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IN THE SUMMER of 2005, the Queen City Angels, a group of wealthy investors in Cincinnati, thought they’d found a sure thing in an intriguing little company called SealPak. SealPak makes water bladders you install in the back of a truck and fill with a garden hose—the weight provides traction in the snow. The invention sounded easy to market, and the angels were especially impressed with the CFO, a well-connected consultant. They happily invested $300,000 of their personal fortunes and rubbed their hands. “It seemed there wasn’t much that could go wrong,” recalls John Habbert, one of the investors.

The warm feeling quickly evaporated. In September the first shipment of bladders got held up in a California dockworkers strike. Next SealPak admitted it couldn’t really afford the CFO. Then a freak warm spell produced one of the mildest winters on record. All told, SealPak brought in less than half its $1 million sales goal. Still, the angels invested another $100,000, assuming things had to improve. Wrong-o. Year two brought shipment-blocking blizzards, a second warm winter and a botched deal with a national chain. The angels now say they have little hope of recouping their $400,000 investment; all they have to show for it is the self-published account of his adventure that SealPak’s CEO is selling on Amazon.com. “Maybe that’s how he hopes to repay us our money,” sighs the group’s chairman, Tony Shipley.

Angel investing—buying partial ownership in local startups—isn’t easy. But a growing number of Americans are trying their hand at this miniature version of the private-equity game. So many, in fact, that angel investing is now bigger than venture capital: Last year angels sunk $25.6 billion into new companies. Meanwhile, the number of clubs like the Queen City Angels grew from fewer than 100 at the start of the decade to 265. While the first groups formed in tech centers like Silicon Valley, we now have the St. Louis Arch Angels in Missouri and the Vegas Valley Angels in Sin City. One reason for the trend: the swelling ranks of entrepreneurs who are cashing out in their 40s and 50s. For these natural risk-takers, angel investing is a second career and high-action sport rolled into one. Scott Miller, 46, who joined the QCA after selling his software company, compares funding startups to betting on the ponies: “When they start moving around the track, you can go back and put more money on ’em,” he says. “Others pull up lame and you gotta shoot ’em.”

Traci Metzger
CEO, The Perseverance Group
Angel Investment: $315,000
Colleges and universities say student attrition is a big problem; the angels are hoping Metzger’s retention technology will be their solution of choice. Metzger managed to sell the service to three schools even before developing the software.Of course, angel investing involves more than placing a few bets. Unlike investors in venture capital funds, who turn over their money to professional money managers, angels select and coach startups themselves. And as you might expect given the egos and cash involved, there’s seldom a dull moment. The 29 Queen City members have endured everything from boardroom shouting matches and CEOs jumping ship to a medical startup whose test pigs died on the operating table. They’ve helped newbie entrepreneurs launch promising companies, funded life-saving technologies and injected the Cincinnati startup scene with new energy. What they have yet to do, despite investing more than $10 million in 26 companies, is hit the jackpot.

If you wanted to learn the secrets of Cincinnati’s startup ventures, you’d do well to kidnap John Habbert, or at least swipe his omnipresent laptop. While most QCA members invest in just a handful of companies, the former Procter & Gamble exec turned gentleman investor has participated in every QCA deal since 2001 and keeps close tabs on his holdings. He knows their current operations and future projections, and can recount management bios and product specs in mind-numbing detail. He logs 40-hour weeks on QCA business, serving on the boards of seven companies and mentoring many more; he spends entire days running spreadsheet projections in the basement office he shares with the family pool table. A sharp-eyed man with a bristling mustache and dry sense of humor, Habbert loves working with startups, and the entrepreneurs he mentors mention him with the respect and affection due a beneficent uncle.

Bob Frey is more typical. Two years ago the chemical engineer was preparing to sell his packaging company when he spotted an article about the QCA in the Cincinnati Business Courier. It sounded like the perfect solution to the what-the-hell-should-I-do-when-I-retire quandary: “It’s a huge change when you go from being a somebody to being a nobody, and that’s what you get when you sell your company,” he says. With the angels, he’s not just another duffer on the golf course; he’s a player on the startup scene. He decided to invest $1 million over four years, what he calls his “fooling-around money,” and has already invested in five companies. A tall, unassuming man with a frank demeanor, Frey relies on fellow members to steer him toward the right deals. “I follow the crowd,” he says. Still, he likes to think he can beat the pants off the stock market—he’s hoping for a 15% return—and he enjoys advising local entrepreneurs, not to mention the occasional low-stakes QCA poker game.

Other members refer to time spent mentoring companies as “volunteer work” and think of their investments as a kind of enlightened philanthropy. Al Klosterman, a former chief technology officer, loves the fact that when investing in a medical-device company, he can dictate how the money is spent. “If the investment saves a few lives, isn’t that as good as investing in the local Habitat for Humanity?” he asks. “Some of the traditional nonprofits I give to, the money is used a lot more foolishly than by the companies I invest in.”

Jean-François Flechet and Johan Kars
Partners, Chef 24/7
Angel Investment: $60,000
This vending machine serves up a hot meal, drinks and dessert, but the real twist is the advertisements it displays to a hungry, captive audience. The angels hope this version will replace the snack machine.What these wealthy retirees have in common is that while they can spend their time however they please, what they choose to do is meet every third Monday (the day the country clubs are closed) in a bland conference room overlooking a parking lot. At a typical meeting, they discuss current investments, watch a PowerPoint pitch from a hopeful entrepreneur and discuss potential deals. The atmosphere is hardly electric: The uniform is loafers and pastel button-downs, the beverage of choice is bottled water, and the mood is disarmingly low-key, with most of the humor supplied by deadpan references to the overblown ex­­pectations of entrepreneurs: “He wants a three million valuation. Right now.” (Laughter.) They sometimes refer to people as “resources” and always refer to entrepreneur presentations as “dog and pony shows.” They exude the quiet confidence of those in a position to judge the competence of their brothers and sisters.

The attitude is understandable. While the angels have a screening committee and $200 application fee to weed out the “no hopers,” they still see all kinds of oddball business ideas: grocery-cart cleaning systems, home allergen testing kits, self-guided lawn mowers, powdered pasta sauces. And then there’s the endless stream of software ideas: for mental-health clinics and pathology labs, for restaurants and trucking companies. Charlie Sidman, a QCA investor and molecular genetics professor, says the ideas strike him as funny and sad at the same time. He says some seem to violate the laws of physics. “If you’ve seen it in the National Enquirer, we’ve gotten applications.”

Even when the company in question is a serious enterprise headed by an impressive founder, the angel-entrepreneur relationship seems at least partially predicated on the unspoken question: “If you’re so smart, why do you need our money?” Most of the angels have demonstrated their ability to start a successful business—the proof is in their millions. Meanwhile, the typical hotshot entrepreneur, armed with nothing more than a clever idea and a slick presentation, will insist on a handsome salary, operational control and a huge investment in exchange for a small share of his company. “You wonder what the guy is smoking,” says Habbert.

Deals with headstrong entrepreneurs brought disappointment early on. “The person has a CEO title for the first time, and they become a little god,” says Shipley. The angels still sigh over an investment in a new burn treatment. They say the brilliant scientist-founder proved to be a poor CEO; over the angels’ objections, he sold what should have been a hugely lucrative business for a piddling return. These days the angels avoid founders who are “pig-headed” in favor of folks who are “coachable”—that is, willing to do their bidding.

Still, most Queen City–funded entrepreneurs welcome the group’s input; some say they’d be lost without it. When she approached the angels last summer, 35-year-old marketing consultant Traci Metzger had worked on various incarnations of her software startup for eight years with little to show for it. The angels helped her rethink her business plan and sent her on errands akin to the daring feats knights are assigned in fairy tales. First, Metzger wrangled letters of recommendation from universities attesting to the need for her student-retention technology. Next, she sold the service to three colleges—never mind that the technology didn’t exist. “I sold vapor,” she says. Satisfied, the angels invested $315,000. If it weren’t for the angels, Metzger says, the now-blossoming company might still be in the concept stage.

Other entrepreneurs say the oversight verges on micromanagement. Phil Parks, founder of a now-defunct company offering voice-recognition software for doctors, says that when he needed more funding to improve his product, meetings with the angels deteriorated into nitpicking sessions. At one point, he says, the angels started relabeling categories on his spreadsheets. Julie Meek, who led a QCA-funded software outfit, says while the angels had wonderful ideas, responding to their constant questions became so time-consuming, she resorted to sending out a newsletter.

At times the club’s unshakable confidence in its expertise can be an Achilles heel. An obvious example, say several, is CH Mack. In 2001 the angels bought an 80% stake in the struggling patient-care software company and installed one of their own as CEO, thinking their collective experience could turn the company around. But while the company expanded its customer base, sales are well short of projections and profits haven’t materialized. This summer they hired a recruiting firm to find a new CEO, but some early investors say that move is coming too late—their shares were hopelessly diluted in the four funding rounds needed to keep the company afloat. Behavior like that, says Jeff Heinichen, one of the original investors, fits the definition of insanity: “Doing the same thing over and over, expecting different results.”

Mark Twain wrote, “When the end of the world comes, I want to be in Cincinnati, because it’s 20 years behind the times.” Cincinnatians offer this bon mot to outsiders as a shorthand way of explaining their risk-averse business culture, which is dominated by conservative Fortune 500 outfits like Macy’s and Procter & Gamble. In high-tech capitals like Austin and Seattle, entrepreneurs have friends, neighbors, lawyers and accountants who understand the startup process. “It’s part of the culture,” says Liz Stites, a Cincinnati consultant who worked in Silicon Valley. In Midwestern cities, by contrast, pioneers make it up as they go.

Patrick Walters
CEO, Cambiatta
Angel Investment: $400,000
The cyclist market never warmed to this performance-monitoring device, and the angels lost their entire investment. When Walters quit and took a job with a cycling company, the angels threatened to sue him over his noncompete agreement. As do investors. When the Queen City Angels launched in 2000, it was just five friends meeting in a seafood restaurant. One of their first investments was a medical-device company started by a member’s neighbor; they briefly considered naming themselves “The Motley Crew.” Enter Tony Shipley, a green-eyed über-extrovert who admits to once sitting on the boards of 15 different organizations. He’d recently sold his 380-employee software company and had no intention of slowing down. Shipley met with venture capital firms to learn their methods, established ties with folks who could refer promising startups and lured entrepreneurs out of the woodwork with free seminars and mentoring sessions. He also brought new members to the group—men with backgrounds in everything from market research to medical devices. As the club’s expertise grew, members were able to pool their knowledge and comfortably invest in different industries.

The angels have evolved from an informal club to a Cincinnati institution. Paul Darwish, a Harvard MBA, Cincinnati native and serial entrepreneur, used to tell people that if he hadn’t been born in Cincinnati, he’d leave. He considered it a parochial town where the rich huddled in country clubs, ignoring entrepreneurs in favor of more fashionable causes like the arts. The QCA changed all that. “They’re a godsend,” he says. But angels don’t do this work to be kind; they support Cincinnati’s startups to expand their own opportunities to make money. The strategy seems to be working. In its first year the QCA funded just three companies. In 2006 they funded nine new outfits, and this year they’ve got more prospects than they know what to do with. Moreover, their work has had a ripple effect: Ohio venture capital consultant Mark Butterworth says QCA now has a reputation as a farm system, preparing local startups for the big leagues of VC funding.

What all this effort hasn’t done is make the angels richer. So far, they’ve taken seven companies to the finish line: Three went broke, and four sold for a very modest return. Other investments will take years to pan out, and several are zombie outfits, effectively dead but still lurching along in search of fresh funding. The angels do have one very hot prospect—a local outfit that makes bank vaults and safe-deposit boxes—but only five members bet on this unlikely pony when the deal was struck in 2004. Were they Wall Street stock pickers, this abysmal record would get them canned.

In the strange world of startup investing, however, they’re doing just fine. Their performance is actually comparable to that of any angel group or VC firm out there, says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire’s Whittemore School of Business and Economics. Angels and VC pros alike expect that for every 10 investments, five will tank, a few will break even, and one or two will save the day. Moreover, if it’s at all typical, the QCA will likely beat the average VC fund in the long run. Angels are amateurs in the sense that they’re investing their own money, but their methods often rival the pros’ for sophistication—they just invest smaller amounts in what are often earlier-stage companies. And because they do riskier deals, over time angel groups typically earn an average of 20% to 40% annually, compared with 14% to 20% for VC funds, according to Sohl.

Of course, while every angel knows half his investments will bomb, failure is still hard to swallow, and some members have trouble handling it with professional detachment. Parks, the voice-recognition CEO, says that when his company tanked, one QCA board member “ripped me a new back end and told me I wasn’t cut out to be an entrepreneur.” Perhaps the ugliest episode involved Cambiatta, a startup offering a performance-monitoring device for cyclists. The product didn’t sell, and an already tense relationship shattered when the angels asked founder Patrick Walters to stay onboard for $800 a week while selling the company. Walters, broke and exhausted, refused. “I was spent,” he recalls. “I had nothing left to give.” Instead, he took a job with a cycling company in Wisconsin. Weeks later he got a letter from the QCA threatening a lawsuit over a noncompete agreement. The angels say they were protecting their investment, but a member who served on Cambiatta’s board remembers differently. “They wanted revenge,” says Jeff Heinichen. “They wanted to shoot the messenger.”

There can be an upside to this passionate amateurism: a willingness to invest in quirky long shots that might never pass muster with a cold-blooded venture capitalist. Consider one of John Habbert’s pet projects, a vending-machine startup consisting of two cheerful Belgians who endlessly tinker with their prototype in the basement of a small hilltop house in Newport, Ky. The entrepreneurs met Habbert through their lawyer, and he’s stood by them ever since, though it’s not always clear why. Their invention, a charming contraption with a mechanical arm straight out of The Jetsons, serves a hot meal on a tray with beverage and dessert while displaying animated ads. The creators hope advertisers will pay big bucks to reach folks buying their vending-machine dinners.

Founder Jean-François Flechet, a 34-year-old former market researcher at AC Nielsen, admits it’s been a bumpy road. When the angels lent him $50,000, they expected a working prototype in six months. It took 15. The engineer hired to build the mechanical arm suffered two heart attacks (“He liked to put nine shots of espresso in his Starbucks,” explains Flechet), and the custom-made microwave oven and refrigerator didn’t fit the machine’s frame. When Flechet ran out of cash, Habbert stopped by, pronounced the prototype a "nice science project" and doled out another $10,000. This time Flechet and his partner, Johan Kars, a former journalist who likes fixing old cars, built a prototype themselves—a snazzy, fully functional model dubbed “Chef 24/7.” This summer they proudly led Habbert into the basement and ordered him an organic bean-and-cheddar burrito. The machine blew a fuse. Habbert’s response? Keep going! He hopes the QCA will invest $300,000 for a production run. “These are two guys who put their hearts and souls into this project,” he says. “You gotta like that.”