SUB CATEGORIES OF Funding Your Startup

Angel investors are high net worth individuals who make equity investments in startups. Many angel investors work alone in searching for, evaluating and investing in startups. Angel investors are a diverse group of individuals, which makes them difficult for startups to find. Most angels do not create websites or advertise themselves as angels. Angel investors often rely on their professional networks to vet startups and to help develop the startups in which the angels have invested. This means that angels choose startups within their area of expertise or sphere of influence.

Certain active angel investors try to achieve economies of scale in their investment efforts through guilds known as angel investment groups, or angel groups for short. Most angel groups are not legal entities per se, but simply groups of individual angels working together to evaluate investment opportunities in startups. Angel groups serve a great benefit to startups because they give startups access to groups of angel investors who might otherwise be difficult to find and make it easier to raise larger angel financing rounds.

Most individual angel investors are wealthy, but not necessarily all members of angel groups are wealthy. The bar to being a member of many angel groups is relatively low, such as a requirement for a member to invest only $2,500 per year in startups.

Angel groups typically designate a few angels to lead the evaluation of a startup for all of the angels in the group and then individual members of the group choose whether to invest in the startup. It is usually not an all or nothing invest requirement by angel groups. In fact, we do not know any angel groups that require all members of the group invest in the chosen startups.

With angel groups, there is a structure and process to investing, so angels are not shooting from the hip as often in their investment decisions as individual angels. The study cited below by the Kaufman Foundation illustrates why structure matters.

Most individual angel investors are wealthy, but not necessarily all members of angel groups are wealthy. The bar to being a member of many angel groups is relatively low, such as a requirement for a member to invest only $2,500 per year in startups.

The Kaufman Foundation conducted a study on angel investor performance and found that certain characteristics improve investment returns, including:

  • Commitment to due diligence. The more time committed to due diligence, the higher the investment returns on average.
  • Industry expertise. Returns were nearly double for investments in startups for which the angel investor had industry expertise.
  • Participation. An angel investor’s participation in the startup, through mentoring, coaching and monitoring, improves the outcome for the startup (and the angel investor).
  • Follow-on investing. If a follow-on investment is required by the angel investor, the returns were lower and nearly 70% of which were at a loss.

The first three are characteristics of the benefits offered by angel groups more than individual angel investors.

Fees

Some angel groups charge more than nominal fees to startups for the opportunity to pitch to the angel group. One that has received a lot of negative press for doing so is the Keiretsu Forum that charges $1,500 per branch. With Keiretsu Forum, a startup must pitch to a minimum number of branches, typically four, which translates into a $6,000 minimum fee. Ouch. These groups do fund startups, but are clearly money-making ventures for the organizers as well.

The average application fee for an angel group is $100 to $150. The fee is required to ensure that the startup has some “skin” in the game to encourage its preparation for the pitch. We personally do not object to nominal fees of a few hundred dollars because fees seem to improve the quality of the startups by weeding out those that are simply seeking free feedback. Most angels are successful business people and are protective of their time and do not appreciate startups that waste their time.