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.
5. Understand the differences between angel investors and venture capitalists
QUICKTIP
Venture Capital
The word venture, as in venture capital, is used to describe any money being raised for a new venture. So angel investors will refer to “venture capital” just as readily as venture capitalists will. For more information on the venture capital industry, visit the website of the National Venture Capital Association (NVCA) at www.nvca.org.
Although they both invest in entrepreneurial companies, angel investors and venture capitalists (VCs) are not the same. Understanding the differences between them will help you decide which you should seek for your business. The key differences between the two types of investors include:
Whose money they invest. Angels invest their own money. VCs invest other people’s money. This is a critical distinction and colors all the decisions angel investors and VCs make.VCs raise money for funds ($100 million or more is not unusual for a single fund) from large institutional investors, pension funds, and extremely wealthy individuals. (Capital provided by venture capitalists is sometimes referred to as “institutional” capital.) They must show very high financial returns to these investors. Angels, on the other hand, are not under pressure to make money for other people. They can trust their own instincts and take more risks.
How much they invest. Typically, individual angels invest from $25,000 to $100,000, while angel groups invest $100,000 to $2 million. VCs, on the other hand, routinely invest more than a few million dollars, even in early-stage companies. Since they know some of these companies will go bust, VCs need the other companies in their portfolios to be huge hits to balance their returns.
Size of the potential businesses. Both VCs and angels seek businesses with high growth potential, but because of their responsibilities to their own investors, VCs need to find companies with the possibility of extraordinarily high growth, a minimum of $50 million to $100 million within a few years.
When they invest. While both angels and VCs will invest in companies at any stage of development, angels are more likely to invest in younger companies. “Seed” funding—given in the very earliest stages, when a company is still developing a prototype, refining a business concept, and researching a market—is more likely to be appropriate for angels than for VCs. VCs are increasingly investing in later-stage companies, to reduce their risk.
Decision-making process. VCs almost always make group decisions, with all members of the VC firm weighing in on an investment. Angel investors can make individual decisions.
Relationship to founder. VCs typically see their role as bringing in professional management to the companies they invest in. They’re far more likely to replace the founders of a company with experienced CEOs and managers. Angels, by contrast, expect founders to stay in key management positions, if not to run the company.
Key Differences between Angel Investors and Venture Capitalists
| ANGEL INVESTOR | VENTURE CAPITALIST | |
| Investment criteria | Growth company |
Extremely high-growth company
|