BUILDING AN ANGEL GROUP

INTRODUCTION

Angel investors often work in groups for three key reasons:

  • To access more and higher quality deal flow than can be found by working alone.
  • To reduce individual effort by dividing up the work.
  • To reduce risk by tapping into the group’s varied experience.

Group participation also allows individual investors to spread their capital across more deals, resulting in better diversification and reducing risk.

Less than 20 local angel groups have been formally established in Canada, compared with more than 300 in the U.S. While each network is uniquely designed to serve the interests of its members, these groups have many characteristics in common, such as the investment screening process, and many that vary, such as organizational structure. Four groups are profiled in this chapter.

KINGSTON ANGEL NETWORK

The Kingston Angel Network was launched in November 2001 with an informal dinner hosted by the Kingston Economic Development Corporation (KEDCO). This was in response to interest expressed by recent arrivals to the community with angel investing experience. Using the personal networks of business people in the community, organizers invited approximately 20 people to discuss the need and opportunities for angel investing in Kingston.

The guests identified a clear gap in the availability of seed capital below the thresholds of venture capitalists. Companies requiring investments of over $1 million were able to tap into venture capital funds to meet their needs. However, small businesses needing investments of less than $1 million had few sources of funding and there were very few deals. Consequently, many of the area’s prospective entrepreneurs were moving to larger centres such as Toronto, Montreal and Ottawa where they stood a better chance of attracting the financing needed to bring their ideas to fruition.

Angel Investor Group

Angel Investor Group

Following that first dinner, 12 investors, with the support of KEDCO, formed an ad hoc group and began meeting monthly as the Kingston Angel Network. They were motivated as much by the need to assist the economic development of the community as by the goal of achieving superior financial returns. The group quickly ruled out pooled investments, as no one wanted to be responsible for investing someone else’s money. Instead, the group decided to cooperate on uncovering deal flow and evaluating opportunities, and then to invest as individuals where appropriate.

Finding and evaluating deals

KEDCO provides the public interface for the angel group through its Web site and offices. Entrepreneurs fill in a one-page summary, which can be downloaded from the KEDCO Web site, for screening and coaching by KEDCO staff. This also provides a coarse filter to ensure that proposals sent to the angel group meet its basic requirements.

Following this initial screen, applications are passed onto the members of the network. If a member expresses interest in the proposal, the entrepreneur will be scheduled to present at an upcoming meeting. If not, the proposal will receive one final review at the next monthly meeting. Presenters are typically allotted 20 minutes, with an additional 20 minutes for questions. Investors interested in pursuing the opportunity create an ad hoc committee to pursue due diligence and negotiations. If there is no interest in the proposal, the entrepreneur is given feedback on the reasons, and if possible, the names of contacts who may be able to help.

In its first year, the Kingston Angel Network considered 24 proposals and closed one deal. At 4 per cent on this albeit small sample set, the close rate is close to the range of one to three per cent typically found in angel investing. While membership of the group has fluctuated, there remain 12 members, including six who are active on a regular basis. Four of these individuals participated in the lone deal to be closed.

Investment Strategy

Investments don’t necessary have to be made at early stages or in any particular industry. Any proposal that represents a sound business opportunity, while fulfilling community objectives, is looked at seriously.

VANCOUVER ANGEL NETWORK

The Vancouver Angel Network was created by a small group of like-minded investors in 1999. The group began as a casual meeting of approximately 20 people. These were individuals who had been successful in running their own businesses and who were looking to be active participants in the businesses they invested in.

From these informal meetings a more formal structure evolved. Today, there are over 200 members, with 40 or 50 attending the network’s monthly breakfast meetings. The philosophy of the group is simple. People are there to make evaluations of serious proposals brought forth by the local business community. The group meetings also provide the investors with the opportunity to get to know each other and trade stories and experiences about what they are currently working on.

Finding and evaluating deals

Deals are brought to the attention of the membership through a structured, if somewhat informal, process. An angel member must sponsor a prospective business in order to bring it in front of the group. To be a sponsor, the investor must work with the network and be interested in making a personal investment in that company. By making an individual member do this initial due diligence, the group avoids having to deal with a formal application and screening process.

Approximately one in four presentations made to the group receive capital. The investments range from as low as $25,000 to as high as $4 million. The group has a definite technology focus and only looks at applications from local Vancouver businesses.

Three or four companies are brought before the group at each monthly meeting. The meetings begin at 7:30 a.m. and typically last two hours. Each presentation is restricted to 15 minutes; the presenters have ten minutes to present to the group, with five minutes reserved for questions. The presentations are not intended to spark a detailed discussion, but to gauge general interest among the group.

Generally speaking, presenters do not listen to other presentations. At the end of the meeting, each business’ sponsor leads a discussion on the presentation, without the presenter in the room. Gauging interest is normally a simple process, with people just speaking their minds. Often it becomes clear very quickly who, if anyone, is interested in the opportunity.

A nominal annual fee is used to defray the minimal administrative costs and to provide coffee and muffins for the breakfast meetings. No presenters or investors are charged for attending the seminars.

OTTAWA ANGEL NETWORK – BAND OF SCOUNDRELS

The Band of Scoundrels, formed in 2001 by several individuals to facilitate investing in the Ottawa community, is a general partnership consisting of eight individuals and two corporations. It is structured as a pooled interest with a formal process for selecting investments. Rather than providing a forum for individual investors to select targets, the Band pools the members’ funds and decides as a group on a per investment basis. Decisions are made by voting, with a 70 per cent vote carrying the day.

Finding and evaluating deals

Band members nominate candidates to present to the group; however two members of the Band must examine the deal before agreeing to hear the presentation. The champion or sponsor is responsible for ensuring the necessary information is presented.

While each member of the organization shares equally in the financial risk, workload varies among the members depending upon availability.

The Band meets on the first Monday of each month over dinner and companies are given one hour to make their presentation. Following the presentation, the candidate is asked to leave. The members of the Band then go around the table to vote “yes”, “no” or “yes but.” “Yes but” requires the company to provide further information; if satisfactory, the vote becomes a “yes.” As soon as four “no’s” have been registered, the deal is dead. Once a decision is made to pursue an investment, the major conditions of a term sheet, such as valuation, are considered.

Follow up discussions to resolve the “yes buts” are performed by phone and e-mail. If the e-mail message has not been responded to within five business days, then the recipient is deemed to be in agreement with the e-mail

The Band actively works with other syndicates or early venture capital groups to raise larger amounts of money for potential investments. In its first 18 months, the Band invested in four deals with another two in progress. Four other opportunities, which had been approved by the group, fell through during negotiations and final due diligence. Decisions as to valuations are made at the group level, where parameters are set defining minimum or maximum values. It is then up to the champion to negotiate the specific terms with the company.

LONDON ANGEL NETWORK – THE TECH ALLIANCE VENTURE GROUP

London is home to many leading institutions, including University of Western Ontario, Fanshawe College, and major hospitals and research centres. Many residents and graduates have started innovative companies in the life sciences, information technology and advanced manufacturing sectors. Recognizing that these start-ups and early-stage companies require capital, a number of angel investors and other stakeholders have formed a network with the goal of bridging gaps in early stage financing and promoting small business growth in London.

Over the years, the London Venture group has taken advantage of several government programs to assist network angel investors and innovative businesses. The group has also attracted a significant number of volunteer members who provide support to high potential companies at no cost. Over time, a list of investors has been compiled that is used to contact angels regarding investment opportunities.

There is no pooling of funds and decisions regarding investments are left to individuals. That being said, investors have followed each other on deals after other members have completed the background research and due diligence.

The London Venture Group joined the TechAlliance to share resources and to expand the number of volunteers and angels available to assist in the growth and success of innovative companies. The TechAlliance Venture group offers acceleration services to the businesses and angel education services for potential angels. These are discussed below.

Finding and evaluating deals

The Venture Group Acceleration encourages companies, which are looking for financing, to present a business plan for review and follow up. When a potential business seems promising, the group assigns two or three of its members to act as advisors to that business. These advisors spend several months getting to know the people and the company. They attend regular meetings with the company and assist in developing the presentation that will be made to the rest of the group members. Once the advisors are satisfied that the business is worth investing in, the principals will be allowed to present to the other angels.

If the presentation sparks interest, the members of the group will match prospective investors with the capital requirements of the company. A major benefit of this approach is that individuals can invest smaller amounts in a number of businesses, thereby diversifying their portfolios and spreading risk.

The angel investor education services include peer-to-peer network meetings where information and learning is shared. Keynote speakers cover topics that will help angel investors make better investment decisions and encourage more investments.

CONCLUSIONS

While there are many models for structuring an angel investor group, there are also a number of critical success factors common to each. Successful groups begin with a core of investors who have experience and share a commitment to angel investing. They select a process that quickly connects entrepreneurs with interested investors or provides constructive feedback to entrepreneurs as well as leverage to other sources of funding and support.

These examples show that angel investors will easily find a structure and process that works for them and quickly develop templates and tools to evaluate deal flow. Cultivating the network for deal flow and attracting new investor membership are the ongoing activities that determine the sustainability of the angel investor group.