By David Worrell, Entrepreneur, November 2004

LISTEN UP. CHRIS WASDEN, CEO OF HEARING diagnostics device company Tympany Inc., is no stranger to raising money. Before co-founding Tympany, Wasden, 44, spent nine years as an investment banker at JP Morgan. He knows that to raise money, you've got to make some noise. Out on the fund-raising trail in fall 2001, Wasden made a lot of noise: He gave more than 90 investor presentations in his hometown of Houston. But his pitch fell on deaf ears until he focused his efforts on those who knew his industry best--ear doctors and their patients. "The majority of our investors have been touched by hearing loss in one way or another," says Wasden. "We found that most other investors didn't understand our business."

In fact, by focusing on hearing-loss patients, their families and their physicians, Tympany has raised $4.3 million from about 60 investors. Three of those investors put up $500,000 each after seeing the company's new hearing-test equipment in action. One has long struggled with diminished hearing. Another--a partner at a VC fund--wasn't even aware that his hearing was in jeopardy until taking the test himself. With third-year revenues headed toward $6 million, Tympany is already rewarding them handsomely.

"Angels prefer to invest in industries that are close to their hearts," says John Garcia, managing partner of Angel Strategies LLC in Tustin, California. "There's no doubt that if you strike the chord of a particular life experience of an angel you'll do well," he says. "If you're building a chain of grocery stores and can find an angel that worked in his family's grocery store as a child, you'll have a much better chance of getting an investment from him."

At Angel Strategies, Garcia coaches entrepreneurs to look for these "affinity investors" from the get-go. "We teach entrepreneurs how to raise money from friends of friends--but to never go into a pitch without knowing the person's whole background." Whether it's their past careers, where they grew up or what schools they attended, finding a common thread is critical. The more you know about their backgrounds, Garcia posits, the more likely you are to succeed.

Turn the Tables

Mark Miskie, 39, didn't start out looking for affinity investors for his company, Arcus Medical LLC, in Charlotte, North Carolina. Miskie started Arcus Medical in 2003 to commercialize a device that helps incontinent men manage their condition.

Although incontinence is not uncommon, Miskie found that the typical investment group did not understand the true potential of his new product. His pitch to angels and VCs in his local area turned up nothing. "Everyone loved the idea, but no one would invest," he says.

Miskie began to re-evaluate his funding strategy. "I had to ask myself, Who should I target?" he says. "Finding urologists to invest was the one thing that could most increase my chances of making it in the market." His new direction soon bore fruit. Urologists not only understood the product, but were also eager to invest in something that could improve their patients' quality of life.

"They see the product through a different set of eyes than a typical angel," says Miskie. "They're selling 60 million units a year of competing products that nobody likes, so they understand how easily people will adopt tiffs product." From one presentation at a prominent urology clinic, Miskie found to urologists who put up enough seed capital to get a prototype of the product made and to complete some initial market testing.

It didn't take long before word spread among the other urologists and their colleagues. By the time Arcus Medical was ready for a second round of funding, the investors were waiting. "Within 48 hours of opening our second round, all the equity was earmarked. I made the pitch in the middle of an evening meeting There were a couple of people who walked up to me and handed me a slip of paper--with dollar figures written on it. They were even calling me on the drive home."

Although Arcus Medical had not yet begun distributing its product at press time, orders were already flowing in. Revenues in 2005 are expected to easily break through the $1 million mark.

More Than Money

Credit for the runaway success of the products from Arcus Medical and Tympany goes in large part to the companies' investors. All investors bring cash, but affinity investors like Miskie's urologists and Wasden's otologists bring deep industry knowledge that creates an aura of credibility around a young company. Most of the early investors in Arcus, for example, are from Virginia Urology, a well-respected institution famous for treating incontinence. "These guys bring more value than money," says Miskie. "They bring connections and credibility. Every time I got a check from a urologist, it was an endorsement for the product."

Wasden agrees. "I think we've gotten something beyond money from them," he says of the physicians in his investor group. "Plus, it's interesting to see their perspectives as potential customers."