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Your Angel Is Close By

It used to be that angels would only invest in businesses that were no more than half a day’s drive from their home. Angels like to be close to their investments; they want to be involved in business decisions and stay abreast of company developments. Today, sophisticated angels will take a short plane ride for the right investment opportunity, but most investments are still made locally.

When angels join forces and combine their investment dollars, they are known as an angel group (or network). These groups review new business opportunities and invest collectively as a unit or, more typically, as individuals. In 2005 there were more than 250 well-established angel groups across the United States, with an average membership of forty-one individual investors.

The majority of angel groups hold regular meetings, often monthly lunches. Most bring together investors to hear entrepreneurs present their business ideas. Members of the group then discuss the merits of the business concept, giving feedback and suggestions. Then individual investors decide whether or not they want to invest their own money in the venture.

Most angel groups have established application procedures—some are stricter and more formal than others. Some groups have websites spelling out their application and presentation processes. Others require a member of the group to sponsor you if you want to apply or make a presentation.

Individual members of the group may have responsibility for screening entrepreneurs and business plans before they are presented to the entire group. The Rockies Venture Club, based in Denver, Colorado, does screening in this way. In the case of other groups, a professional manager is hired to screen applications from entrepreneurs. And then there are groups like the Boston-based Common Angels, which has a professionally managed fund and a full-time, dedicated staff.

A few groups work more like venture capital firms by pooling members’ funds or even raising money, which they then use to invest collectively in business opportunities, rather than having each member of the group decide whether they want to invest individually (a much more common approach).

Angel networks like to receive business plans and applications, especially from promising companies. They believe that the more investment opportunities they see, the more potential there is to find high-quality deals (this is referred to as quality deal flow). The New York Angels, for example, receives thousands of applications for funds each year. Of those, approximately three companies are invited to present to the group’s members every month.

Working with an angel investor group, rather than an individual investor, presents both advantages and disadvantages. An angel group has more capital to invest, so if you need to raise a lot of money (more than $100,000 or so), you may be better off approaching a group instead of an individual investor.

Angel groups have more collective investment experience, and they are concerned about their reputation in the entrepreneurial community (to ensure quality deal flow). So they are likely to offer you a fair, if not always the most competitive, deal. On the other hand, an angel group may use its clout to negotiate terms that are tougher for you than a solo angel would.

You may also find it more difficult to form a strong personal connection with a member of a group assigned to your company than you would with an individual angel who you know relates to the challenges you are facing.

Finally, some angel groups may act more like venture capital firms and make more stringent demands of you than individual angel investors normally do, such as asking you to agree that you can be replaced as CEO. Understanding the differences between angel groups and solo angels will help you find the right match for your company.

Angel Groups at Work:

A Snapshot

 Angel groups meet regularly (often once a month) to review business proposals from entrepreneurs.

 The average investment for an angel group is $100,000 to $2 million, compared to $25,000 to $100,000 for an individual angel.

 In the majority of cases, individual angels in the group make their own decisions about whether to invest in a particular company. However, some angel groups create a fund in which individual angels pool their money, and they then take a majority vote on whether to invest in a deal.

 Many angel groups invest in a broad range of industries and assign the management of particular investments—in retail, manufacturing, or telecommunications businesses—to group members with relevant industry experience.

 Some groups have particular specialties. BioAngels in Chicago invests in medical and life sciences businesses in the Midwest, for example.

 The number of applications an angel group receives depends on its size and location. A large group, like Common Angels in Boston, considers several dozen business plans every month, while a smaller one in a less populated city might see fewer than ten applications a month from entrepreneurs.