In 2004 James Surowiecki, New Yorker business columnist, wrote the Wisdom of Crowds which recognizes that the opinions of groups is routinely more accurate than those of most individuals in the group. In particular, the author demonstrates that large crowds consistently outperform experts within the group in decision-making. I sense that the Wisdom of Crowds defines a winning strategy for angel investors, especially those who are members of angel funds.
Angel investors invest time and money in seed and startup companies. Since the mid-90s, many angels have discovered the efficiency of investing as part of an angel group. There are two types of angels groups (see Models of Angel Organizations): Networks in which member angels screen and scrub deals together and then make individual decisions to invest for their own accounts. Angel funds, on the other hand, pool their monies in advance, screen and scrub deals together and then vote on making an investment from the fund. The Frontier Angel Fund (Kalispell) is an example of an active angel fund and one for which the strategy suggested by the Wisdom of Crowds might be quite useful.
To quote Surowiecki, “Diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromising. An intelligent group, especially when confronted with cognition problems, does not ask its members to modify their positions in order to let the group reach a decision everyone can be happy with. Instead…the best way for a group to be smart is for each person in it to think and act as independently as possible.”
Surowiecki’ s message for optimizing returns in angel funds is that members need to be as independently informed as possible on each deal, debate the pros and cons of each investment and then vote to make the best collective decision.