Understanding How Angel Groups Operate is Key to Successful Funding
With more than 250 separate groups in the Angel Capital Association, there’s a huge variety of sizes and missions. But there’s also a lot of similarities in how the groups operate. There are plenty of exceptions to everything in this article, so the most important takeaway is to know the group you’re pitching to and adjust accordingly.
For more than 12 years, I’ve been a member of Tech Coast Angels (TCA), investing in startups in Southern California, and am now a member of the executive committee of the TCA Los Angeles chapter. I also invest with Chemical Angel Network (CAN), a nationwide group focusing on the chemistry sector.
Benefits of an Angel Group
As the name implies, an angel investment group is a group of angel investors collaborating on startup investment. Members have to meet the requirements of an SEC accredited investor to invest in startup stock.
For the most part, we are not super angels writing multi-million dollars checks. Angel group members tend to be working professionals and retired executives banding together small individual investments.
By teaming together, we share the work that goes into finding and evaluating investments that would be impossible to do alone. Angel groups vary widely in size, but both TCA-LA and CAN have 100+ members.
For startups, angel groups offer a single place to pitch to 100 angel investors at once. If 20 members decide to invest $25K each, that raises $500K in one shot.
For investors like me, angel groups are critical. I’ve learned the hard way that investing alone never works out well.
By joining with other angels, I leverage a hundred other members’ expertise and experience. By splitting the work, we can do the investigation necessary to separate startups that sound good from the ones that actually have something. And by combining our individual investments as a group, we can negotiate special terms like a board of directors seat.
Most importantly, an angel group gives me the ability to invest in fields where I have no experience. If a medtech startup pitched me personally, I’d have to pass. But if the doctors, insurance executives, medical equipment engineers, and regulatory experts in the room all think it’s a great startup, count me in, too.
Different Types of Angel Groups
Most angel groups are geographically or thematically focused.
TCA, for example, invests primarily in startups in Los Angeles and Southern California. Most cities around North America have at least 1 angel group and bigger cities may have multiple.
Thematic groups focus on a particular industry, theme, or university. Chemical Angels invests in startups in chemistry, materials, and energy. Harvard Angels is the investment group for Harvard Business School alumni. Golden Seeds invests in female founders. There are angel groups covering a wide diversity of themes.
Some angel groups invest strictly as individuals. Other groups pool their investments into a member fund. TCA and CAN take a hybrid approach with both individual member investments and a member fund.
Angel Group Funding Process
The typical angel group funding process is:
- Application review: Applications are reviewed to weed out any that don’t meet the requirements. A screening committee may hear an initial pitch to decide which startups to invite to a group screening.
- Screening: This is the big moment — the pitch to the group, typically 10–15 minutes followed by Q&A. After the pitch, members are canvassed to see if there is potential interest in investing.
- Deep Dive: If there’s sufficient interest, a small group of members will hold a longer meeting with the founders. Documents may be requested. One member is designated the deal lead.
- Diligence: If members remain interested after the deep dive, they split up the work to resolve concerns and check details such as interviewing customers and reviewing patents. This can take a few weeks.
- Negotiations: If the group is the lead investor, it has to negotiate investment terms and legal documents with the startup.
- Investment: Crunch time! Individual members decide if they want to invest and how much. Fund members vote on whether to invest. Documents are signed and funds wired.
- Syndication: If there is room remaining, the group may introduce the startup to other angel groups. Syndication may happen earlier in the process so multiple groups can collaborate on diligence.
When dealing with angel groups, it’s important to keep in mind we’re a collection of individual investors volunteering our time. For most of us, this is a part-time gig and many of us have full time jobs. We try our hardest, but don’t be surprised if the process is slow and clunky, and may at times seem ad-hoc.
Angel Group Investment Stage & Check Sizes
If you’re expecting an angel group to pony up $2M on a $20M valuation to build the MVP, you’re likely to be disappointed.
The sweet spot for both of my angel groups are startups raising under $1M on a $6M — $8M valuation. In most cases, the startup has initial revenue, or at least an MVP in pilot. (Life science startups are exceptions.)
Angel groups are not the best place to raise funds to build an MVP. And VCs writing big checks are the way to go to raise Series A and later.
Angel groups are therefore best for pre-seed/seed rounds once the product has been proven with initial customers.
Out of the total raise of say, $750K, an angel group might invest $100K from the member fund, and perhaps another $200K from 8 individual members investing $25K each.
We’d then introduce the deal to other angel groups. Together, we might put in $500K — $750K.
The startup would then fill the round with follow-on investors from earlier rounds, other angels the founders find on their own, and possibly an early-stage VC fund or two.
Know Your Audience
Keep in mind angel groups are a collection of small individual angels, investing our own personal money. We do this because we want to make money, of course, but to be honest, we could probably make more in real estate, or if we want to gamble, there’s crypto. We invest in startups because we want to be part of the startup community.
When pitching to us, you’ll have the most success if you consider us individuals who bring expertise and connections to help you on your journey. This is very different from a VC firm that operates as a single entity.
But even within angel groups, there’s huge diversity. Make sure to tailor your pitch to the specific audience. When pitching to a generalist group like TCA, most members will be unfamiliar with your particular industry, so the pitch needs to be simple and high level.
In contrast, when pitching to an industry group like Chemical Angels, you’ll be talking to scientists and executives from the chemicals industry. Even in the initial pitch, we’ll want to hear about the chemical processes and see an overview of the scientific data.
So be sure to know your audience and tailor your pitch accordingly.
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