By ANGUS LOTEN

Budding entrepreneur Eric Bolden had never met an angel investor until he tried pitching a business idea to a few of them.

Entrepreneurs are finding that it’s easy to start a business but hard to build one. Angus Loten discusses how entrepreneurs are linking up with angel investors on digits.

Last week, the retired prison guard showed up at a midtown New York loft for an event that connects entrepreneurs with investors to see whether he might get, say, $50,000, from the angels—wealthy individuals who provide capital to start-ups with the potential for fast growth.‬

Mr. Bolden, dressed in a suit and tie, took to the microphone for a two-minute pitch, clutching his crumpled notes of the key selling points for his idea—a police handgun identification signal, complete with a flashing alert. The proposed device is meant to protect plain-clothes officers from friendly fire.‬

‪Angel funding has become increasingly available to entrepreneurs like Mr. Bolden, whose product ideas are in the earliest stages.‬

Of the $8.9 billion in total investments by angels in the first half of this year, 39% went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period in 2010, according to data from the University of New Hampshire’s Center for Venture Research.‬

The number of businesses overall that received angel funding over the first half of the year increased 4.4%, compared to the same period a year ago, with the average angel investment measured at $338,400 per start-up, according to the data. Jeffrey Sohl, director of the Center for Venture Research, says he expects start-up investing by angels to remain solid in 2012.‬

In the first of a series of reports that looks inside the world of venture capital and tech start-ups, WSJ’s Andy Jordan profiles a start-up “chatID” as it goes through an accelerator program and also looks at what some consider a glut of seed-stage companies.

The 48-year-old New Yorker Mr. Bolden has sunk more than $60,000 of his savings into building a prototype of his police handgun signal—a concept that came to him two years ago after an off-duty cop was shot dead by fellow officers while pursuing a robbery suspect. ‬

‪”I thought I could walk in there with a great idea and someone would write a check,” Mr. Bolden said after making his presentation last week. ‬

But, as Mr. Bolden is discovering, many angels are more demanding than they were before the recession.

“If you don’t have any skin in the game, how can you expect angels to put up their own money,” says Katherine O’Neill, executive director of JumpStart New Jersey Angel Network, who attended the networking event last week. She wasn’t particularly impressed with any of the pitches she heard, she says, because she thought the business plans seemed “pretty unformed.”

David Freschman, founder of the ARC Angel Fund, says angels are now more likely to ask founders and entrepreneurs to provide them with prototypes of fledgling products, beta-tested websites and extensive market research.

One possible factor driving angels’ greater diligence is the rise of angel alliances, with individuals banding together to invest in start-ups to spread the risk.

Between 10,000 and 15,000 angels are believed to belong to angel groups in the U.S., which spread risk around by syndicating deals between members, according to the Angel Capital Association. The Overland, Kan.-based trade group says the number of angel groups has tripled since 1999.‬

The group-investor approach often results in a more formal review process because potentially dozens of people have to review and discuss the possible risks and rewards, Ms. O’Neill adds.‬

‪Another potential factor: an understanding among angels that venture capital remains very hard to come by for midstage companies.‬

‪Without this venture capital funding down the road, it could be more difficult for an angel-funded start-up to ever become profitable, or to be viewed as an attractive acquisition target by a larger company, many angel investors say.‬”You don’t want to build a bridge to nowhere,” says Josh Lerner, who teaches finance and entrepreneurial management at Harvard Business School.

‪In response to angels’ increased scrutiny, many entrepreneurs say they are spending substantial amounts of time and money on tools, props and research that could help demonstrate the viability of their ideas in the marketplace.‬

“There’s far more scrutiny now,” says Max Belenitsky, an entrepreneur who spent the past two years trying to get investors to notice his Text-A-Cab smart-phone reservation system for taxis and limousines.

A former vice president at Goldman Sachs Group Inc., he says he raised $100,000 from friends and family and now needs as much as $500,000 for further development and marketing costs to “flip the switch” and take payments from customers on the website.

“They want to see implementation,” he says of potential angel investors. “They want to see the first 1,000 users [of the website] and how revenue is generated.” ‬

Liza Deyrmenjian, the founder of ShopToko.com, an online fashion and accessories wholesaler for independent retailers, says prospective angel investors in her company have asked for a breakdown of all the recent transactions on the site, as well as specifics on her target market and other data. After raising $250,000 from friends and family to get her site up and running in October, she is now seeking an additional $1.5 million to scale up and reach more retailers.

“They want to see a business that is up and running,” she says.‬

To be sure, there’s a chance that angel investors could lose their heightened appetite for investing in start-ups.‬

About 58% of venture capital professionals say they expect there to be an overall shortage in seed or early-stage funding in 2012, according to a new survey from the National Venture Capital Association and Dow Jones & Co. Dow Jones owns also The Wall Street Journal.‬Venture capitals are institutional investing funds.

Of course, many seasoned entrepreneurs with proven track records are and will remain able to get funding with little more than a back-of-the-envelope, or informal, pitch, angel investors say.

Mr. Bolden says he is polishing his pitch. He is currently developing a website that he hopes may help to lure angel investors, including those outside of New York. The site will show video demonstrations of how the gun signal works.

Building it may cost him another few thousand dollars at the very least, he says.‬

—Zoran Basich contributed to this article.‬

Write to Angus Loten at angus.loten@wsj.com

By KAREN BLUMENTHAL

What does being “underwater” in your house really mean? Probably not that you’re drowning.

The number of underwater homeowners — those who owe more on their mortgages than their home is now worth — has been growing sharply since 2006 as real-estate prices have tumbled. By some estimates, between one in six and one in eight homeowners are in that position, most of them people who bought homes in the past few years or who put down small or no down payments.

This worries economists and policy makers, since owing more than your home is worth is the first step toward foreclosure. And it’s a concern to the rest of us because foreclosures are roiling the financial markets and, closer to home, they drag down our neighborhoods. (Most people who still have equity, by contrast, would rather sell their houses at a loss than lose what’s left of their investment.)

In response to concerns about rising foreclosure and delinquency rates, federal regulators are studying possible new programs aimed at needy homeowners. There are concerns that such programs could attract a flood of applications from those who don’t truly need assistance or encourage lenders to push homeowners into foreclosure. At the same time, lenders such as J.P. Morgan Chase and Bank of America have committed to working on new loan terms for the most-distressed homeowners.

But experts who have studied previous sharp housing downturns in Texas, California, New York and Massachusetts say that being underwater, while unpleasant, doesn’t lead huge numbers of homeowners to default on their mortgages and end up in foreclosure.

Christopher L. Foote, Kristopher Gerardi and Paul S. Willen of the Boston Federal Reserve Bank studied more than 100,000 homeowners who were underwater in Massachusetts in 1991 and found that just 6.4% of them lost their homes to foreclosure over the next three years, according to a paper published in the September Journal of Urban Economics. The vast majority of homeowners simply continued paying as usual because they focused on the affordability of their payments, not on what they owed, and they believed home values would eventually recover.

The economists found that homeowners typically lost their homes only after at least two things happened: Their home values dropped and they either couldn’t afford the payments or stopped making payments after losing hope that prices would eventually recover.

Homeowners in California also were more likely than expected to keep paying during the deep 1990s slump, says Richard Green, director of the Lusk Center for Real Estate at the University of Southern California. More people turned in their keys in Ohio and Michigan during the difficult 1980s downturn because they lost faith in an economic turnaround.

Typically, homeowners fall behind after a job loss, divorce or serious illness. In the current downturn, foreclosures are higher than in previous cycles because more homeowners reached beyond their means to buy their homes and simply can’t keep up the payments. As a result, the Boston economists project that up to 8% of underwater Massachusetts homeowners could lose their homes between now and 2010 — a significant amount, but still not catastrophic.

So what does this all mean for you?

If you have a low-interest fixed-rate loan, you have a valuable asset that might be hard to replace in the current market, no matter what your home’s value is. Keeping that mortgage current has some value, even if it means cutting other household expenses.

In addition, the penalties for defaulting are great. In most cases, walking away from a mortgage can knock a top credit score down to the cellar, says Ethan Dornhelm, a senior scientist at Fair Isaac Corp., which sells credit-scoring formulas to credit bureaus.

A person with a stellar credit score from the high 700s to the top score of 850 would see it drop more than 200 points. A person whose credit score is lower may see it fall by fewer points, but still end up with a score in the mid 500s. At that level, reasonably priced new debt, from credit cards to car loans, will be out of reach. In addition, a default could lead landlords and utilities to require more cash up front and even affect your job prospects.

If the borrower continues to pay other debts on time, the score will climb gradually, though it may take three to five years to return to “good” scores, from the mid-600s and up. Scores of 790 or more — which are rewarded with the lowest interest rates — won’t be attainable for at least seven years, when the default blemish finally disappears, Mr. Dornhelm says.

Fannie Mae requires borrowers who have lost their homes to foreclosure to wait five years before it will accept a loan from them, though borrowers who had extenuating circumstances, such as an illness or job loss, may requalify within three years.

What’s more, lenders in most states can go after homeowners for an unpaid balance on a mortgage. That’s a real risk, especially if you have other assets.

The longer you stay in your house, the better the chances of making it through this down cycle. Though a return to peak prices may take five or 10 years, some housing markets may start to bounce back once credit becomes more available. Meanwhile, you’ll be reducing your mortgage as you make your payments.

Lenders aren’t going to renegotiate just because prices have fallen, but if you truly can’t afford your payments, contact your mortgage servicer to see if you can rework your interest rate or work out new payment options. The federal Hope for Homeowners program, which began Oct. 1, is intended to provide some relief if lenders will agree to reduce the loan amount to 90% of the home’s current value.

If you can’t get help from your lender, try contacting a credit counselor certified by the Department of Housing and Urban Development. These counselors have direct access to lenders’ loss-mitigation departments, which consumers don’t, says Natalie Lohrenz, counseling administrator for Consumer Credit Counseling Service of Orange County, Calif. A list of HUD-certified counselors is available through Hope Now, a consortium of lenders and counselors. (Call 888-995-HOPE or go to www.hopenow.com.)

If you need to sell the property and can’t afford to cover the shortfall, your lender may agree to a “short sale,” in which you sell at a price below the mortgage amount. This is a much more complicated transaction to pull off than a regular home sale, though, and it may hurt your credit score if the lender reports that you failed to pay off the whole obligation.

• Email: familymoney@wsj.com

Printed in The Wall Street Journal, page D1

By RACHEL LOUISE ENSIGN

The readers’ picks narrowly beat the darts in Sunday Journal’s 44th Investment Dartboard Contest, extending their winning streak to four in a row.

But the tepid market of the second half of 2011 led both the readers and the darts to overall declines.

The reader with the biggest gain in the six months ended Dec. 31 was Minneapolis Star Tribune reader Evan Stein. His stock, Caribou Coffee, was the only reader pick to end in the green, up 5.4%.

“I’m a big fan of the coffee,” says the Indiana University undergraduate. “With the new year and how well coffee’s doing right now, there could be a [further] expansion.”

Christine Luttermoser’s selection, retailer Abercrombie & Fitch, fared the worst with a 27% decline. That’s likely because the retailer tends to be “higher priced and they don’t put things on sale nearly as much as other companies,” says the Harrisburg Patriot News reader.

As a group, the six readers’ picks fell 12.8%, compared with a 13.1% loss for the six stocks chosen randomly by darts thrown at stock pages. Sunday Journal contributor Sarah E. Needleman’s picks were up 1% overall.

The Dow Jones Industrial Average was down nearly 2% over the same period.

The darts have historically beaten the readers, with 26 wins out of 44 contests.

By SARAH E. NEEDLEMAN

Sylvester Chisom began paying a consultant last summer to blog on Twitter, post status updates on Facebook and run marketing campaigns on both sites for his auto-detailing business.

He thinks the service, which costs $450 a month, is worth it. “It’s just better having somebody else dedicated to thinking of stuff to put up,” says Mr. Chisom, co-owner of Showroom Shine Express Detailing LLC in St. Louis.

Some small-business owners, overwhelmed by the time commitment required of marketing their products and services via social media, are hiring consultants to lend a hand. But the price of such support can vary widely based on the extent of work involved, and many entrepreneurs with already meager resources for marketing and advertising may need to think carefully before taking on the extra cost.

The start-up 3 Green Angels, for example, charges clients a $400 fee to organize Twitter parties — real-time discussions on specific topics. Everywhere LLC, another specialty firm in Atlanta, charges clients up to $20,000 to arrange three streaming video press conferences led by popular bloggers.

Other agencies simply tack on social-media support as part of a package of advertising and public-relations services. Red Square Agency Inc., in Mobile, Ala., charges clients around $200 an hour, and ThinkInk LLC charges $10,000 to $20,000 a month for the integrated services.

Showroom Shine’s Mr. Chisom says he’s received several inquiries from potential customers who said they learned about his company through a recent promotion on Facebook. Revenue and traffic to his company’s Web site are up slightly from this time last month, he adds.

But Jonathan Zadok, co-owner of the Coffee Groundz LLC in Houston, says he wouldn’t pay another firm to blog on behalf of the four-year-old café.

“The idea with Twitter is that you get close to an immediate response,” he says. With an in-house person handling it, “there’s no middle man that has to go check with the company,” he says.

Mr. Zadok says last fall Coffee Groundz’s general manager, J.R. Cohen, set up profiles for the café on Twitter and Facebook. Customers started tweeting orders and special requests such as booth reservations, and in-store events promoted on the sites drew crowds three times as large as those previously advertised through signs and other traditional means.

Mr. Cohen, 31 years old, says he simultaneously posts blog entries on Twitter, Facebook and his employer’s Web site three times a day, often from his BlackBerry. He receives text-message and email alerts whenever messages are posted to Coffee Groundz’s feed so he can respond, if necessary, in a timely manner.

Mr. Cohen taught himself how to use Twitter and Facebook in about a month despite being someone who’s “not tech savvy at all,” he says. He estimates he devotes no more than 30 minutes a day to managing his employer’s presence on social media. “That’s really all you need,” he says.

Larry Chiagouris, professor of marketing at Lubin School of Business at Pace University, says it makes sense for some companies to pay for help to quickly learn social-media basics. But to use sites like Twitter and Facebook effectively, he says small firms typically need to be in control to show they are legitimate and sincere. “Unless a third party lives with you a long time, they can’t do that very well,” he says.

Some small-business owners say they are paying only for training and will eventually take full responsibility for managing their companies’ day-to-day presence on social media. Still, others say they need continuous support for handling certain tasks and promotions because they lack the necessary manpower and expertise.

Back of the House USA LLC, a St. Petersburg, Fla., provider of back-office support to solo entrepreneurs, falls into the latter category. Founder Erik Vonk says he and the firm’s 12 employees are getting “technical guidance” in using social media from consultants at Everywhere. But he adds that any opinions expressed on the sites “are ours.”

Back of the House has been paying Everywhere a monthly retainer since the spring and expects the social-media training to wrap up late next month. Afterward, Everywhere’s consultants will continue to help the firm take advantage of social media by organizing special promotions, monitoring what’s being said about the company and more.

The service is costing Back of the House between $5,000 and $15,000 a month (Mr. Vonk declined to be more specific).

So far Mr. Vonk says the investment is paying off. “I’m learning enormous amounts about how social media work, where to find the right software, how to search, what lingo to use, etc.,” he says.

Write to Sarah E. Needleman at sarah.needleman@wsj.com

Printed in The Wall Street Journal, page B5

By KRISTINA PETERSON

WASHINGTON—-Amazon.com Inc. “strongly supports” federal legislation permitting states to collect state sales tax from Internet retailers, so long as few companies are permitted to duck the requirements, an Amazon executive said at a congressional hearing Wednesday.

Amazon is backing new sales-tax proposals but some small businesses are worried it may hurt them in the end, Stu Woo reports on digits. Photo: AP.

Though the Seattle-based online retailing giant has clashed with several individual states this year over efforts to gather sales tax, Amazon supports “an even-handed federal framework for state sales tax collection,” Paul Misener, Amazon’s vice president for global public policy, said at Wednesday’s House Judiciary Committee hearing.

“Amazon strongly supports enactment of a federal bill with appropriate provisions,” Mr. Misener said.

Earlier in November, a bipartisan clutch of 10 senators introduced a bill that would allow states to require online and catalog retailers to collect sales tax. Currently, online retailers are not mandated to gather state sales tax in states where they have no physical presence, often placing them at a competitive advantage over local brick-and-mortar stores.

“What we’re doing today is exploring the need for legislation to level the playing field between small businesses and online retailers,” Rep. John Conyers of Michigan, the top Democrat on the House Judiciary Committee, said at Wednesday’s hearing. “Local mom-and-pop” stores, and other businesses, “suffer when they have to collect a sales tax but online retailers don’t,” he said.

The National Governors Association estimated that states are currently missing out on collecting more than $22 billion each year in sales tax on goods sold online or through catalogues.

The 10 senators—who include Michael Enzi (R., Wyo.), Dick Durbin (D., Ill.) and Lamar Alexander (R., Tenn.)—introduced a bill that would allow states to choose whether to collect sales tax from out-of-state businesses. A state would be able to collect sales tax after 90 days if it joins the Streamlined Sales and Use Tax Agreement, which helps coordinate state tax rules and definitions and incorporates new technology. States also have the option of not joining the coalition, but would have to adopt certain simplification requirements to become eligible to collect the tax. Bills in the House would also enable states to collect sales tax from online retailers.

States’ ability to bring in sales tax from remote businesses has been a contentious issue for decades. The U.S. Supreme Court’s 1992 decision in Quill v. North Dakota held that online retailers don’t have to collect sales taxes in states where they don’t have a physical presence, but left room for Congress to resolve the issue. Wednesday’s hearing is focused on the constitutional limitations on states’ authority to collect sales tax from Internet retailers.

Thanks to modern technology, “widespread collection no longer would be an unconstitutional burden on interstate commerce, and Congress feasibly can authorize the states to require all but the very smallest volume sellers to collect,” Mr. Misener said. However, the Amazon executive stressed that few businesses should be freed of obligations to collect the tax, if a federal law is passed.

The threshold for exempting businesses “must be kept very low to attain the objectives of protecting states’ rights, addressing the states’ needs, and creating fairness among sellers,” Mr. Misener said.

The bill currently proposes to exempt online sellers with less than $500,000 in annual sales. Mr. Misener argued that only 1% of online retailers sell more than $150,000 per year.

Rival online retailer eBay Inc. countered that small Internet retailers need protection to keep them competitive against larger retailers. Allowing states to force them to collect sales tax “means that the shopper will be less likely to buy from small retailers on the Internet,” Tod Cohen, eBay’s vice president and deputy general counsel, said in his testimony Wednesday. If a federal bill is passed, “eBay supports robust protections for small business retailers,” he said.

The National Retail Federation said the current tax collection laws discriminate against brick-and-mortar stores.

“In addition to the pricing disadvantage caused by sales tax being included in the cost of the purchase from the brick-and-mortar store, local stores also bear a significant compliance burden for collecting the tax,” David French, the National Retail Federation’s senior vice president of government relations, said in a statement Wednesday.

–John Letzing and Stu Woo contributed to this article.

Write to Kristina Peterson at kristina.peterson@dowjones.com