Bob Aholt of Pasadena Angels says that his group looks at about 35 to 50 business plans a month. That’s 420 to 600 businesses a year looking for capital.

These businesses go through extensive screening. “We sit around for a couple of hours and we try to whittle the 35 down to six entrepreneurs whom we want to come in and give a 15-minute screening pitch to us,” Aholt explains.

Aholt and his colleagues narrow those six down to one or two entrepreneurs whom they invite to give a full pitch to the entire membership group at a breakfast meeting.

“If they can come out of this breakfast meeting with a significant level of interest, say 24 [or] 25 members at a minimum saying that they’re interested in going into due diligence. At that point we’ll move along the scale, take the company into due diligence, and we’ll start looking at the documents and doing reference checks and talking to customers and things like that,” Aholt says. [Read Irina Patterson's interview with Bob Aholt here.]

While there are variations in their size, investment criteria, and the exact process, a large number of angel groups in the U.S. and even around the world use a similar screening model.

The oldest and most well-known of these is Silicon Valley’s Band of Angels. Comprising 127 high-tech executives, the band has seeded 200 companies and has had more than 40 profitable M&A exits and nine Nasdaq IPOs. The combined networks of the 127 members produces a large deal flow of about 50 a month, of which only three are invited to present to the group. The band has invested in eight companies in the last 12 months. [Read our Band of Angels interview with Nicola Corzine here.]

New York City–based Wider Wake Networks has 25 members and a sharp focus on digital media advertising and the related ecosystem. The group does only about four investments a year. Paul Olliver, a founder of Wider Wake Networks, explains the low number this way: “The first is that if we’re making four investments a year of $1 million each, that’s $4 million in a year that we’re putting into businesses. But the second and most important thing about that number is that we don’t want to drill 10 pipes and make sure that three come back with oil; we want to put down only three pipes in precisely the spots where we know there’s going to be oil.” [Read Paul Olliver's interview here.]

So, you see, the number of entrepreneurs who actually succeed in raising money is small. The angels acknowledge this is an issue, but they rarely have the bandwidth to invest energy in coaching the entrepreneurs whom they choose not to invest money in.

Olliver says he occasionally sees a good business plan that doesn’t fit his investment portfolio, and he’ll refer that business to other angels and VCs. “We’ve all been on the other side of the table. We’ve all tried to raise money, and it’s not easy,” Olliver says.

Malvern Lusky of Houston Angel Network says, “I invest in the management. Accordingly, they must be seasoned management teams with proven track records. I have found that investing only in seasoned management teams who have performed previously will increase the chances of the venture’s success.” [Read Malvern Lusky's interview here.]

Many angel investors have this bias, as do many VCs. But as we know from history that a large percentage of entrepreneurs are first-time entrepreneurs, and they are the ones who will likely make many mistakes; they need a lot of coaching, mentoring, and hand-holding.

But let’s also not forget that Sergey Brin, Larry Page, Bill Gates, Steve Jobs, and Mark Zuckerberg were all first-time entrepreneurs who built some of the most valuable companies in history.

So we do need to continue nurturing and encouraging the entrepreneurs who are “works in progress.” At 1M/1M, if entrepreneurs have come up with bad business models, we tell them so and advise them not to waste precious years of their lives on dead-end ideas. Where possible, we offer them guidance on how to tweak their business models in hopes of finding greater success.

For the future to be glorious, the entrepreneurial energy that is being wasted needs to be harnessed. Just like oil, water, and other scarce resources powering the world, entrepreneurial energy is something precious and critical for economic growth and sustenance.

Let’s figure out ways to make a much larger percentage of our entrepreneurs successful. Let’s not allow this essential energy to dissipate.

Gunjan Sinha: Ashu and I had built WhoWhere? which grew to be amazingly popular. We had web based email, white pages and yellow pages. We had a lot of traffic and a lot of emails. That is where we had an idea that perhaps other sites were having a problem with the flood of email. We found it difficult to handle and manage all the email we were dealing with at WhoWhere?.

In 1998 we started building the software to allow people to manage email. It was a much more significant problem than we had initially envisioned. The overall volume of email was rising. It required more intelligence. We had to parse and dissect the emails in order to route them. It slowly became a full blown online customer service company.

We started off with a very simply problem of email management. That was the problem that retailers and large financial institutions were experiencing at the time. One thing led to another and soon we had a full suite of offerings.

Sramana: In terms of figuring out what problem to work on, would it be fair to say that when determining what businesses to start you did it by working on the problems that you encountered yourself?

Gunjan Sinha: Yes. Definitely. When we were at WhoWhere? we felt overwhelmed with the management tasks. At WhoWhere? we were just trying to connect people. It was not a social network but it was a precursor to it. We imagined what became social networks in the Web 2.0. We focused on helping people find and connect to other people. All of that led to a lot of email traffic and high volumes that led to eGain.

eGain grew very rapidly and did very well. Post 9/11 the world came to a standstill. Travel stopped. I realized that risk in the world had changed. It affected me personally. It affected eGain personally. The trajectory of that office had to be changed. We had to reduce our 18 global offices and go through massive restructuring. The recession that came lasted for three years. The essence of that experience produced MetricStream. It was a reaction to the fundamental change in risk experienced in our world.

Sramana: How did you architect a solution for that fundamental change in global risk?

Gunjan Sinha: There was a company called Zaplet that already had some interesting technology in that space. They had also raised a lot of money and had gone through 90 million dollars of capital. It was backed by great investors. Through various conversations I had with key players and key investors I realized there was a potential play there involving applying that technology to risk. Their technology was developed to enable very wide spread collaboration using email and Zaplets. We felt we could apply that to the world of risk. We took that technology and merged it with MetricStream in 2004.

ADP’s Financials
ADP’s (NASDAQ:ADP) Q2 revenue grew 7.4% over the year to $2.6 billion, in line with the Street’s projections. EPS of $0.69 was marginally ahead of the market’s targeted EPS of $0.68.

By segment, Employer Services revenues grew 7% for the quarter to $1.83 billion. Revenues from PEO Services grew 16% over the year to $0.42 billion and Dealer Services revenues grew 7% to $0.41 billion.

For the current quarter, ADP estimates revenues of $2.9 billion with EPS of $0.93. Revenues for the year are expected to be $10.7 billion with EPS of $2.74.

ADP’s Acquisitions
ADP continued with their acquisitions during the past quarter as well. Last week, they announced the acquisition of Massachusetts-based private player, PhyLogic Healthcare LLC. PhyLogic  is known for revenue cycle management and medical billing outsourcing services. The company’s services help manage billing and accounts receivable services for medical practitioners across the country and provide electronic health records and cloud-based practice management solutions. In 2011, ADP entered the medical space through the acquisition of AdvancedMD. PhyLogic’s acquisition will help them improve offerings within this field. The Revenue Cycle Management segment is also expected to grow rapidly in the coming years. Analysts estimate the market to grow from $4 billion in 2010 to more than $9 billion by 2018.

Early this year, ADP made a significant international play by moving into India through the acquisition of an Indian human resources and payroll management consultancy, Ma Foi Consulting Solutions Ltd. ADP will now manage Ma Foi’s Indian business, which includes domestic and multinational companies. With 200 employees spread across India, Ma Foi manages payroll outsourcing business for 350 clients in India.

Their acquisitions are being received positively by the market. Their stock is trading at $54.87 with a market capitalization of $26.71 billion. It touched a 52-week high of $57.10 last month.

Paychex’s Financials
Paychex’s (NASDAQ:PAYX) Q2 revenues grew 7% over the year to $545.7 million, short of the Street’s projections of $551 million. EPS of $0.39 grew 5% over the year and was ahead of the analyst target of $0.38. By segment, Payroll Service revenues grew 5% to $371.7 million and Human Resource Services revenues grew 12% to $163.3 million.

Paychex’s SMB Focus
To enhance their SMB offerings, Paychex acquired Oregon-based time and attendance solutions provider Icon Time Systems. Paychex plans to leverage Icon’s reseller network with their own sales force to offer their customers a wide range of options and higher quality service. Paychex had worked with Icon systems earlier to help develop their own time and attendance system, the Paychex PST 1000 time clock. Details of the transaction were not disclosed.

As part of the extended offerings to SMBs, Paychex also launched two new tax credit servicing tools. The Small Business Tax Credit Estimator is a free web-based tool that helps businesses estimate their tax credit on the health insurance schemes they offer based on employees’ hours, wages, premiums, and employer contributions. The Small Business Tax Credit Package helps the SMBs assess their eligibility to receive the tax credit and file for it.

Paychex’s stock is trading at $31.70 with a market capitalization of $11.49 billion. It touched a 52-week high of $33.91 in March 2011.

Overall, both Paychex and ADP are on a strong growth path, driven not only by their acquisitions but also by improvements, however small, in the economy.

Let me show you the money!

First, meet La Grande Dame. The idea for the venture came about when mother–daughter team Michelle and Catherine Wood realized they had spent a decade scouring stores across the country (and sometimes abroad) for stunning clothing and accessories. The shopping trips were often marred by tears in the dressing room and unkind words from salespeople who “didn’t have anything big enough” for Michelle, a size 18. So Catherine and Michelle started La Grande Dame in Los Altos, California, as an online boutique dedicated to high-end fashion for plus-size women.

The company was launched in April 2009 during the great recession. A year later, when they pitched at my roundtable, this pair had about $9,000 in monthly revenue. They were trying to figure out how to increase the conversion rate of their marketing campaign, which is what we discussed at the session. However, it looked like La Grand Dame was on its way to becoming a “real business.”

For investors, the question is whether the company has enough of a target market. Roughly 62% of women in the U.S. are plus size (size 14 or higher), resulting in a $64 billion market. Assuming 10% of women shop online, that’s a $6.4 billion potential market. La Grande Dame’s niche is the higher-end consumer; women aged 30–55 with annual household income of more than $100,000. This further subsegments the market, but nonetheless, the target market for the business is quite large. Michelle and Catherine are enjoying growing the business. They may consider selling in the distant future, but definitely not in the short term. (More details here: The 1M/1M Incubation Radar: La Grande Dame.)

Two other companies from the 1M/1M program: Phitch and Artimus Art.

Phitch is an inventory optimization software for QuickBooks users that already has 25 paying small-retail customers, a validated pricing model, and a rather cleanly defined market. There are millions of small retailers, and many of them run their businesses on QuickBooks, making them perfect targets for John Krech, the Minneapolis, Minnesota–based entrepreneur behind the project. Whether or not this is a billion-dollar market opportunity, it is certainly at least a $30 million dollar opportunity.

Artimus Art, which presented at the same session, is a service for parents to turn their children’s art into museum-quality photo books. Massachusetts entrepreneur Dana Hostage has so far sold $250 books to 65 customers. Whether her customer count can reach 6.5 million is questionable. It is, however, not a stretch to think that Hostage can recruit 4,000 customers, which will get her to the prized $1 million mark.

These companies are typically not on the radar of investors. On their own they will be somewhat successful. With some mentor capital they could be enormously successful.

That brings me to the observation I have been pondering for a while. It may not always be apparent who would buy a business like Artimus Art or La Grande Dame to provide a clear exit strategy for the investors. The entrepreneurs may not be interested in selling. This is their passion, and they want to continue to enjoy the process of running and growing it.

So, what if the idea of exit was removed from the equation? What if the investor and entrepreneur agreed to a different model – the model of sharing dividends? With a $500,000 investment, if they succeeded in building a $10 million a year company with a 20% profit year after year, they would collect several million dollars in dividends.

It beats me why angel investors continuously chase exits. It seems to me they can make a lot more money, or at least an equivalent amount of money, with a built-to-enjoy approach rather than the built-to-flip model. It would open up a much larger set of opportunities for entrepreneurs and investors to join hands.

In 1M/1M we are determined to support entrepreneurs interested in built-to-enjoy businesses. I hope with time the angels will, too.

Gunjan Sinha: We started MetricStream in 1999. The MetricStream we know today was created with the merger of Zaplet in 2004. Zaplet had raised a lot of money from institutional investors, and I essentially did a reverse merger to pull this current company from that environment. Shellye Archambeau served as the CEO and I took the role of executive chairman. Vinod Kholsa was also a part of the board; that was when he was with Kleiner Perkins. We brought in Advanced Equities as new investors to help build the company.

Over the past seven years we have built MetricStream into a market leading company that is acknowledged by Gartner and Forrester. We have customers all over the world. Our clients use us for risk management, compliance, and governance.

Sramana: Let’s talk some about the blood, sweat, and tears of being an entrepreneur. Why did you go down the path of entrepreneurship?

Gunjan Sinha: Entrepreneurship is an interesting journey and one that I would recommend to anyone. While it is a difficult path to take, it is also very rewarding and extremely exciting. In 1993 I got together with some friends. We had absolutely no money but we all wanted to start brainstorming to come up with some sort of business idea. We had a little bit of savings here and there, but by and large we all had a big dream and desire to make something happen.

We tinkered with a dozen different ideas. We thought about building a voice mail system. We looked at interactive voice response systems and telephonic systems. What really got us excited was a tiny project we received from the American Red Cross. They wanted us to build a website for their Palo Alto chapter in 1994. The web was very new at the time and the Mosaic browser had just been invented. One thing led to another, and we discovered the power of communities.

Sramana: How much did you charge the American Red Cross in 1994 for their website?

Gunjan Sinha: It was a few thousand dollars to begin with. The novelty factor was high and nobody knew what to charge. I just made up the quote. We did all of this work out of my apartment in Mountain View. I was sharing an apartment with Ashutosh Roy at the time.

Sramana: You have done two ventures with Ashu. What constitutes a good co-founder, and what is the secret to having a good relationship with them?

Gunjan Sinha: Ashu and I are very good friends to this day. I knew him back at school in Delhi; we shared a hostel together. He was two years my senior. There was a lot of familiarity when we reunited at Stanford. He was in the business school while I was there working on my masters. We just started brainstorming and we had a high degree of alignment. We had a shared vision and commitment that has spanned a long time. We were both cognizant of that vision. We would not make unilateral decisions, and we always kept the other person in mind.

Now, let’s get to the entrepreneur pitches.

TravelTriangle.com
First, Sanchit Gurg from Noida, India, pitched TravelTriangle.com, a marketplace for travel agencies offering personalized tour packages for travelers seeking such help. The company already has engaged about 75 travel agencies and some 900 customers. They have started transacting, generating multiple bids for each RFP and taking a commission off closed deals. Reviews, ratings and other core marketplace functions are part of the offering. Sanchit and his team of six have validated the concept already.

I like the idea a lot, especially because traveling in India and South Asia and South East Asia is still quite complicated. Local knowledge and contacts are key, and the logistics of travel can be very complex. Having personalized, reliable service from a travel agent, along with local guides, etc., are attractive value propositions.

The market size, however, is relatively small: 5% of $500M or $25M is the estimated Total Available Market for the foreseeable future. Frankly, that doesn’t bother me, since I tend to like small, niche businesses with good, solid execution, which Sanchit’s company is demonstrating. Clearly, a multi-million dollar, profitable business can be built here, and I plan to be a user of the service. In fact, I’d like to design a trip to visit Bandhavgarh National Forest in Madhya Pradesh to see tigers, as well as visit the Khajuraho Temple, ideally during the famous dance festival that is held there. Maybe one of the travel agents on TravelTriangle can help put this together for me.

For the time being, the company is seeing maximum interest from travelers who want to visit Rajasthan, Kerala and Sri Lanka.

BabbleTAB
Next, Andrew Jaffa from Jacksonville, Florida, pitched BabbleTAB, a social media marketing service that generates relevant content for the Facebook pages of small businesses like car dealerships, restaurants, retail, etc.

Andrew wants to offer a tablet-based console on location that would capture video and images of customers and post them to the businesses’ Facebook pages. The business model is a subscription service with a small fee per loaded image.

We brainstormed today about the adoption barriers and whether consumers would take the trouble to be photographed or recorded. Andrew’s preliminary research says that they would if offered the right incentive. In a car dealership, for example, he thinks a $250 discount would be a substantial enough incentive. I am listening to the use cases but would like to see a statistically significant validation exercise done on the idea.

We also discussed Andrew’s proposed tiered pricing model, which I felt was too complicated. A simple flat pricing would be more appropriate. Andrew agreed and is planning to change the model.

You can listen to the recording of today’s roundtable here. As always, I would very much like to hear about your business, so let me invite you to come and pitch at one of our free 1M/1M public roundtables. We will be holding future roundtables on the following dates starting at 8:00 a.m. PST:

Thursday, February 16, Register Here.
Thursday, February 23, Register Here.
Thursday, March 1, Register Here.
Thursday, March 8, Register Here.
Thursday, March 15, Register Here.

If you want a deeper relationship with me, you are very welcome to join the 1M/1M premium program. If you have any questions about the program, please, first study the website, especially What to expect from the 1M/1M premium program and the FAQs. If you have additional questions, please email me, and I would be very happy to respond. Please note that I work exclusively with 1M/1M entrepreneurs.

I also invite you to join the 1M/1M mailing list for the ease and convenience of getting updates. This way we can stay in touch, and it will help you to decide if 1M/1M is a program for you.

A new book from the Organisation for Economic Co-operation and Development (OECD) looks at seed and early stage financing for start-up companies and notes the impact of the recent economic crisis. With banks reluctant to provide loans to startups and venture capital firms preferring to invest in later stage companies, a growing class of experienced entrepreneurs and business people are stepping in to fill this funding gap. These “angel investors” not only provide funding but also leverage their expertise to provide mentoring to the entrepreneurial teams in which they invest, according to a new OECD report.

The book, Financing High-Growth Firms: The Role of Angel Investors, looks at angel investment around the world and includes more than 100 interviews with entrepreneurs, policymakers, and academics from 32 countries. The findings show that angel investments are increasing around the world, and while precise data is hard to collect, the report points out that estimates of the total angel investment market in a number of countries are greater than traditional venture capital investment, particularly for seed and early stage financing.

Angel investors support a much wider range of innovation than VC firms as they traditionally invest locally and in a wider range of sectors than venture capitalists. This means there is broader investment coverage both in terms of industry sectors and geography (angels live everywhere, not only in areas where VCs have offices, which tend to be concentrated in a few technology or science hubs). However, it also means that angel investors can be involved in companies that are not necessarily technology intensive or high growth as well as companies in later stages of development. Like VCs, angel investors tend to invest in a portfolio of companies.

The report notes that women are greatly underrepresented in the angel investment community. Only 5% of angel investors in Europe are women and only 13% in the U.S. While groups like Golden Seeds in the U.S. and GoBeyond in Europe are working to engage more women in angel investing, more efforts are needed. The book suggests that if a greater number of women were investors, more women in high-growth firms would be successful in accessing angel and venture capital funding.

Start-ups from universities are often touted as an important source of deal flow for angel and venture capital investors; however, these firms tend to be more research rather than commercially focused and therefore do not often succeed in securing equity financing. This highlights the broader issue of a potential disconnect between innovation and entrepreneurship policies. Innovation policies tend to focus on R&D rather than the broader definition of innovation, which was noted in the recent OECD Innovation Strategy, while entrepreneurship policies focus on the teams, culture, and ecosystem but not always on the translation of innovative research into firms.

Government policies to boost angel investment are becoming increasingly popular, including tax incentive schemes, such as the ones in the U.K. and France, and co-investment funds like those in the Netherlands, Scotland, and New Zealand. The book discusses these and other policies in further detail, highlighting some of the pros and cons of these approaches while emphasizing that any government intervention must be geared toward providing incentives for greater private sector involvement.

While policymakers and others tend to focus on the venture capital market, which is more visible than the angel market, data indicates that angel investors will continue to be critical to overcoming the financial and growth challenges facing entrepreneurs. This, in turn, will contribute to job creation and economic growth – greatly needed today in Europe and other regions around the world.

Family support allowed Vanderbilt University fraternity brothers David Muzzo and Cameron Chalmers in 2000 to found Study Island, an educational software company. Since then, the company has changed its name to Archipelago Learning and gone public, and it did $55 million in revenue last year.

One of their grandmothers had a condo in Fort Lauderdale, Florida, that she was not using, and she let Muzzo and Chalmers live there rent free. The two friends spent a year and a half developing what would become Archipelago.

The idea for Archipelago was to create a software application that let students enter the material they were trying to learn and share it with other students. Muzzo and Chalmers’ vision was that Archipelago would evolve into a shared library of academic content.

Teachers are now using Archipelago’s software. When a student goes to the lab at home, all the student needs is a browser. There is a mini review lesson online of what was taught in class, and the student starts to answer practice questions related to the topic. If the student answers questions correctly, she gets to play a game for 10 to 15 seconds. If she gets a question wrong, she receives an immediate explanation about why her answer was incorrect and the software asks her to answer the question again. The next day, the teacher gets a report that shows how much time the student spent on the program and how well the student did. Archipelago’s software can also create reports for principals and parents.

Archipelago first focused on schools in Ohio and created educational software for that state in a mere six months. “We started with grades 4, 6, 9, and 12,” Muzzo says. “The subjects we focused on were math, reading, science, and social studies. Those grade levels and subject areas were chosen because of Ohio standards testing.”

From the start, Archipelago had high revenue growth. “In 2000 we started off with no revenue,” Chalmers recalls. “In 2001 we made $250,000 in revenue. In 2002 that jumped to $550,000. In 2003 we broke the million-dollar mark with $1.4 million.” (Read more about Muzzo and Chalmers’ story on my blog.)

Gradually, Archipelago moved into Illinois, Texas, and Oklahoma.

Until Muzzo and Chalmers sold the company in 2007, there was not a penny of external financing. What there was, however, was grandma’s condo in Fort Lauderdale. Their rent-free stint probably amounted to about $20,000 in angel financing!

What a difference it can make, these small amounts, in the life of young entrepreneurs with the work ethic to roll out a large chunk of an entire state’s educational content in six months.

Parents, grandparents, uncles, and aunts, America’s youth will need you to give them a hand as they delve into entrepreneurship this year and beyond. And who knows, a great rejuvenation of America could take place as the millennials grow up and claim their place in the professional world.