The Venture Capitalist Next Door Angel investing is a messy, hit-or-miss business, and lately overextended. But the lure of the moon shot has made it a huge economic force.
By John Helyar Reporter Associates Ahmad Diba and Feliciano Garcia

(FORTUNE Magazine) – It was during that effervescent time in late 1998 and early 1999, when dot-com IPOs defied gravity and the market value of new-economy darlings like AOL soared past old-economy stalwarts like Coca-Cola, that four Dallas golfing buddies got a sour feeling. This regular Saturday foursome--a developer, a construction contractor, a prominent lawyer, a telecom CEO--were used to being among Dallas' inside players. But now the game had abruptly changed, and they were neither playing nor profiting.

"We were looking with envious eyes at the Yahoos and the Broadcast.coms," recalls Dal Berry, the telecom guy. (, a local startup, had just hit a gusher when high-flying Yahoo bought it for $4.9 billion.) "We were wondering, 'Hey, how do I get me some of that?'"

They figured the only way, really, was to get in on tech startups. They would screw up their courage, put up some money, and join the groundswell of Americans getting in on these deals early. They would become angel investors.

Fast-forward to the September 2000 meeting of the Dallas Angels. That's the organization created by the golf foursome (plus some cohorts), and it's now 17 months old and numbering about 100 members. It gathers monthly in a club atop a Dallas office tower for drinks, dinner, and, for dessert, pitches: three entrepreneurs touting startups and hoping to draw investors. Anyone who bites will put up $25,000 to $100,000 to join a pool of investors taking a stake in the company. Altogether, the club has made $7 million or so of investments since its inception.

The Dallas Angels are part of a huge national upsurge in angel investors that's created a major economic force. There are just plain more people eligible to play this high-risk, high-reward game (a minimum net worth of $1 million is needed to be an eligible "accredited" investor, under SEC rules, and the U.S. millionaire population more than doubled from 1994 to 1999). Some are creatures of the old economy, like the Dallas golf foursome, who want a piece of the new-economy action. Some are geeks who made good, who find recycling some of their fortunes into startups as natural as writing code. Some are cashed-out entrepreneurs still hooked on the adrenaline rush of startups. Then there are the people who just can't stand being left out. Getting a stake in a startup has become a status symbol, and, says Dallas Angel Kurt Wall, "bragging privilege is important."

You could see angels dance on the head of a pin more readily than you could find them in economic statistics, though. Their deals are private and so individually piddling that they come in under the radar of conventional measurements. A small group of investors typically pools $100,000 to $1 million for a 20% to 30% stake in a company. Taken as a whole, however, angels are having a huge impact: at least $40 billion a year plowed into at least 50,000 startups. By some estimates, that's 30 to 40 times the number of seed investments of institutional venture capitalists. Angels are "a big part of the extensive infrastructure that's developed to finance and support entrepreneurs," says Edward G. Boehne, former president of the Philadelphia Federal Reserve Bank. The flowering of entrepreneurial America that they've fertilized, he says, is "one of the most important reasons we've had such a long economic expansion and the economy has grown faster than we thought it could."

Angels, in the business sense, once meant only Broadway show backers, but the University of New Hampshire's Center for Venture Research credits itself with applying the term to startup investors about 20 years ago. The usage spread, as did the angels themselves. Jeffrey Sohl, the center's director, says the ranks of active angels (doing a deal once a year or more) grew 60% just between 1997 and 2000, to about 400,000. The total angel pool has reached three million.

Academics who study this phenomenon are at once wowed by its growth and dismayed by its disorderliness. Mark Van Osnabrugge and Robert J. Robinson, who conducted extensive angel research at Harvard Business School, lament in their recent book, Angel Investing, that "the informal venture capital market of business angel finance is quite inefficient, thanks to the fragmented nature of the market, imperfect channels of communication, and the invisibility of business angels."

Professors! You're missing the whole beauty of these cherubs! They are funky and quirky and quintessentially American. They may not know a killer app from a killer bee, but they know their gut, and they'll take a chance on the local guy with the big idea. Angel investing is Buffalo concrete and crushed-stone millionaires raising $3 million for software entrepreneurs. It's the golden-agers of the Nashua (N.H.) Breakfast Club backing teenagers designing videogames. It's a 49-year-old Finnish-American writing a $1 million check to a 25-year-old Atlantan and watching the resulting company, WebMD, rocket straight to the moon (and, alas, back).

Angel investing is simply a step along America's march toward economic self-determination and embrace of risk. We sneer at FDIC-insured accounts; we abandon full-service brokers; we don't just invest in venture capital funds, we become venture capitalists. And the VCs need the angels, however much they may look down on them. The venture funds are so awash in cash that they must invest larger sums in later-stage companies, which are closer to being IPOs than startups. They need the angels as a feeder system, and the angels at some point need to hand off their babies to the VCs for further capital. The two have something in common: a high percentage of losers (for the angels, nine out of ten investments) but a high yield on winners. For active angels, that translates to about a 30% annual return.

It's about the money, of course, but not just about the money. In the view of Shirley Morley, wife of a Nashua Breakfast Club member, angels are driven by a combination of "gambling and altruism...and a lot of ego thrown in. They like giving advice."

That's one reason angel investing, while unlikely to sustain its recent growth rate, is unlikely to go the way of tax-sheltered oil wells. Yes, too many angels have entered with outsized expectations and undersized assets. Yes, as we shall see in Atlanta, there's been an element of fickle fashion. But far beyond the coastal venture-capital hubs where you'd expect angels to flourish, and quite apart from the megarich and supergeeks you'd expect to be dabbling in this, angel investing has taken root. You can see it in the 150 formal angel clubs that have sprung up across the land, in some locales supplanting Rotary Clubs as the Babbitts' preferred bonding ground. You can see it in a city like Memphis, where an unlikely combination of the city's billionaires, the consultants McKinsey & Co., and a local VC are trying to make angels a more potent economic force. You can even see angels alight in a place like...Buffalo.

Back in 1996, when Buffalo had lots of old smoke-stacks and no new tech companies to speak of, two young men named Paul Bandrowski and Ron Schreiber set about trying to create one. Schreiber was chairman of Softbank Services Group, a tech support and distribution business, and Bandrowski was his technology chief. As they adapted their business to the Internet, they figured out a great new opportunity: encryption for combating piracy and protecting copyrights.

They proposed to majority owner Softbank Corp. that they spin out a new entity. The big tech investor disbursed $500,000 in seed capital. Schreiber and Bandrowski used that up in five months and were nixed when they went back for more. Bandrowski started knocking on the doors of venture capitalists, who responded, in essence, "Hah! In Buffalo?"

Then Schreiber approached a local man named Ross Kenzie. Once CEO of a major Buffalo thrift, Kenzie had turned to angeldom as a "hobby." In about 30 deals over the years (buyouts, sometimes, as well as startups), he had consistently found winners, with returns scaling up to 150 to 1. Today he has a loyal band of followers, willing to toss $50,000 into any Kenzie deal and watch their aggregate $1 million or so go to work.

For all those deals, though, Kenzie had never gotten into technology. First, there wasn't much of it in town, and second, the banker in him didn't like tech's ratio of smoke to assets. Now here came a techie asking for three million bucks. Kenzie, who can be as icy as a Buffalo February, recalls saying, essentially, "I'm from Missouri. Show me."

He assembled his regulars at the Buffalo Club for two breakfast meetings with Schreiber and Bandrowski. There he put the supplicants to the acid test: talk software to people more familiar with concrete. The pair had to keep acknowledging they had no revenues, no customers, and high burn rates. That was just the way of this industry. It all seemed to be leaving these angels cold--that is, until one of them began musing aloud about this outfit called Yahoo. Its financials were skimpy but not, since its 1996 IPO, the stock price. "You know," the fellow said, "it would be interesting to see if this were the next Yahoo. We should really be so lucky."

It was that seminal moment in any angel investment when the doubters drop away and the believers emerge, chattering on about the possibilities. "We pandered to the emotion of that," says Bandrowski, who from opening coffee to closing handshake saw his baby shift from suspect to hot prospect. He and Schreiber got their $3 million, and soon the VCs who'd shunned their startup were eager to back it.

Reciprocal Inc., as the company came to be called, is on its way to being a roaring success by Buffalo--if not Palo Alto--standards. It employs 180 people, it's 15% owned by Microsoft, and in the age of Napster, it's well positioned in the field of "digital rights management." That $3 million leap of faith triggered $75 million more of investments and made the company worth hundreds of millions of dollars. Its original backers haven't cashed out, for the company has neither gone public nor been acquired. But it's a fatted calf, all right, and Kenzie's angels have already feasted on at least one other tech deal. Soon after Reciprocal, a nascent company called OpenSite Technologies came along. They invested $600,000 in this Internet auction software outfit, whose operations oddly straddled Buffalo and Durham, N.C. Two years later it was bought by Siebel Systems, and Group Kenzie reaped 120 times its investment.

These were transforming events. Paul Bandrowski, who'd been part of the OpenSite group, left his day job at Reciprocal to become an angel investor and advisor to startups. Ron Schreiber turned pro, too, starting an early-stage investing fund called Seed Capital Partners. A 69-year-old attorney named Gordon Gross was the fourth major angel in town, "selling stardust," as he put it, to his own group of followers.

And people who once would sooner go over Niagara Falls in a barrel than take a plunge on a startup were dying to be asked into the angel syndicates. "When I was first approached about going in, six or seven years ago, I said, 'No, that's too risky,'" says Roy Emerling, a local auto dealer. But between the lore of these deals and the zeitgeist of the time, "I figured I should just loosen up a little bit." He has now been in 25 angel deals and counting.

It was eventually as much about one-upmanship here as money lust. Angel investing became a status symbol, and those who weren't in the deals were in for needling. The putdowns went something like this, according to Duncan Shaw, an early Reciprocal executive and a subsequent angel investor: "'You want to come to this political fundraiser? I can afford it; I was in X.' Or 'Do you want to come play cards? I know you weren't in X, but why don't you come along anyway?'" Whatever the motive, the angels have given Buffalo something it didn't have in 1996. Here in the heart of the Rustbelt, there's now a downtown area called the Byte Belt: a growing cluster of young tech companies.

Informal angel networks grow naturally, almost organically, in old, small cities where everybody (who counts) knows everybody. But in other places, where cities and money are newer, even the filthy rich often need nametags. Here angel alliances have to be created synthetically, and so they have been, at a prodigious pace. Some 150 formal angel clubs have sprouted around the country, most of them in the late 1990s.

The template for many was created by a veteran San Francisco investment banker and venture capitalist named Hans Severiens. His name was in a lot of Rolodexes after decades in business, and that meant lots of calls from entrepreneurs seeking seed capital. Some of these startups interested him enough to think about investing his own money. But checking out esoteric technologies and handicapping their chances was time-consuming and risky. Severiens figured there had to be a better way, and he came up with one: a group of angels with members from a variety of tech backgrounds who could make smart, quick calls on the smorgasbord of business plans presented to them. A group could also pool money, spreading members' risk and increasing their collective stake in a startup. And so, in 1995, Severiens and his friend Jack Carsten, a former Intel executive, founded the Silicon Valley Band of Angels.

It turned out to be a divine idea. The band grew to 140 members, who'd meet monthly to have dinner and hear pitches from entrepreneurs. Members placed bets on the ones who impressed. By mid-2000, the band had invested a total of $74 million in 122 companies. As it got some press and some buzz, it was imitated in city after city.

When the Dallas golfers mulled starting an angel club, it was Severiens whom their ringleader, Jerry Mills, called for advice. Mills knew he couldn't recruit the kind of rich techies who populated the Bay Area. But Dallas had lots of old-economy fat cats looking for some sector rotation. As a local venture capitalist puts it, "Our oil patches dried up, so there are many oil-patch people who have made their money [and ask], 'So what's the new gig?'"

A year and a half into the Dallas club's life, it has the comfortable, casual feel of a weathered cowboy boot. The Dallas Angels have no officers, few rules, and such loose financial controls that a pile of investment checks--maybe 20 of them, worth at least $25,000 apiece--disappeared into an angel's desk drawer for several months until a deal closed. It also has people who delight in giving some adult supervision to the entrepreneurs the club has backed. "I've finally become the dilettante I've always aspired to be," says member Mike Corboy.

Other clubs develop their own distinctive cultures, like the genteel LORE (Loosely Organized Retired Executives) in suburban Philadelphia. "We go by the Quaker adage, 'You do well by doing good,' " says founder Buck Bell. That may be partly because of the club's Main Line location, but it's mostly because the original purpose wasn't investing but mentoring. Bell formed a consortium of fellow former CEOs to impart their accrued wisdom as business consultants. But, he says, "it turned out what people wanted wasn't our wisdom; it was our money. We became angels by default."

Though LORE has now made a high number of investments (47 in 12 years), it still has a high-minded aura. Lots of angels talk about wanting to "give something back," but these guys seem to mean it. They even hate breaking the bad news to entrepreneurs who have failed to wow them. (Members give a quick thumbs up or down right after the pitch, while the pitcher waits outside.) "The hardest part is when they walk out in the hall and there is no interest," says Jay Tolson, LORE's current president. "Who is going to tell the mother their baby is ugly?"

In contrast to the likes of LORE, where meetings often include members' recountings of their life stories and hanging out is part of the whole deal, some clubs, on the fun scale, are just this side of a venture fund. The TriState Investment Group (TIG), in Research Triangle Park, N.C., has an executive director to keep things shipshape and organizes itself in formal partnership pools (so that the club invests en masse, by 75% majority vote, rather than by each member's making his own choice). It eschews dinners, drinks, and any refreshments at all, for that matter, unless you count the Coke machine. "I wanted it to be strictly business," says Spencer Everett, one of the founders. "If we had cocktails, it would turn into a social club."

Judging by the turn-away demand for TIG membership (capped at 99), people are happy to come not for small talk but for big returns. Everett and some fellow pioneer angels started the organization in 1989, and it took them five years to reach 35 members and $1 million in investments and thereby close its first fund, called Tig I. But when the subsequent TIG II fund got a 70-to-1 return on one of its investments, in a company called Accipiter, it had a galvanizing effect. The investors piled in, chipped in more money, and deployed it faster. The TIG III fund took only from February 1999 to July 2000 to invest its members' $5.5 million. Now the TIG IV fund, begun in July, has $6.5 million to disperse. Life in TIG is grim but good.

Despite the clubs' growth, the major impact players are still more likely to be idiosyncratic individuals forming ad hoc groups. They network and invest more nimbly, particularly when they are young. As cashed-out tech entrepreneurs have been drawn to angel investing, the average age of an angel has dropped from 60 to 49 in the past five years, according to University of New Hampshire expert Jeffrey Sohl. From well-known figures like Netscape's Jim Barksdale to the more obscure likes of OpenSite Technologies' Michael Brader-Araje, a lot of the made men of tech have basically made full-time angel investing their second career. And they often seek their fortune in it as boldly as they sought their first one.

Consider Brader-Araje. He was co-founder of OpenSite, that Internet-auction company that reaped the Buffalo angels a 120-to-1 return. The sale of the company to Seibel also showered stock worth $54 million on Brader-Araje. At the tender age of 31, he was confronted with a decision: "I could do nothing...or I could work myself to the bone again starting another company...or I could take a middle ground."

The middle ground became truePilot LLC, a $5 million angel fund he launched last summer in Research Triangle Park. In his new incarnation he dispenses anywhere from $50,000 to $500,000 per investment and has already accumulated an eclectic mix of startups. There's a wireless marketing and advertising network, an online educational magazine, a credit information service, you name it. Brader-Araje is no creature of a group; he's practically a nation-state. He's got a three-person staff to advise his portfolio companies, and he links up with fellow professional angels on deals they originate. "We're angel investing on steroids," he says.

In some places, angel investing takes hold not because of a particular alpha angel but because of a legendary Big Score: a startup that rockets straight to the moon and takes its angels to investment heaven. The angels take their returns and reinvest them in other local startups. Their peers look on enviously and plunge into angel investing themselves. That's what happened in Atlanta, where the whole thing was precariously tied to the trajectory of a rocket named WebMD.

The legend goes something like this. In 1995 young Jeff Arnold goes in search of angels for his startup company, which provides a heart-monitoring service for arrhythmia patients. He's rebuffed, because he doesn't look old enough to shave, until a Finnish-American chap named Jouko Rissanen, who has started and sold five successful medical companies, grudgingly grants him ten minutes. A few hours later Rissanen has committed $1 million. In 1996, looking to grow the company further, Arnold seeks more backers. He gets some Nashville money, but most of his new angels are Atlantans. A Merrill Lynch superbroker named Taylor Glover comes aboard, and two pals follow him--Bert Ellis, a TV-station magnate turned Internet entrepreneur, and Rex Fuqua, a wealthy Atlanta family's scion. Arnold also woos and wins the investment of a local telecom entrepreneur named Boland Jones.

They all think he has a bigger vision, and he does. He sells the heart-monitoring business for $25 million and in 1998 launches a company with an audacious goal: to network together doctors, hospitals, labs, pharmacies, insurers, and other health-care parties on the Internet. It will be called WebMD.

Hoo-hah! Talk about being in the right place at the right time. In the great Internet land rush, the health-care space is prime real estate, and WebMD is as plausible as anything. It draws big investments from News Corp., Du Pont, Microsoft. It goes public in February 1999, and its stock soon soars over $100. Putting that rich currency to work, it's off on an acquisition binge that culminates in a November 1999 merger with Jim Clark's Healtheon. WebMD's market value is $20 billion, and its founder makes FORTUNE's 40 Richest Under 40 list.

And the angels? Their shares of WebMD are worth hundreds of millions, and their personal stock is at a lifetime high as well. Le tout Atlanta wants to get in on their next deal. "You get a 200-fold return, and all of a sudden people think you're a genius," Rissanen observes.

The WebMD angels take some chips off their heaping pile and make more investments. Rissanen is in a dozen deals. Bert Ellis' angel portfolio soars past two dozen. "I'm in for a hundo" (angel slang for $100,000), he's often heard to say in the OK Cafe, the breakfast spot of choice for Atlanta's angel/VC crowd, where Ellis figures he has done nearly half his deals.

It's a boon for business formation in Atlanta, where startups have historically gone begging for capital. A startup called, about to die aborning, gets new life with a $4 million infusion from the WebMD angels, and the Web-navigation business is instead off and running. It's also a careless and crazy time. The WebMD angels set the tone for "covering the table" with many bets, and imitators follow, throwing their hundos around as well. Angel groups compete to fund even the flimsiest startups. Lawyers who once dutifully turned out incorporation papers for startups feverishly broker deals.

"They saw the food coming across the table at law offices and said, 'Hey, I can not only be a lawyer, I can be an entrepreneur,' " says Boland Jones, the WebMD angel. "That's when you know you've reached the full development cycle of crazy, out-of-hand, unfathomable markets. That is called scary dot-com."

Actually, as some people here saw it, the ultimate manifestation of "out of hand" was a Boland Jones production last March. At a Red Herring conference in Atlanta, he sponsored a Who Wants To Be a Millionaire-style trivia contest, with four entrepreneurs competing for the grand prize: a $5 million investment from Jones (actually, his corporate venture fund).

Later that month, dot-com fever officially broke. The Internet stocks that had so long defied gravity crashed, and the Nasdaq index fell 40% over the next half-year. WebMD was slaughtered too, falling from a high of $75 in early 2000 to as low as $6.75 recently.

The tidal wave of angel investing in Atlanta began to roll back. The WebMD angels, true believers all the way, hung on to most of their shares and rode the stock right back down the roller coaster. Some of their other major holdings were being pummeled. The stocks of Bert Ellis' and Boland Jones' companies, once trading around $50, plunged into the single digits.

The newcomers quaked. "Angels got very popular when the fairy godmother kept showing up," says John Huntz, managing director of WebMD angel Rex Fuqua's venture fund. "When the easy returns stopped, the [newcomers] panicked: 'That's not the deal.' You're going to see a pretty radical pullback."

Indeed, he is speaking to me across a table at the OK Cafe, where it is far easier to get a table at 8 A.M. than it was six months ago. The fallen angels of WebMD can look around here these days and feel a little glad that all the amateurs have cleared out, but also a little lonely. "You thought there were 30 or 40 good angel investors here, and in reality there's only ten," says Boland Jones. "The rest have gone back to their North Carolina getaways and said, 'Okay, forget it. I've got two new boats and a car out of that run.'"

They aren't the VIPs they were in the salad days, though they do still advise Jeff Arnold. As it was all falling around his ears, in recent months, and as he was trying to come to terms with being co-CEO, he consulted with some of his original kitchen cabinet of angels. Then, in mid-October, he resigned.

Nashua, N.H., is far removed from Atlanta climatically--the air had turned chilly and the leaves had turned color when I visited there, at a time when air conditioners still ran full blast in Atlanta. It's also far removed from Atlanta angelically. For the core members of the Nashua Breakfast Club, this isn't fashion; it's passion. They're three MIT-trained physicist-entrepreneurs who have been doing this approximately forever, dating back to when two of them--Dick Morley and Mort Goulder--met on a cruise and discovered their common college education, home location, and avocation.

Both men had built successful businesses--Morley a factory- automation outfit, Goulder a defense contractor--and both enjoyed seeding startups on the side. They thought it would be jolly to do it together. Morley recruited his longtime business partner and college classmate George Schwenk; they pulled in a fourth named Doug Drane (who's since gone Sunbelt on them) and started meeting capital-starved entrepreneurs for breakfast at the Nashua Country Club.

There, in the coffee shop, they've eaten a lot of eggs and hatched a lot of deals. They're not really sure how many, just as they're not really sure when it all began ("the mid-'80s" is as precise as it gets) or what their annual investment returns are (maybe around 30%). This isn't a formal club with rules and records and regular meetings. It's an ad hoc bunch whose meetings may comprise as few as two members or as many as a dozen. Decisions are often made on the spot and always from the gut. I may have met angels who made greater sums, but none who had more fun.

"We're professional gamblers," says Morley, sitting at a table in the office of his huge red barn, sharing popcorn with his cohorts and swapping war stories.

"My wife says that too," says Goulder. "I say, 'No, no, no, we're physicists using our intellect.'"

They're growing long in the tooth now--Morley and Schwenk in their late 60s, Goulder in his late 70s--and they're tolerating no fluff. No MBA-speak business plans, please; executive summaries only. Forget the PowerPoint presentations and entrepreneurs, and leave behind your lawyers. You don't pitch the breakfast club's members; you field questions from them--strange ones. They might ask: What do you watch on TV? What was your family like as a kid? Where did you go to college? Oh, yes...and what about your business? Morley explains, "We've got an average nine-year run from back of the envelope to exit." These guys want to get a sense of their long-term partners.

"Our biggest errors have been in people," says Goulder. "We used to think the technology was the most important thing. We don't anymore."

From its initial trickle, the Breakfast Club's deal flow has cascaded to ten or 12 a year. From its original four members, the club expanded during the '90s to about 20. The club meets whenever a promising venture presents itself. Members are notified by fax, show up if interested, and, if it's a consensus "go," typically chip in $25,000 to $50,000 apiece. The breakfast club's total investment has been as small as $100,000 and as big as $1 million, but is more typically $200,000.

The cornerstone members have settled into steady roles. Mort Goulder is the deal guy, initially hammering out terms with the entrepreneur and eventually, God willing, with VCs or acquirers. George Schwenk is the mentor and financial monitor, tracking the club's investments. Dick Morley is the techie (he's a noted factory automation inventor) and the angel of death. When it's time to pull the plug on a company, he does the dirty work.

The fact is, two out of every ten deals will die ugly deaths, two (at most) will hit hugely, and the rest will meander along in a state they call "the living dead," which, for these angels' money, is the worst. "You know they're never going to make it, and you think you ought to give them the hypodermic needle in the neck," says Schwenk. "But if the guy is plugging along, you have to at least commiserate with him and ask, 'Have you tried this? Have you tried that?' It takes a lot of time."

Complain as they may, the Breakfast Club regulars clearly love it all. They recall fondly one of their tech companies, called Epion, which they loved so much they didn't even care about an exit strategy--until, that is, a $100 million acquisition offer came in. The windfall didn't all accrue to the Nashua gang, as Epion had lots of other investors, but still..."When I got my stock," says Goulder, "I waved it at my wife and said, "See, this isn't gambling."

As they've gotten older, they've gotten more set in their prejudices. "I have three rules," says George Schwenk. "Don't invest in a company that has doctors. Don't invest in a company that has New Yorkers. And never break rules one and two and think you're going to get away with it." Dick Morley's rule one is: "Never invest in a company with a Ph.D. as president. They know the way things are supposed to be, not how they are."

He's also firm on another point. When a winner comes in, put 30% of the profit into CDs to cover taxes; plow 50% back into new deals; and with the remainder, "My wife and I each must take 10% and blow it on something totally irrational. I like to buy a Harley."

It's not really the lure of the profit that keeps the club's founders going; it's the constant sense of discovery and surprise. Consider their latest caper. Early this year Morley began getting e-mails from an entrepreneur who was developing videogames for teens. He said he understood the youth market in a way other developers didn't; that he and his staff had the necessary insights and expertise to draw teens to their games. They just needed some money and some guidance from experienced angel hands. It all sounded pretty sophisticated, and Morley grew pretty intrigued, finally telling his colleagues, "This is worth breakfast."

Who should show up at the coffee shop that April morning but three 17-year-old kids, with all the appropriate confidence and demands of adolescence. The nascent company's CEO, David Bell, said he was looking for $2.6 million. Seeing that Schwenk and Goulder (Morley wasn't present) were about to have a cardiac event, Bell hastily added, "But we can do it for $250K."

That saved his bacon right there, and the more the teenagers elaborated on their plans and their all-volunteer force of adolescent programmers, the better the Breakfast Club liked it. "They were bright," says Goulder, "and the idea that only kids know what kids like is absolutely solid as a rock."

The club committed $150,000, and Chasma Inc., as the company was called, was able to move out of Bell's basement and into a real office. It could also start paying its work force for the 2 P.M. to midnight shifts each day after school. George Schwenk was assigned by the club to Chasma's board ("He's got a lot of Scoutmaster experience," cracks Goulder) and to the Thursday-night staff pizza meetings. There, they review progress toward their new strategic initiative: developing a Web portal for teens, with content on the movies, music, sports, and, yes, videogames of interest to Generation Y.

Dave Bell and two Chasma colleagues were thoroughly jazzed about it all the day they cut their last-period class at Nashua High to visit with me and their angels. Equal parts idealist and capitalist, Bell talked excitedly about his corporation as part of a revolution, and he left, excited, with some computers donated by Morley.

These kids may or may not prove to be revolutionaries, but the geezers who plunked down $150,000 on them surely are. The Nashua Breakfast Club was in the vanguard of angel investing's advance, and it will be around when the fair-weather angels have retreated--as Dick Morley hopes they will. "In the last couple of years all the venture money has been overdone," he says. "It's been the professionals against the Johnny-come-latelies."

Other builders of the angel movement also rue its excesses. Hans Severiens looks across the land and fears he created a monster: Lots of groups that look like his Silicon Valley Band of Angels but lack its discipline. "They think, 'Hey, it's simple. We'll just throw money at these deals. The stock market has been hot, and we'll get big returns,'" he says. "With the crash in all of the Internet deals, I think the chickens are coming home to roost."

The faint of heart may fly the coop and the growth rate of angeldom temporarily slow, but this movement will almost surely continue to take wing. The advance of investor sophistication and the urge toward firsthand participation won't reverse. Nor will the mindset of the moneyed, more than ever made up of the self-made. The '90s brought a sea change in attitudes as well as fortunes, and the question now is, How're you gonna keep 'em down on the country club after they've seen the deal flow downtown?

In all its splendid contradictions and variations, despite all its imperfections, with all its messiness and funniness, its misplaced faith and well-placed bets, angel investing is, in some weird way, millennium America. It's part throwback to our self-reliant forefathers: capitalism operating beautifully and bountifully at the grass roots. It's also partly a product of our modern obsessive search for the highest possible returns and the newest new things. Here, amid the angels, the new economy jumbles up with the old, the amalgam of amateurs fuels the army of entrepreneurs, the wealth is spread, and the fancy-pants MBAs no longer have all the fun. We are Deal Nation, where the venture capitalist lives next door.

REPORTER ASSOCIATES Ahmad Diba and Feliciano Garcia