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DECEMBER 16, 1999

FINANCE

An Angel Who Doesn't Flit Away
Internet investing veteran James Bidzos explains why he sticks with his protégés

James Bidzos

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James Bidzos is an angel investor — one of those mavericks who risk their own money on unknown companies even before most venture-capital firms (which invest other people's money, after all) dare to. Yet, the retired president and chief executive of RSA Security Inc., a leading Internet data security company that's based in Bedford, Mass., is much more engaged with his prot�g�s than most angels. He takes large stakes, is an active adviser, and sticks with the companies through subsequent rounds of financing, when many angels get out.

Bidzos is credited with turning RSA into a leader in computer security and data encryption, and he knows the Internet landscape intimately. In the past decade, he has invested in more than 60 Internet startups, including Netscape, CyberCash, and Verisign, the multibillion-dollar digital certificate company, which he co-founded in 1995. He recently spoke with Business Week Online's Jeremy Quittner about investing in startups. An edited transcript of their conversation follows.

Q: How are you different from the typical angel investor?
A: I would describe an angel investor as someone who is one ring outside friends and family. Angels are usually successful entrepreneurs themselves, and they will invest $50,000 to $100,000 in a company because they have some sort of connection. Rarely do those angels join the board of directors, and rarely do they get involved in helping to develop the business plan. [Entrepreneurs] find me for a different reason. They know that I have already solved many of the problems that they are going to encounter.

Q: What makes you choose one company over another?
A: The people — if there is a chemistry and I like them and believe in them. The other is: Do I think it is a good idea? If I do, I look out into the future for many years and decide what the prospects for this company are. Is there going be a market for what they are doing? The third is: Do I feel like being involved, and what are they looking for from me? I don't care to go to meetings every week or every month, but every now and then, if there is an interesting problem in which I have a great deal of experience, it is kind of nice if you can put all of that experience together to help them avoid making mistakes.

Q: How much do you usually invest?
A: The average is probably close to half a million dollars. On one deal, I have put in a couple of million. Some were as little as $50,000 to $100,000.

Q: What kind of returns are you looking for?
A: Positive returns. The average returns have been unbelievable. Probably less than 10% [of the companies I invest in] don't do well, and my average return is better than a 1,000%. I am getting better than $10 back for every dollar I invest.

Q: How long do you invest for?
A: I wait for a liquidity event, either an IPO or when the company gets bought. If the company has further rounds of investment and if I still like it, I will invest along later, too.

Q: Why is it that you make subsequent rounds of investment?
A: If you make that first investment, you give them $250,000 and you own 10% of the company. Every time they raise more money, they are selling new shares. So if you don't participate in the second round, your ownership will drop from 10% maybe to 6%. If your plan is to own 10% of these companies at the time of the liquidity event, you need to participate in all these other rounds of financing.

Q: What do angel investors want that is different from venture capitalists? Is it possible to be a candidate for angel funding but not for VC funding?
A:Angels are looking for a home run. They want to invest $100,000 in the next eBay or Amazon. I know some angel investors who will indiscriminately invest $25,000 in every deal that comes their way, figuring if they make 20 of these investments and invest $500,000 that way — well, it only takes one of those to get lucky. The VCs have a different problem. They get more involved. They do join the board of directors. They do guide a company along, and they do attend strategy meetings. They can only do that with so many companies. Also, they have these big funds, and they have to invest this money. So what they will do is scrutinize the company more carefully, and if there is not room for them to invest $3 million to $5 million, they are probably not interested.

Q: Many VCs consider angels to be annoying. They say that they want to participate in many different rounds of financing but that the angels want to get out after the first round. Why is this a concern to entrepreneurs?
A: [Angels are considered] amateurs and a nuisance. Let me give you an example. Let's say a company is finally able to raise some angel money. Say they raise $500,000. They may have given up a third or half of the company for that $500,000. Now let's say they have become a company that fits the venture profile better. They need $10 million [from VCs] to market themselves. [But] the VCs generally don't want to pay more [per share] than the angel investors did. They are reluctant to acknowledge that the angels have actually added any value.

Q: Do you think that VCs and investment banks are rushing unprepared companies to market so they can get their money out first, leaving the small-time investor holding the bag when a correction hits?
A: If you look at companies like Yahoo! and Amazon and eBay, a lot of the original VC investors are still big holders. In fact, those companies offer a lesson that it is a mistake to try to get out early and leave other people holding the bag, because you leave a lot of money on the table. I think some people who just want to cash in on the Internet craze are going public long before their companies are ready to go public to get a lot of investor money and sell their stock at a high price. But I think the good VCs are in for the long haul.