Angel investors are wealthy businesspeople who invest time and money in startup, high-growth companies – usually after demand for their products has been validated by customers. Typical angel rounds of investment range from $150,000 to $1 million with multiple investors participating. Beginning in the mid-‘90s, angel investors began forming groups to take advantage of the efficiencies of investing together. There are now over 350 angel groups in the US and about 400 in Europe. Angel groups are organized as Networks and Funds and are managed by members, in some instances, and by managers in others.
Group members are typically retired, experienced businesspeople or entrepreneurs who have sold their businesses – and have the time and money to help startup entrepreneurs. The average angel is in his or her 50s, but many groups have members ranging in age from their 30s to their 70s. Angel members have traveled extensively as businesspeople and most are now looking for local investments, especially in familiar business segments.
Members of Angel Funds pledge to invest a fixed amount of money which is pooled and invested in 10-25 companies over several years. Members of the Fund work together to screen opportunities submitted by entrepreneurs for funding and, after validating the business plan, vote on investing in each deal. Once the Fund has committed to invest, individual members who like the deal often invest additional sums alongside the Fund. A member with experience in the business sector of each portfolio company is usually elected to the Board of Directors – mentoring the entrepreneurs, assisting with introductions to customers and partners and eventually helping the company be acquired by a larger public company. The Frontier Angel Fund (Kalispell, MT) is an excellent example of an angel Fund.
Angel Networks are groups of investors who work together to screen applicant companies and validate the investment opportunity, but then write individual checks to invest for their own accounts. Some members may choose not to invest, others to invest smaller amounts ($10,000 to $25,000) and still others may choose to invest larger sums ($25,000 to $100,000 or more). Members of Networks typically commit to helping manage the deal flow process of the group, to mentoring portfolio companies and to writing one or two checks per year to fund new and existing portfolio companies. The Bellingham Angel Group just north of Seattle is a great example of an angel Network.
Both models have advantages and disadvantages – the choice depends on the preference of the members in a given community. Funds tend to invest consistently over time, regardless of the economic business cycle, but take longer to organize because of the fund-raising aspect. Networks generally have better member engagement than do Funds and are preferred by members who want to make individual choices among good investment opportunities. But Networks sometimes have difficulty recruiting leadership from among their members. In the US, about 75% of groups are organized as Angel Networks.
Angel groups are either member-managed or manager-led. Group managers do most of the “heavy lifting” for angel organizations, leading the screening process, heading up deal validation (a process called “due diligence”), maintaining mailing lists, arranging meetings, etc. Managers are compensated with a combination of salary and a share of the profits of the group. Members assist the manager in due diligence and serve as mentors and directors after investment.
Member-led angel groups rotate leadership among volunteer members with only minimal administrative assistance, usually from a part time or shared administrator. Angel groups have difficulty raising the operating capital necessary to pay group managers, while member/leaders can burn out unless group members take active roles and participate in leadership succession. Both the Frontier Angel Fund and the Bellingham Angel Network are member-managed angel groups.
Angel groups are located in every state in the union and are easily found on the Internet using popular search engines. Angel groups each have a website in which they explain their Criteria for Investment and their deal flow process. Most do not require that entrepreneurs know a member and encourage applicants to complete an online funding application. For a directory of Angel groups, go to the website of Angel Capital Education Foundation at www.angelcapitaleducation.org.
Columnist Bill Payne is an entrepreneur and angel investor. He may be reached by email at [email protected] or see his website at www.billpayne.com where his book The Definitive Guide to Raising Money from Angels is available. This is the eighth in a series of monthly articles in the Entrepreneurs’ Corner written by Bill Payne for the Flathead Beacon.