By Christine Chu
Angel investors and angel groups have become popular sources of funding for new start-ups and a boon for the national economy, jobs, and innovation. In recent years, many entrepreneurs have also learned to take advantage of angel funds to keep their startups running.
But how do angel investors and angel groups work? How is this type of funding better, and how can entrepreneurs locate and take advantage of this money?
A majority of investors in startups are high-net-worth individuals with an eye for innovation and desire to fund it. These individuals are often referred to as ‘angel investors’ or ‘accredited investors’. In fact, the idea of angel investing dates back to the wealthy financiers who used to back broadway shows.
Although angels are usually accredited investors, angel investors and accredited investors can also be separate titles. Nonetheless, these individuals are among the most attractive sources of funding for start-ups for many reasons, including their ability and desire to provide funding.
A high net worth can mean several things. As defined by the Securities and Exchange Commission, accredited investors are individuals with $1M in assets or more (excluding personal residences), $200k in income for the previous two years, or a combined income of $300k for married couples.
Angel investors invest in the early stages of a start-up, during seed rounds and Series A rounds of financing. There are also Super Angels who invest sums north of $500k on Series A and above. Many ultra-high-net-worth angel investors also opt to invest through family offices. This often goes under the radar by entrepreneurs, but family offices are actually a powerhouse in investing and capital markets.
Angel investments can be categorized somewhere in between funding from your personal network and formal capital from a group. Angel investors can invest purely for profit, or to make an impact on causes and industries that they’re passionate about. Sustainable farming, education, and healthcare start-ups are just some of the possibilities.
One Halo study found that these investors are drawn to a range of industries, with web technology (37%), medicine (23%), and mobile tech (10 %) making up the top three markets.
In addition to funding, angel investors are often able to benefit budding startup founders with their advice and strategic expertise. Because many angel investors have held executive positions at large corporations, they bring years of experience to the table. As reported by a Harvard study, startups funded by angels have a higher chance of survival in part due to this advantage.
Angel investments are high-risk, typically making up 10% or less of angel investors’ portfolios. Investors are looking for a good idea and a good team to get a return 10 times the initial investment within 5 years, until they can make an exit through an initial public offering of an acquisition.
Angel investors invest their own money, which can range anywhere from $150k to $2M. In the US, angel investments drive $25B into startups every year. The Center for Venture Research at the University of New Hampshire found that they are collectively responsible for funding well over 60,000 startups every year (creating over 270,000 jobs.) In contrast, venture capital firms invest in only 1,000 new companies per year.
Moreover, while angel investors contribute around 1/5 the funding to start-ups than traditional sources, Dow Jones VentureSource found that these (smaller) investments in startups grew over 35% between 2008-2012; while venture capital investments dropped by 8%. This was in part due to the JOBS Act, needs for new investments after the 2008 financial crisis, and advancements in technology, which led to over 750,000 active angel investors by 2013 when new regulations began being implemented.
While Silicon Valley has been the dominant geographic area in terms of number of angel investments, Silicon Alley (New York City) is catching up quickly.
Six reasons high net worth investors like angel investors are an attractive source of capital for you:
- They can bring added value through advice from experience
- You’ll be able to raise more money through fewer investors and contacts
- Less restrictions on raising money from accredited investors
- They may put in more money later on
- Potential for referrals to other angels
- Flexibility in terms
A study through the Stanford Center for Entrepreneurial Studies reported that angel investors make up 90% of all seed and startup capital.
Angel Investor Groups
When angel investors join forces, they combine to form angel groups. According to the Angel Capital Association, angel groups multiplied from 10 in 1996 to over 330 in 2013. Estimates from the Small Business Association suggest that roughly 5% of angel investors are part of an angel group. In the past decade, angel investors joined angel groups to gain entry to exclusive deals, which are often hard to access without connections to founders or angel group resources.
Besides gaining access to deal flow, there are several reasons for angel groups to come together, such as:
- Lowering risk in investing
- Increasing investment diversification
- Ability to conduct better due diligence
- Ability to make more sizable and meaningful investments
- More power to control the success of the start-ups invested in
Because membership in an angel group boosts individual investors’ confidence, better terms for the startups themselves can often result. Altogether, US angel groups have collectively invested in over 60,000 start-ups across the country.
Some of the largest and most active angel groups include the New York Angels, Houston Angel Network, the Tech Coast Angels, and many more. Although usually organized by geographic region, some angel groups focus on specific groups of industries. Top groups have grown to incorporate around 100-200 members.
Finding Angel Investor Groups
There are many ways to find angel groups, such as:
- Personal introductions
- Attending pitch night events
- Through local coworking spaces and accelerators
- Local events, such as Meetup events
- Angel investor associations
The Angel Capital Association has compiled regional angel groups around the US into an online directory. CB Insights has also used algorithms to quantify the top angel groups in the US.
Choosing the Right Angels for Your Fundraising Needs
Each angel has their own unique personality and perspective--angel investors are individuals, after all. On the other hand, angel groups can help with creating more consistency in the start-up’s structural organization, and can also streamline and simplify the fundraising process for start-up founders.
Other questions to ask while finding the right fit include:
- Are the investors eager to fund in your location?
- Are they excited to fund innovations in your industry?
- How much flexibility will they give you?
- Are they willing to be lead investors?
- Do they often participate in follow-up rounds?
- Do they have a track record of successful exits?
- What level of vetting do they ask for? What about proof of concept?
- What’s the amount they’re willing to invest?
There is such a wide variety of groups to choose from, and once you’ve located the right angel investor or angel group for your fundraising needs, it’s essential to lock in a quality pitch deck.
Angel investments have worked wonders for the start-up ecosystem, and investments have only grown in the past decade as investors look to capitalize on successes within their network of friends and peers. Angel groups have also been an increasingly popular way for individuals to learn, gain a sense of security, and collectively invest more wisely.
Next Steps for Start-ups
Do you have a vision to pitch, but not the technical expertise or funding to build it? MassLight can develop your business solely in exchange for equity and help you secure your angel investors. Learn more about MassLight’s build for equity program and check out our portfolio to see if our services are the right fit for you, and contact us to get started.