Origin of Angel Groups
Angel investors earned their name in the 1950's when wealthy individuals started investing in theatrical shows. Fast forward 64 years, angel investors are individuals that make investments in startup companies with round sizes increasing to an average of $980K per deal with pre-money valuations circling the $2.7M mark, according to a recent HALO report.
The aim of this ecosystem built by angel investors was primarily driving by the need to crowdsource startup investment opportunities and more important, share in the due diligence process. The driving value of this infrastructure was that each angel's potential experience and industry expertise helped bring a holistic view to guide sound investment decisions..
Without a doubt, the Angel Group model was very successful in the offline world for the past 80 years. First, experienced angels had more people participating in deals and deep expertise to contribute in the screening stages. Second, it was beneficial for individuals that didn't have access to startup investment opportunities either due to lack of connections, time or geographical barriers.
In the past, being part of one of these Angel Groups was a fantastic way of getting in front of entrepreneurs building businesses that propel innovation forth and shape our society on, especially if you were located outside of the major tech hubs like Silicon Valley or Alley.
Members that are admitted to these groups are for the most part the elites of our society that meet the Securities and Exchange Commission's (SEC) accredited investor definition. This means each individual is either making over $200K per year or that they have $1M in assets excluding their primary residence. With this in mind, the number of accredited investors is just 1% of the US population.
In essence, we could arguably state that people qualifying under the SEC's definition of accredited investor are very busy individuals with an agenda that can hardly accommodate additional activities such as the ones listed above that are required in order to be a member of an Angel Group.
Distribution of groups and deals
To add some context around angel investing, according to the Angel Capital Association, there are over 330 Angel Groups in the United States and Canada that are active within the startup community. Angel Groups in the US alone are responsible for investing over $228M in a total of 170 deals during Q1 in 2014. Transaction details can be found on CB Insights.
The most active Angel Groups in the US according to the August 2014 HALO report are: Alliance of Angels, Angel Investor Forum, Central Texas Angel Network, Desert Angels, Houston Angel Network, Launchpad Venture Group, Robin Hood Ventures, Sand Hill Angels, Tech Coast Angels and Wisconsin Investment Partners.
Moreover, the Halo Report, published a study stating Angel Groups particularly liked startups operating in the industries of internet (37.4%) and healthcare (23.5%). Outside of those two leading verticals, angels backed mobile & telecom (10.4%), energy & utilities (4.3%), electronics (4.3%), consumer products & Svcs (3.5%), and other industries (16.5%).
Requirements for Angel Group members
Some of the requirements that angel groups establish are minimum investments in companies that are screened by the group every year. This investment is normally structured via investment vehicles that invest in the startup or by having the individuals investing directly in the company.
Additionally, members of these groups have the following obligations:
Attend networking events,
Participate in pre-screening sessions of companies seeking capital that are looking to get in front of the membership
Involvement with onsite demo days where pre-screened companies pitch to the entire membership
Disadvantages of Angel Groups
One important disadvantage of being a member of an Angel Group relies on the lack of diversification. Companies that seek capital from these groups receive checks with a median size of $50K. Having in mind that startup companies fail 90% of the time, it is very hard to find winners reason. The only way to guard against this (unfortunate reality) is to hedge your bets by diversifying investments into a basket (multiple) of startups
Diversification is critical, as the rule of thumb of successful angel investor portfolios is that 1/3 of companies will run out of money and die, another 1/3 will break even, and the rest will provide returns ultimately covering the losses from the companies that failed.
Another component that makes it hard for Angel Groups to scale is the due diligence process. Being a very manual process with a median time of 20 hours invested on each deal, which really limits the amount of deals that can be reviewed per month as the HBAN study from 2007 noted.
In addition, Angel Groups are very much focused on the location where they are based, which makes it very difficult to come across companies that are based in other regions. Now with online platforms you have the opportunity to source deals from all over the world.
Startup investing platforms: the beginning of a new era
The oldest platform in the startup investing arena is not even 2 years old. However, with the advent of online platforms, angel investors will not have to take time out of their busy schedule anymore in order to participate in the required activities that are established by joining an Angel Group. Angels will now have the chance to navigate and source deals from the comfort of their home or from anywhere in the world. This includes interacting with other users online for crowdsourcing the due diligence process via "deal rooms" or online groups that could be established on some of these sites.
Furthermore, with platforms like Onevest there is no such thing as a minimum investment to become a member and membership is completely free.
The secret sauce of these sites is diversification. As an inventor, now you can invest that same $50K median investment into 5 different startups, increasing your chances to find the winners. This is a completely different approach in comparison to the offline investing norms, investors are required to invest minimums that range anywhere from $25K to $150K for any single investment opportunity.
Companies like Kodak or Blackberry failed to adjust to major shifts in market conditions. That made them fall from grace which resulted in loosing their leadership position that previously differentiated them from other competitors.
My predictions is that the Angel Groups who find a way to keep up with rapidly changing conditions we're experiencing from the internet, social networks, and evolving laws, will survive so long as they evolve congruently with the times. Some may partner with with existing online platforms or by developing technology that would streamline the process. And if they don't they'll become extinct
On the contrary, Angel Groups that decide to keep old traditions will end up failing and will have to shut down their doors as their members explore new venues.