What's better than having an angel by your side? A group of sophisticated and well-organized angels. Such is the premise behind Blue Tree Allied Angels, a Pittsburgh angel network that co-founder Catherine Mott says is changing the face of angel investing.

Tom Jones and Catherine Mott co-founded Blue Tree Allied Angels to fill a funding gap faced by many startup companies. "Venture capitalists have all but moved out of early-stage investing, and angels are stepping in," says Mott.

"Venture capitalists have all but moved out of early-stage investing, and angels are stepping in," says Mott. She contends that angels—typically, wealthy individual investors willing to provide initial seed money to a company—have an entrepreneurial spirit that attracts them to startups. "We see a market opportunity and want to grab it," she says.

Beyond a market opportunity, Ben Franklin Technology Partners (BFTP) sees angel networks filling a growing need for investments in early-stage companies between $500,000 and $1.5 million. Research shows that regions with organized angel groups make larger investments and tend to reinvest more often. Late last year, BFTP launched the Angel Group Assistance Program to catalyze the formation of angel groups in the region. Blue Tree was the first recipient of support under this program.

The Lure of the Early Stage
Mott herself enjoyed a successful career in the banking industry before forming her own business to help small- and medium-sized banks build wealth management divisions. Mott's first entrepreneurial venture afforded her the opportunity to become an angel investor. After investing in three companies, she was concerned that she was not applying the same sound investment principles to her angel efforts that she was to the rest of her portfolio.

She began investigating the exponential growth of angel networks, primarily in California. She realized the same model was needed in Pennsylvania, so she launched Blue Tree Allied Angels with co-founder Tom Jones. Pittsburgh is an ideal location for such a venture, she says, because of the city's rich university environment, which attracts millions in federal research dollars.

"This is a key part of an entrepreneurial environment that makes it ripe for investment," she says. "There's a lot of dormant capital that can be deployed to aid commercialization of these technologies and early-stage companies." The downside, however, is that there tends to be more opportunity than capital. "That's why pooling resources, both capital and intellectual, is smart business," she says.

“Lengthening the Runway”
Blue Tree was formed to organize and motivate individual angels and enable them to make smarter investments. This kind of thinking aligns perfectly with BFTP, which invests heavily in the entrepreneurial culture of the region. While their goals are decidedly different—Mott makes no reservations that her pursuit is purely capitalistic—the relationship between BFTP and Blue Tree is mutually beneficial. In fact, eight of the eleven companies in Blue Tree's portfolio—including 4moms, Caracal, RedPath and medSage—are also BFTP portfolio companies. Together, they are helping these promising companies during their most vulnerable stages.

According to Mott, angel investor networks like Blue Tree help "lengthen the runway" that early-stage companies need in order to get up to full speed. Finding ways to syndicate—to pull together more money by partnering with other angel networks—helps angels pool enough money to get companies to the point where they can attract the interest of venture capitalists.

"There's a perception in the venture capital world that angels can ruin a deal if they lack sophistication and understanding of what it takes to make a company successful," Mott says. "Angel networks like Blue Tree are changing those perceptions."

Active Investors Bring More Than Dollars
Mott attributes much of Blue Tree's success to the group's "active investor" model. "We like our angels to be involved in due diligence, evaluations and research during the vetting process," she says. "After investment, we monitor the companies' activity, so we can help them be more successful more quickly."

Most angels invest in their own region because of familiarity. And while Mott says there is an abundance of great technology being created in the Pittsburgh region, in the end it comes down to people. "We first look for a defensible product with a competitive advantage. The next thing we do is look at the management team. That is the part that requires the deepest amount of research. The product is rarely the issue."

Again, having a resource like BFTP aids the process. "If there is an entrepreneur who is really ripe but needs seed capital and business advice, we encourage them to go to BFTP first," she says. "We are all about leveraging BFTP's talent and resources—and shame on us if we are not utilizing them."

 From the December 2006 issue