Angels -- the wealthy investors who entrepreneurs pray to hear from -- often keep to themselves. That makes them hard for fledgling companies to find and reduces the angels' chances of funding the best prospects.

In 1995, with that in mind, Hans Severiens founded Band of Angels, a loose organization of 120 executives who invest solely in small, high-tech companies in California's Silicon Valley. Severiens, a nuclear physicist by training and investment banker by profession, was struck by the investment opportunities in technology companies that are too small for venture capital but present good deals for those who have the knowledge and contacts to find.

Today, the Band's members include such tech luminaries as Benjamin Rosen, chairman of Compaq; Owen Brown, founder of Sun Microsystems; and Novell Chief Executive Eric Schmidt. Severiens plays a key role in vetting the deals. The angels meet over dinner each month to hear presentations, and those who are interested pursue deals. Few companies get more than $600,000, though the Band recently raised $4 million for Sendmail, a Berkeley, (Calif.) Web E-mail company. So far, the Band has placed $44 million in 74 deals and boasts an annual return of 30% on its portfolio.

Severiens talked with Business Week Online's Jeremy Quittner about the Band's work. Here's an edited transcript of their conversation:

Q: What are you specifically looking for in members of Band of Angels?
A: Access to good deals is really the most important thing, and a willingness to work with me and my associate to make sure the deals are of high quality, and then the willingness, obviously, to invest some money. The average has been about $50,000 per person, but it varies. We have never dictated that. I want to keep this band as loose and as relaxed as possible.

Q: You are not looking for people in the banking industry or lawyers?
A: Ninety-eight percent of our people are local. They all have to have a high-tech background -- otherwise they can't analyze these deals. We do not have lawyers, and we do not have real estate developers, and we don't have bankers and people of that nature.

Q: Can you talk about the phenomenon of organizing angel investors into this loose band. Is this a way to make angel investors like venture-capital companies?
A: We are really more company builders. We like to keep the spontaneous, intuitive aspect of angel investing -- but layer on top of that some of the disciplines of due diligence of the venture-capital funds. We are a little bit of a hybrid.

Q: What is the size of the company you generally invest in? Is it beyond the startup phase?
A: The valuation of these companies is generally between $4 million and $5 million. It is beyond the seed phase. I like to say that we are really the first round of outside professional money.

The average venture fund is about $400 million to $500 million, and they have eight to 15 partners. They are not really interested in the $1 million or $2 million deal, where there is the same amount of work. The risk is higher -- yeah, the return is higher -- but the amount of work is the same. So that has created a gap, and it is in that gap that we play.

Q: Do you operate by consensus?
A: I am a lot like the chef in a smorgasbord restaurant: I prepare the dishes and put them out on the table, and then people eat what they want to eat.

Q: How many deals are successful, and how many flop?
A: We have had about five or six that have died or are in the terminal wards. Or some that are really very disappointing. Then we have four or five that are doing quite well, four or five that have been acquired for anywhere from three to five times what we paid for them. We have not had any gigantic initial public offerings. Maybe Sendmail [will be one]. Maybe we will have a couple, but it will be another 12 months before we start seeing those.

Q: What about going forward, how do you see the band changing?
A: I think we can still get a lot better in terms of how we work together. Right now, there are limits to what we can do. That is why I am starting this little fund, which would go alongside what the angels do. People generally come to us if they want to raise $1 million to $2 million. And if we like the deal, we come up with $600,000 to $700,000. We will go in, selectively, cherry-pick about half of the [companies], and put money in alongside of it. So the companies that are raising $600,000 from us -- if all goes well -- can raise in excess of $1 million.

Q: How would you raise money for the fund?
A: The money would be raised from outside, from corporations. It would be about $30 million.

Q: Anything else you want to add?
A: I want to make sure people know this is a local thing: We don't get involved in non-Silicon Valley deals. It is a waste of time for a Boston company to approach us. The final message is that there are angels and angels -- all over the country, probably half a million of them. They are unorganized, and some of them really don't spend the time thinking about what they invest in.

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