Business Angel Investing Groups
Angel investing has long been an important source of financial support and mentoring for new and growing businesses bridging the gap between individual (friends and family) and institutional venture capital rounds of financing. Over the past several years, this sector of the private capital market has been formalizing in response to both growing demands and complexity.
According to research conducted by Jeffrey E. Sohl at the University of New Hampshire’s Center for Venture Research, there were approximately 50 formal business angel investing groups in the United States five years ago. He now estimates that there may be as many as 170 formal and informal organizations located throughout leading technology and business regions in the US and Canada. These groups have several characteristics: loosely to well-defined legal structures; part-time or full-time management; standardized investment processes; a public face usually with a Web site and public relations activities; and, occasionally a traditionally structured venture capital/angel investing fund.
The number of organized groups has grown in response to several factors:
- A desire to attract better deals and generate higher returns than angels acting alone;
- The growth of venture capital funds and the attraction of venture investing;
- A widening “capital gap” between individual and institutional venture capital investors that has created a need and an opportunity for pooled investments;
- The legal and economic complexity of these investments;
- A large increase in the number of self-made, high net worth individuals who want to be more involved in their alternative asset management;
- The volume of deal flow; and,
- Social camaraderie among investors.
As a result, investment screening is fairly consistent across groups. Specific organizational and legal structures, however, remain varied. Most groups developed their own organizational structures and processes independently and have recently begun to discuss and debate best practices, some of which are discussed in this paper.
For entrepreneurs and other investors, the net results of this change are mostly positive. Although the models of business angel investing groups continue to evolve, these groups are generally better financed than ad hoc groups of individual investors. These groups provide an extended network that benefits both funded companies and co-investors by providing greater due diligence, operational support and domain expertise. Business angel groups can also provide a key source of qualified deal flow for venture firms; as well as provide intermediate capital for companies with financing requirement levels between individual investors and institutional venture capital.
This paper is the product of the first summit of organized angel investing groups, an April 2002 meeting focused on the best practices of angel investing. Thirty representatives from 18 groups across North America attended the meeting at the Massachusetts Institute of Technology. The Ewing Marion Kauffman Foundation coordinated the summit, working with a committee of angel organization leaders. The summit was initiated by the leader of CommonAngels, of Boston, who noted that organized angels need and are interested in opportunities to share information in order to enhance their practices. The participating angel organizations expressed a strong interest in continued sharing of information and best practices, and will hold additional summits in the future.
What Is An Angel?
From a purely legal standpoint, an “angel investor” (or “business angel investor”) is a “high net worth individual,” usually an accredited investor (as the term is defined in Regulation D under the Securities Act of 1933 or SEC Rule 501) who invests his or her own funds in private companies, typically at the seed and early
stages. To most companies, though, angel investors are much more: they often bring expertise or affinity for that company’s product, market or management team, in addition to taking additional financial risks. Many serve as active advisors or mentors for entrepreneurs, provide additional relationships to aid the business’ growth, and supply industry and entrepreneurial experience.
Broadly, these individuals fall into four categories as defined by a study on angel investors by MIT’s Entrepreneurship Center:
- Guardian Angels, who bring both entrepreneurial and industry expertise. Many have been successful entrepreneurs in the same sector as the new companies they back.
- Entrepreneur Angels, who have experience starting companies but come from different industry sectors.
- Operational Angels, who bring industry experience and expertise, but generally from large, established companies, and may lack first-hand experience with the travails of a startup.
- Financial Angels, who typically invest purely for the financial return.
All are present within today’s angel organizations, but many Continue reading