Need Seed Capital? Angel Groups May Be Your Best Bet

Individual angels are increasingly giving way to pooled investments in start-ups.

By Jonathan N. Crawford, Researcher-Reporter, the Kiplinger letters

April 2009

Looking for an angel investor in your new business? You’d better try to find more than one. While dealmaking is down only 3%, angels are forking over a lot less. Angel investment dollars fell 26% in 2008 to $19.2 billion, split among 55,500 deals, according to the University of New Hampshire’s Center for Venture Research.

Try seeking out an angel group or syndicate. The number of them is growing as more individual investors look to spread the risk by pooling their money. Moreover, angel groups and syndicates -- made up of two or more groups that coinvest -- are plunking down much higher amounts than stand-alone angel investors. A survey of Angel Capital Association members found that the average pooled investment in 2008 was $281,000, whereas individual angel investments ranged from $10,000 to $200,000 per start-up.

The shaky economy is a big factor behind the growth of coinvesting. “With the economy the way it is, you’re finding that deals even smaller than $750,000 will need multiple groups to be involved,” says Marianne Hudson, executive director of the Angel Capital Association.

Angel groups and syndicates can provide an efficient way for start-ups to raise larger amounts of capital. Instead of knocking on the doors of several investors, start-ups need to knock on only one. So while they benefit from exposure to more potential investors, entrepreneurs also spend less time and energy on the screening and due diligence process than they would otherwise.

The downside: Expect a much more rigorous screening process and due diligence. Getting angel investors to back your firm is difficult to begin with. Only 2% to 4% of firms seeking angel money actually get it.

Angel groups play a crucial role, helping to fill gaps left by venture capitalists, who tend to target bigger deals and look for firms that have a proven track record. The average deal size for venture capitalists is $8 million -- an amount much higher than what would typically be needed in a seed deal, says Jeffrey Sohl, director of the Center for Venture Research. Only about 10% of deals by venture capital firms are committed to early stage firms, he says.

Angel groups are more geographically diverse than venture capitalists, who tend to focus almost exclusively on firms on the West Coast and in the Northeast, especially the burgeoning tech sector in Massachusetts. “The likelihood that something in Champaign-Urbana or Tulsa would grow to be a significant company with venture is very remote in this economy,” says John May, chairman emeritus of the Angel Capital Association.

The number of angel groups, and syndicates in particular, continues to rise. In fact, it’s been growing since the late 1990s. Investors like the group approach because of the efficiencies that come with collaborating on research and sharing best practices. About 200 active angel groups in the U.S. today account for around 20% of overall angel investing, says Sohl.

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