Solo angel investing can be rewarding, but it’s a ton of work. Accessing deal flow, completing due diligence, negotiating investment terms, and monitoring progress is a beast to tackle alone. Especially while building out a diversified portfolio of investments.
Over the past few years, I’ve onboarded several new members into our angel group, observing how they fold into the mix. Many are not new to the startup world, bringing their own entrepreneurial stories with them. Yet, most find the initial experience of assessing early-stage investment opportunities like learning a new language. Sure, there are new terms to learn. But many are also figuring out how to read founders, understand new markets, uncover personal interests, all while deciding what their investment strategy should be.
I ran and sold my own business and yet this feels like a foreign language.
Whether you are a new or experienced angel, the time requirement and workload can be heavy. Dividing efforts among many interested investors as part of an angel group can significantly lighten the load one carries.
What’s it take to be an Angel?
Bringing a passion for startups and tolerance for high-risk investments is a great place to start with angel investing. Individuals who want to pursue angel investing must meet the SEC’s definition of accredited investor:
Individuals with a net worth over $1M excluding the value of their primary residence, or individual income exceeding $200,000, or joint income with a spouse exceeding $300,000.
Entrepreneurs usually find angel investors either through organized angel groups or individual connections. Either route, angels typically operate in similar ways. Early-stage funders make independent investment decisions, often seeking equity in exchange for their capital. Let’s take a quick look at two paths of participation.
Organized angel groups provide members (accredited investors) access to high-quality investment opportunities. Typically groups focus on supporting their local startup ecosystem. For entrepreneurs, angel groups provide a streamlined process for reaching numerous potential investors with one pitch. While the structure is in place to streamline investment activities from sourcing deal flow to closing deals, individual angels make their own investment decisions and participate in deals only where they choose to.
It’s also common to see other types of accredited investors with an interest in supporting early-stage, high growth companies participate in angel groups (i.e., corporate VCs, family offices, micro VCs).
Many accredited investors choose to participate in funding startups independent of an organized group. These angels often find investment opportunities through personal connections, online platforms (i.e., AngelList), pitch competitions, and other networking activities. Conversations are usually held between only the founder and investor, allowing the entire process to be completed relatively quickly.
Top 5 reasons for joining an Angel group
Ultimately it comes down to personal preference for how angels decide to participate in funding startups. From both new and experienced investors, I’ve listed the top reasons why angels choose the group path over tackling it alone.
1. Source of deal flow and due diligence.
Most angel groups will review hundreds of applications every year, sourcing from online applications, conferences, pitch competitions, syndicate partners, and personal connections.
Invites are usually extended to 20–30 companies to formally pitch the groups’ members each year. From my experience, it would be common for groups to conduct due diligence on 25%-50% of the deals presented. Therefore, an angel group is likely to assess at least one investment opportunity every month.
Due diligence activities include follow-on meetings with founders, calling customers, conducting personal reference checks, and negotiating or reviewing terms. Unless an angel investor can commit full-time to sourcing, screening, and analyzing investment opportunities, the benefit of having an entire groups’ effort behind these activities far outweighs the challenge of tackling it alone.
2. Collection of knowledge and experience.
One of the greatest outcomes of combining numerous angel investors into one group is the sharing of collective knowledge amongst members. It’s common to see angels gravitate towards making investments in industries they are very familiar with. Makes sense, angel investing is risky enough and funding companies in unfamiliar territory can be scary.
However, statistics show the best way to increase chances for investor returns is to build out a diversified portfolio. Combining investors with a wide array of backgrounds into one group allows individuals to gain exposure to areas they may not consider on their own. In this setting, members benefit by having access to other opinions in the group, oftentimes by experts within the same industries that are presented by startups.
In addition to sharing knowledge on specific investment deals, angel group settings are a fantastic place for individuals to learn more about, you guessed it, angel investing. An online search will provide numerous articles on the topic, which is a great place to start. However, diving into the process alongside experienced angels is one of the best ways for new investors in the space to get their feet wet.
3. A match to your investment.
One of the unknowns with making independent angel investments is whether the entrepreneur can successfully raise additional capital. You’re already taking a leap of faith with writing that check; doing so without certainty that other capital will be pooled with yours can be unnerving. Investing with a group of angels can help de-risk this uncertainty. Transparency to the entire groups’ investment in a startup provides some level of assurance that there’s enough funding for a reasonable runway.
4. Access to investment tools and resources.
Angel groups often provide members access to numerous tools and resources to most effectively manage deal flow and track investment activity. Many of these tools can be purchased individually but can be costly and less impactful without a larger group to compare to.
Membership to an organized angel group should also provide investors access to the Angel Capital Association (ACA), the largest angel professional development organization in the world. (Worth asking about before joining any group.)
Many angel groups also offer investors the ability to fund capital through a special purpose vehicle (SPV), which typically allows members to invest less than $25,000 in any given deal. This is a great option for those who want to participate in many deals with smaller check sizes as they build out a portfolio of investments.
5. Flexible participation.
Angel groups realize members have different limitations and interests for involvement and encourage investors to participate within the organization as it best suits them. Members can engage by attending pitch events, screening meetings, due diligence sessions, educational and networking events, etc.
Most groups have minimal or no investment requirements, and the decision to invest is entirely the prerogative of each member. Every group is structured a little different, be sure to understand all expectations before joining. Ultimately groups become more of a benefit to members if members are mutually supportive and engaged with the group.
Expand your network
Whether you are exploring a hobby or looking to dedicate many hours each week to angel investing, participating through an organized angel group provides numerous time-saving and experiential benefits. It’s also a great environment for veteran angels to share their knowledge with new investors in the space.
Groups will often encourage those potentially interested in becoming a member to join a meeting as a guest. Most states and metro areas have at least one organized network and a simple online search can point you in the right direction.You can also check out the ACA website for a full list of angel groups within their network.
If you’ve been walking the path alone or have considered getting into angel investing, give the group setting a try. You might like it.
Disclaimer: The opinions expressed do not necessarily reflect those of the Nebraska Angels organization or its members.
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