How do angel investors and angel groups work? Where do you find them as an entrepreneur?
Angel investing has not only become trendy and highly profitable, it has emerged into being a powerful source of fuel for the national economy, jobs, and new innovation. For entrepreneurs, angels have become a primary source of funding, and for many startups, a vital part of their existence. How do angels and groups work? How is this type of fundraising different? How can founders connect with this money?
As described in my book, The Art of Startup Fundraising, high net worth individuals make up the bulk of the ranks of start-up investors. These individuals are often referred to as ‘Angel Investors’ or ‘Accredited Investors’. The term angel investor actually was born out of investors that financed the broadway shows back in the day.
While an angel is normally an accredited investor, this isn’t always true. And not all accredited investors are angels. Together, these individuals both have the finances and desire to provide funding and for many reasons, they are among the most appealing sources of funding for start-up founders.
While there are various levels and definitions of ‘high net worth’ individuals; accredited investors are defined as those with a net worth of $1M in assets or more (excluding personal residences), or they have $200k in income for the previous 2 years, or a combined income of $300k for married couples. This is all according to the definition established by the Securities and Exchange Commission (SEC).
Angel investors are individuals who invest in start-up businesses; normally in the early stages. This tends to be on Seed rounds of financing and also Series A rounds. Super Angels are those that invest checks north of $500K on Series A and up.
Angel investors also invest via family offices if they are ultra high net worth individuals. Family offices often go unnoticed or unrecognized by many entrepreneurs and start-ups. But they are a very significant force in the investment world and capital markets. So much so that they effectively lobbied Congress to provide family offices exemption under the Dodd-Frank Act. We’re talking about Rockefeller money.
Angel investors fill the gap between friends and family, and more formal venture capital funds. Some invest purely for profit. Others look to make an impact with their funds by investing in causes and industries they are really passionate about. This can range from sustainable farming to education and healthcare start-ups.
Angel investors invest their own money, where the typical amount raised ranges from $150,000 to $2,000,000. According to Richard Branson’s VirginStartups.org angels invest around $1B in startups in the UK each year.
Since angel investors are very often individuals that have held executive positions at large corporations, they can often provide fantastic advice and introductions to the entrepreneur, in addition to the funds. A Harvard report provided information on how angel funded start-ups had a higher chance of survival.
Angel investments are high-risk, which is why this strategy normally doesn’t represent over 10% of the investment portfolio of any given individual. What angel investors look for is a great team with a good market that could potentially return 10 times their initial investment in a period of 5 years. The exits, or liquidity events, are for the most part via an initial public offering or an acquisition.
According to the Halo Report, angel investors particularly like start-ups operating in the following industries: internet (37.4%), healthcare (23.5%), mobile and telecom (10.4%), energy and utilities (4.3%), electronics (4.3%), consumer products and services (3.5%), and other industries (16.5%).
Data collected by the Kauffman Foundation shows that the best estimate for angel investor returns is 2.5 times their investment even though the odds of a positive return are less than 50%, which is absolutely competitive with venture capital returns.
Reaching nearly $23 billion, angel investors are not only responsible for funding over 67,000 start-up ventures annually, but their capital also contributed to job growth by helping to finance 274,800 new jobs, according to the Angel Market Analysis by the Center for Venture Research at the University of New Hampshire. On the contrary, venture capital firms only invest in 1,000 new companies per year.
While angel investors contribute about five times less capital to start-ups than VCs, individual investments in start-ups grew by 36 percent from 2008-2012, while venture capital investments dropped by 8%, according to Dow Jones VentureSource. Thanks to the JOBS Act, need for new investments following the 2008 financial crisis, increasing awareness and new technology there were over 750,000 active angel investors by 2013 when the new regulations were starting to be implemented.
The dominating geographic area, in terms of number of angel investments, is Silicon Valley, however, Silicon Alley (New York City) is catching up quickly.
Six reasons these high net worth investors are an attractive source of capital for you:
They can lend additional value via advice from experience
Ability to raise more money through fewer investors and contacts
Fewer restrictions on raising money from accredited investors
They may put in more money later on
‘Birds of a feather flock together’ – meaning potential referrals to other angels
Flexibility in terms
Note that a Stanford study reports that 90% of all seed and start-up capital comes from angel investors.
Once you know who to pitch, it’s all about perfecting the pitch deck to close your round of funding. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was actually the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400M (see it here)
Angel Investor Groups
Angel investors are increasingly combining to form and join angel groups. According to historical data and the Angel Capital Association the number of angel groups multiplied by from just 10 in 1996 to over 330 in 2013.
During the last 15 years, angel investors have joined different angel groups in order to get access to quality deals. If you are not a Reid Hoffman, a Ron Conway, or connected somehow to one of the founding members of the start-up, it was certainly very hard to gain access and participate unless you were affiliated with one of the angel groups.
Some of the biggest angel groups that are most active include the New York Angels, Houston Angel Network, Alliance of Angels, Golden Seeds, Launchpad Venture Group, Robin Hood Ventures, or Tech Coast Angels amongst others.
There are a variety of reasons for this groups to come together, including:
Gaining access to deal flow
Lowering risk in investing
Increasing investment diversification
Ability to conduct better due diligence
Ability to make more sizable and meaningful investments
More power to control the success of startups invested in
These groups can give individuals more confidence in investing, which in turn can result in better terms for entrepreneurs.
Angel groups are typically organized by geographic region. Top angel groups appear to incorporate around 100-200 members. Some focus on a specific group of industries, while others are more open. Collectively these groups have invested in over 60,000 US based startups.
Finding Angel Investor Groups
There are a variety of ways to find angel groups, including:
Attending pitch night events
Through local coworking spaces and accelerators
Local such as Meetup events
Angel investor associations
The Angel Capital Association has an extensive online directory of regional angel groups around the US.
CB Insights’ algorithms were used to identify these top angel groups:
Life Science Angels
Queen City Angels
Boston Harbor Angels
Atlanta Technology Angels
Tech Coast Angels
Band of Angels
Upstate Carolina Angel Network
Launchpad Venture Group
Central Texas Angel Network
The Angels Forum
Sand Hill Angels
New York Angels
Alliance of Angels
Blue Tree Allied Angels
Arizona Technology Investor Forum
With a successful exit for your own startup, you may even become an angel yourself one day. The Angel Capital Association and Kauffman even offer guides on creating your own angel group.
Choosing the Right Angels for Your Fundraising Needs
Angels are individuals. Along with that comes an enormous variety of unique personalities and perspectives. Angel groups can help create more consistency, structure and organization in investments, while streamlining and simplifying the fundraising process for entrepreneurs.
Still, it is important to find the right fit. Factors to consider include:
Finding investors eager to fund in your location
Investors excited about funding innovations in your industry
Level of experience versus how much flexibility they will give you
If they are willing to be lead investors
If they often participate in follow up rounds
If they have a track record of successful exits
The level of due diligence and proof of concept they require
The amount they are willing to invest
True to their name, angels have really done wonders for many entrepreneurs and the startup ecosystem. Over the last decade the number of these investors has grown immensely as many individuals look to capitalize on the successes of their friends and peers. Many have organized as angel groups to learn, lower risk, and make more impactful investments.
Today, founders are almost spoiled for choice with such a variety of groups to approach. The key to success is finding the right matches, and presenting your pitch well.