What are angel investor networks?

Angel investor networks are typically local organizations made up of 10-150 accredited investors who are interested in early stage business investing.  An angel investor network (or angel capital network) is made up of private individuals who have joined to pool their resources and share investment expertise.  The stage at which they invest can vary, though it is usually early stage businesses.  Many times angel investor networks are actively involved in their investments and provide more than simply funding.  Some may charge entrepreneurs a fee for making a presentation and some may charge to apply for consideration.

Angel investor networks began forming in New England in the late 1980s with the goal of sharing due diligence and increasing deal flow in addition to pooling their funds to make larger investments.  In recent years, the popularity of these types of networks has increased.  There were 10 established groups of angels in 1996 in the United States, but today there are at least 200 such angel networks.

One of the first large angel investing networks was formed by the government.  In response to calls for better access to equity capital at the 1995 White House Conference on Small Business, the Small Business Administration created the Angel Capital Electronic Network (ACE-Net), now called Active Capital.  Securities can be registered for sale up to $5 million through this network for a small fee.

What you need to know before joining an angel investor network?

“Angels have gone from investing as individuals and sometimes forming ad hoc groups for certain investments, to creating formal investment groups that function in a similar fashion to venture capitalists.  As the percent of dollars invested in early-stage companies continues to drop relative to the total dollars that venture capitalists invest, angel groups will play an increasingly important role in the funding of these ventures. 

Today angel investment is a common second round of financing for high-growth start-ups, and accounts in total for more money invested annually than all venture capital funds combined.  According to the University of New Hampshire's Center for Venture Research, angel investors have provided $24 billion while venture capital firms funded $22 billion in the United States in 2004.  Each member of an angel network may be required to provide a base amount of funding within a specified timeframe.  Often this is between $50,000 and $100,000 over several years.”

Some angel networks are manager-led limited liability corporations (LLC) that aggregate angel funds into pools of capital, sometimes to co-invest alongside venture capital firms.  This type of network functions very similar to a venture institution.  Other networks do deals on a case by case basis, where angels write checks directly to the startup and individual angels are assigned follow-up duties.  In between these models are independent LLCs formed specifically for a particular investment, umbrella LLCs in which each angel is a member, nonprofit organizations with individuals making independent investments, or some combination of these.

Why should you join an angel investor network?

Quality and quantity of deal flow are both reasons that angel investors have formed networks.  An angel investor may also perceive an increase in bargaining clout with the backing of an angel group.  Most groups have about 12 meetings each year, and charge an annual fee of between $500 and $1500.  The fees cover the cost of due diligence and other small costs such as meeting food expenses.  Many angel investors perform due diligence themselves instead of hiring a consulting firm.  Many service providers are more than willing to help, sometimes providing their services pro bono, because they appreciate the opportunity to work with high net wealth individuals.

Angel investor networks are different from a venture capital firm because the money they use is not raised from outside sources.  In addition, an angel network is generally more loosely organized than a venture capital firm.  Many times venture capital firms will pass deals to angel investor networks if the deal is too small for them.  Angel investors are presented with many opportunities for investment, but end up funding relative few opportunities.

Angel networks exist internationally as well.  Canada, the United Kingodm, and Australia among others currently have angel investor groups.  Usually angel investor networks are centered on geography since angel investors typically invest close to their homes.  Many are organized by city, state, or region.

The majority of angel networks maintain websites containing their contact information and other helpful resources for entrepreneurs.  The level of investor sophistication is perhaps greater within the group because of the ability to share information and experiences. 

Though angels do not always require a seat on the board of the company in which they invest, many hold an advisory role or observation privileges at board meetings.  Since angel investors may invest for reasons in addition to financial prospects, they may need to wait longer for their return.  Two or three years would be a short time frame, while eight to ten years is not unreasonable.

Typically entrepreneurs will make an initial presentation to the group at one of their meetings.  If the angel network is interested they perform due diligence.  The decision about funding a company follows.