with women-led startups.
In addition to supporting startups in their portfolio, AoA also periodically hosts free workshops and office hours at communal workspaces, providing advice for budding entrepreneurs.
“They’re really part of the community, helping people get started,” Ellis said.
Where’s the next big-payoff “unicorn” startup? Who knows. Last year the hot companies were in virtual reality, this year it’s blockchain businesses. But AoA members said they’re bullish on the Northwest as a continued entrepreneurial hub — despite the region’s reputation for wanting for more investors and dollars.
“We’ve calculated that there are about five to 10 times the number of good deals out there than we fund,” Rosen said.
Some of the credit for that goes back to the online bookselling business that was just getting started in Seattle in the late 1990s.
“It’s run like hundreds of little businesses inside of Amazon,” Entress said, “so it’s training entrepreneurs.”
Add to that the fact that tech powerhouses — Baidu, Alibaba, Google, Facebook, Salesforce and dozens of others — have engineering offices in the Puget Sound region, creating a concentration of innovative talent.
“We have some of the best entrepreneurs in the world,” Entress said. “The opportunity to work with them and help them grow is why I do this.”