It has been interesting to see how the angel investment component of the capital market has evolved. Historically, angels have had a very high beta. When things are good, they are ready and willing to invest in the next great business ideas. When things are tough, they are nowhere to be seen. They are very sensitive to fluctuations being the first to pull up stakes in a downward economy and the last to come back when things return.
But when you think about it, it makes sense. These are people who have the ability to make decisions at the spur of the moment and can run for the hills. VC funds raise money to invest in three to five year windows. If things turn south, they will still have to find places to invest, the admirable exceptions being those firms who actually chose to return committed capital instead of invest it in to poor markets.
Individual angels are also, generally, not as attuned to trends in the high tech sectors and often chase the institutional participants. Their investment activity is normally not their day jobs, so they usually rely on what the VC’s are doing or what they read in the Wall Street Journal.
Lastly, angels that fly solo tend to not complete a meaningful amount of due diligence. The work it requires to do so becomes prohibitive when compared to the amount that individuals generally invest. The downside to that is that they often make bad investments. Enough bad investments can scare them away from the market for good.
It’s for these reasons that I am enthusiastic about the current trend towards organized angel groups. It helps the angels:
- Meaningfully increase deal flow;
- Spread due diligence efforts over a larger pool of capital;
- Leverage the collective expertise of the group to better understand the leading edge of various technology sectors and, thus, avoid being too late to the party;
- Structure standardized investment materials that are mindful of the needs and concerns of potential follow-on, institutional investors; and
- Understand and react to the economic cycles, diversify their portfolios of risky, seed-stage investments, and ultimately reduce the number of participants who exit the arena, never to return.
The Kaufmann Foundation has done a great job with better organizing these groups with the Angel Capital Association. Think of it as the NVCA for angel groups. It has a directory of angel groups from around the country. Here in the Southeast, we’ve even seen a subset of those groups organize to better share deals and leverage larger groups of people within a close proximity.
I’m optimistic that the structure that’s forming around this part of the capital food chain is going to help fill the gap left behind and venture capital continues to focus on larger, later stage deals