Angel investors help fund very early-stage businesses, typically in amounts that range from tens to hundreds of thousands of dollars. In return for their early investments, angels obtain equity positions that can be enormously valuable if the company later goes public or is sold at a premium.

"The most important thing for someone who doesn’t have much experience [making direct investments in companies] is to make sure you’re not the lead investor," says Audrey MacLean, an associate professor of engineering at Stanford University, and one of Silicon Valley’s most successful angels.

By the end of 1998, MacLean had provided about $1.2 million in seed funding to six companies, generating returns of more than $20 million, according to estimates by Forbes magazine.

The companies she’s backed range from high-tech start-ups, such as Pure Software Inc., which went public in 1995 and was later acquired by Cupertino, Calif.-based Rational Software Corp. {RATL}, to sudsmaker Pete’s Wicked Ale, which was recently sold for $69 million to Gambrinus, a beer importer based in San Antonio.

First-time angel investors "need to know what they don’t know. If you’re new at this, you’ve really got to piggyback on the due diligence of others," MacLean says.

MacLean says she can’t recall a single case where a successful start-up was initially funded by an unsophisticated angel. First-time angels often do get in on the heavenly pre-IPO action, she says, but usually only after deals have been evaluated and structured by more experienced hands.

Otherwise, MacLean says, it’s too easy to fall into the trap of betting on a non-competitive technology, or participating in a deal that’s structured in a way that makes future rounds of venture financing less likely.

"You and your dentist are not going to be able to buy 90 percent of a new company," she says. "If you do, you won’t be able to do a venture round [later on]," she says.

MacLean says would-be angels should understand how heavily the odds are stacked against them. "The thing the dabbler has to realize is that professional investors develop a portfolio of companies," she says. "Out of every 10 they fund, maybe two will go public, and the others will fail." Of the six companies MacLean seeded through last year, one failed, two went public, and three were acquired by other companies, giving her a batting average considerably higher than most.

Bringing angel investors together with entrepreneurs is the goal of Garage.com CEO Guy Kawasaki, the former "chief evangelist" at Apple Computer, and the author of the best-selling book, Selling the Dream: How to Promote Your Product, Company, or Ideas. Kawasaki has stitched together an online network of several hundred high-net-worth investors since founding Palo Alto, Calif.-based Garage.com last year.

Investors joining Kawasaki’s Garage.com must have twice the $1 million net worth required under SEC regulation D, which sets minimum qualifications for certain high-risk seed investments.

"We also want technical expertise and experience," Kawasaki says. Investors who offer only money are not accepted into the group. Garage.com has pumped more than $50 million of its members money into about 20 start-ups since the company’s inception.

Kawasaki has some advice for investors evaluating firms seeking seed money. First, he says, never invest in a company that makes a service or a product that you wouldn’t use yourself. "If you don’t know enough about the product to be enthusiastic about using it, you should pass," he says.

Second, would-be angels shouldn’t fall into the trap of believing that revenue or profitability don’t matter. "You hear a lot these days about successful start-ups with little or no profits," he says. "But that’s not really how it works." Most successful start-ups, Kawasaki notes, have the one thing experienced investors value most: customers.

Despite popular myths to the contrary, almost all of Silicon Valley’s most successful start-ups were experiencing strong customer demand before angel investors pumped money into them. Apple Computer Inc. {AAPL}, for example, had positive cash flow before the company ever received its first dime in venture capital. More recently, would-be advertisers were banging down the doors at Yahoo! Inc. {YHOO} before Silicon Valley investor Mike Moritz wrote the company founders their first check.

Moritz says he’s usually not impressed by the written business plans that are typically circulated to less-sophisticated investors. It’s a view widely shared among his colleagues. Last year, Inc. magazine did a survey of 10 of the most-successful venture capitalists in Silicon Valley, asking them to list the best-written business plans they’d ever seen. The story was canceled after none of the investors surveyed could recall ever being attracted to an investment based on a written business plan.

So what gets sophisticated venture capitalists such as Moritz interested in backing a new company? "The sound of a ringing cash register," he says.

That’s what convinced Menlo Park, Calif.-based Benchmark Capital general partner Bob Kagle to invest in Jamba Juice Co., a maker of fruit-juice smoothies. Kagle was on his way to a meeting with an aspiring high-tech entrepreneur when he noticed a line snaking out of Jamba Juice’s first store in Palo Alto. Impressed, Kagle quickly helped raise $3 million for the company, which has since expanded across the nation.

Few bets will ever pay off as handsomely as a single seed-money investment in a company that later goes public. But the risks are equally huge. "Most people who invest in the stock market hope their stocks will go up," MacLean says. "They also realize they may go down. But this is quite different. You have to be prepared to lose your entire investment. In the stock market, zero is not your typical outcome."

"That’s why it’s called venture capital, not certain capital," Kawasaki adds.