Are you an angel? Angels are well-heeled individuals who invest in startups and who have business experience that makes them a valuable source of advice to those startups. Their investments are usually smaller and earlier than those of venture capitalists. They make investments with their own money and write their checks directly to startups.

Make no mistake — angel investors are in it for the money, and have no compunction about investing wherever a return can be found. But they also like to participate with the startup and offer their own expertise to mitigate the risk of the investment. In Hawai'i, angels typically provide that advice without charge.

For a startup that looks like it's going to be a home run, angels may expect a return of 10 times the investment within five years, and an exit strategy like an acquisition or IPO. But they get 10 times only once in a while. For their entire portfolio, they may get a return of more like double or triple.

While these expectations make angel financing expensive, other sources, like bank loans, are usually not available at all. Although the financial crisis has made loans even more difficult these days, many angels have "kept their powder dry" and are still able to make these investments.

MISCONCEPTIONS

Lots of people don't understand that if we really want to build or save our economy, we have to build a tech industry. High-leverage startups are the best way to do that, but they need capital. To survive, you have to move fast and meet global competition. You need capital to pay your expenses — even before you earn income or make a profit.

And people don't understand how hard it is to raise capital. You can tap your savings, credit cards, family and friends to raise perhaps $100,000 to organize your business, hire staff, rent space and buy what you need. But then you look to the heavens, because you need a kind of miracle — an angel, who "has no reason to love you," but who is interested and affluent enough to provide some startup funding.

HOW THEY GOT HERE

Beyond the "tanomoshi" or "hui" investments that went into real estate and mom-and-pop businesses after statehood, local investors generally limited themselves to the stock market and real estate. Historically, Hawai'i has been starved for venture capital.

In the late 1990s, City Bank offered an exchange where entrepreneurs could meet angel investors. But that stopped before the Central Pacific Bank merger. In 2001, Act 221 created an incentive to invest in local tech startups. The next step was to organize the investors.

Although there were only 10 angel groups in the country in 1996, by 2008 there were over 300 groups with 12,000 members. Networks of angel groups have emerged. The growth of the Angel Capital Association and the Angelsoft network has led to greater syndication of investments.

So what angel groups do we now have in Hawai'i?

WHERE TO FIND THEM

We should be pleased to find that we have the Hawaii Angels, a watering hole here in the Sahara of venture capital.

Rob Robinson wrote the book on Angel Investment at Harvard. He came to Hawai'i to teach entrepreneurship at the University of Hawai'i Shidler College of Business. He organized the UH Angels in 2002 then migrated them Down-town, where they were incorporated as the Hawaii Angels in 2006. Chapters followed on Maui and the Big Island.

The Hawaii Angels has 100 "high net worth" members who share a taste for startups. In the seven years since the Hawaii Angels was organized, its members have invested a total of nearly $30 million. Some of these angels are very active, and others are not — 20 percent make 80 percent of the investments. In general, the Hawaii Angels is recognized as one of the most active angel groups in the country.

Since 2002, entrepreneurs have submitted 2,000 business plans to the Hawaii Angels. Of those, 150 were chosen to present to the Hawaii Angels meetings. Of those, only 40, or 2 percent, received angel funding. Happily, all of those are still in business. Some have made money for their investors, like Hoku Scientific, but most are still working toward a profit or liquidity event. On average, it takes eight years for a startup to make a return for its investors.

LEARNING AT HVCA

On Feb. 26, the Hawaii Venture Capital Association presented a program on angel investment featuring Robinson and angels Virendra Nath, Steve Baker and Shan Steinmark. They told us how entrepreneurs can attract and impress angels, some do's and don'ts about investor relations, company structures and other things angels look for. They gave advice on how to get in front of Hawaii Angels, and tips on making a good pitch.

"This was one of our most important meetings this year," said HVCA's Bill Spencer. "Angel investors are typically very private, so we're lucky that these knowledgeable investors were willing to share their experiences with us," he said. The program video is on www.hvca.org.

GROWING OUR OWN

In his Hot Seat appearance in The Advertiser last week, Robinson mentioned that the total tax credits claimed under Act 221 since 2001 has been $300 million and this has drawn investments of $1.2 billion. This indicates that four times more investment money has been attracted to Hawai'i than the amount of tax credits claimed.

But the $30 million invested by these angels is only a small part of the $1.2 billion of investment. Where's the rest? It's the investments made by investors who prefer to have equity rather than tax credits, by large local corporations, and by local and Mainland venture capital firms.

Have the Hawaii Angels kept up with the growth in our tech startup space? It's hard to say — the more they invest, the larger that growth. In a sense, they are the first capital market for our tech startups, and can catapult them to success. On the other hand, without angels many of these startups would never get off the ground.

The syllogism is clear — if you want startups in Hawai'i, you need startup capital. If you want startup capital, you need angels. If you want angels, you need tax incentives. Without those incentives, our angels will invest elsewhere. For them, we want this place to be like heaven.