You’ve probably heard the term “angel investors,” but not everyone knows exactly what that means. We’re going to focus on one type of angel investor, angel groups, and provide the answers to some frequently asked questions, including:
- Are angel groups right for your startup?
- What are the challenges and benefits of raising funding from angel groups?
- How do angel groups compare to angel syndicates?
- How do angel groups compare to seed funds?
Kruze Consulting is one of the leading providers of CPA accounting, tax, and finance advice to venture capital backed startups. Our clients have collectively raised billions of dollars in venture capital funding from top-tier investors, including many great angel groups.
[Video: https://youtu.be/jgDo5A-3lBU?si=I0rEEXLc26R-RdKG ]
What is an Angel Group?
Angel groups are collectives made up of experienced investors whose aim is to come together and invest in the next big idea. The key thing to focus on here is the ‘collective’ part. Unlike the individual decisions made by professional VCs, high-net-worth persons or single funds, or even an angel syndicate (where there is at least one person who is a little bit more in charge), these groups make group decisions.
Angel groups are an influential part of the startup landscape in several major areas where startups are trying to access early-stage funds, but there isn’t a deep pool of sophisticated seed investment shops, such as Boston. You are less likely to find them in places like Silicon Valley where seed investment is far more accessible.
Why do Angel Groups Matter?
Let’s look at why these angel groups matter:
- Pooled funding. First of all, angel groups pool their funding. By doing so they can offer some pretty substantial amounts of financing to early stage companies, and can be an important part of a pre-seed round.
- Collaboration. They collaborate on the process of evaluating and working with startups. In theory, having a group of experienced investors and entrepreneurs together in the room with similar or slightly different backgrounds should encourage good decisions when making an investment.
- Networking. Very often, angel groups consist of executives who have founded and sold companies, or who were senior executives at important local technology companies or businesses. The networking that a collective of people like this offers can be very valuable to an early-stage startup founder who is looking for advice and information. Furthermore, it could be highly beneficial to a company who’s looking for a big sale opportunity or who is trying to gain access to technology.
- Mentorship. The mentorship potential from an angel group is a very important part of being supported by one. Such a large group of entrepreneurs would undoubtedly try to offer a startup support and experienced advice. A large number of angel groups go beyond financial investment; they offer strategic advice and help founders navigate the complexities of scaling a startup.
How do you Get Introduced to an Angel Group?
Essentially, getting an introduction to an angel group is like getting an introduction to any venture capitalist, and the best way to do that is through networking. The first step is getting a warm recommendation to a member of any such angel group from someone that member trusts. After that introduction the next step is presenting to a couple of members of that group to get them on board and hopefully gaining their sponsorship in the process.
With that sponsorship you will ideally achieve the endorsement you need to present to the group. Following that you’ll present to the entire group of angel investors and that can be pretty intense. Picture an enormous conference room full of a couple of hundred experienced angel investors, all of whom are asking multiple questions. Once that ordeal is over, startup companies tend to leave the room in order to give the angel group time to vote.
While sometimes this voting and deciding process can drag on, hopefully the group will vote on the same day and decide on whether or not they want to proceed. Then they will raise hands and express how much each individual wishes to invest. At this point, the group will begin due diligence, which can sometimes be even more intense than working with a professional VC.
Once all due diligence has been carried out, you then negotiate with them to raise the funding round you’re after. Similarly to working with a VC, you’ll get your term sheet in the close – however this is also a little different to working with a VC and we will get to that in a second.
The Downsides of Working with an Angel Group
Having looked at all the positives, it’s only right we explore the downsides of angel groups.
While angel groups offer a lot of benefits to startups like pooled funding, mentorship, networking etc., there are also some challenges that they can present. You need to understand what these challenges are so that you can make an informed decision if you’re considering raising funding from an angel group.
- Speed of decision making. The first potential negative that comes with an angel group is the decision making speed. Some angel groups have a very arduous, slow decision-making process, usually because there are a lot of folks in the kitchen. There are many stakeholders that get involved and this can delay things. If a pivotal person is skiing in the Alps on the week the group needs to meet, they might have to wait a week. Then, the next week, a different person could be out of town or sick or selling their business. This can all really slow down the pace for startups, which isn’t ideal. Startups typically need to move quickly and raise capital as fast as they can, making this a particularly unhelpful downside with some angel groups.
- Complexity in getting a round closed. Since these angel groups are not a single entity driven by a charismatic general partner, like many venture funds, they can have a lot of diverse opinions. This makes getting a round closed a lot more complex. They also probably won’t have as organized a system of having Monday partner meetings, like a lot of venture funds do, to make an investment. This means negotiating with them can take a while because there may be some highly opinionated members who make things a little more challenging than maybe they need to be.
- Investor relations. After you’ve succeeded in raising funds from an angel group, another thing you will need to consider and ask them about before you close your investment is investor relations. As a startup founder it is essential you understand the type of investor relations you will have with the group. VCs obviously require investor relations, such as sending regularinvestor template updates and holding board meetings. Angel groups deserve the same level of information. They may or may not want board meetings, but they deserve to get regular updates. However, here lies the issue: You may have 10 or 20 people investing through that angel group and therefore 10 or 20 people who might ask you questions. They might ask for updates. They may want to get involved. This can take up a significant amount of founder time after you’ve raised that money, which diverts your attention from your core business.
- Varied levels of recency and operating experience. The next problem with angel groups is that there are going to be varied levels of recency in operating experience. The appeal of an angel group is the diverse backgrounds and diverse opinions. However, while the executives and entrepreneurs in those angel groups have done a lot of different things, some of these people may not have recently run a business. They may not realize quite how quickly their operating experience ages. VCs can also make this mistake as well but, when you raise money from a venture capitalist, you tend to have one of them on your board. When you raise money from an angel group you may have a dozen successful executives who have opinions. Which means you may have to kind of sift through all those different opinions to understand which ones are actually based on current market realities or your specific business needs.
- Follow-on investments. Finally, and this is very important for companies going down the venture capital track, is whether the angel group will be able to offer follow-on investments or not. When VCs commit to a business, they tend to reserve follow-on money that they will use to support the business going forward and to do their pro-rata stake in subsequent venture rounds. As a founder, you want to make sure that your angel group is ready and able to support the business as its capital needs grow.
Angel Groups vs Angel Syndicates
Finally, let’s compare the models of an angel group to an angel syndicate:
Angel syndicates. Angel syndicates have a more flexible approach than the more structured approach of angel groups. Angel syndicates tend to be informal collections of accredited investors who decide on a case-by-case and individual basis whether or not they’re going to participate in an investment. This means each member writes their own check and makes their own decisions on whether to put in their chosen amount or pass. This is based on the negotiation, investigation and diligence done by one syndicate lead, who then shares the information with everyone else. This model allows the syndicate investors to only engage with projects which align with their interests or their mission.
Angel groups. As we’ve discussed, angel groups differ in their model by being far more formal and structured. As a company looking for funding from an angel group you usually have to present to everyone and that means it’s kind of hit or miss.
Pros and Cons of Angel Groups for Startups
Pros
- Pooled Funding: Angel groups pool their resources, offering substantial financing to early-stage companies.
- Collaboration: The collective decision-making process leverages the diverse experience and expertise of multiple investors.
- Networking: Access to a network of experienced executives and entrepreneurs can provide valuable advice and opportunities.
- Mentorship: Angel groups often offer strategic advice and mentorship, helping founders navigate the complexities of scaling a startup.
Cons
- Slow Decision-Making: The group decision process can be slow due to the involvement of multiple stakeholders, which may delay funding.
- Complex Negotiations: Diverse opinions within the group can complicate and prolong the negotiation and closing process.
- Intensive Investor Relations: Managing relationships with multiple investors can be time-consuming and divert attention from core business activities.
- Varied Experience Levels: Members’ operating experience may vary, and some advice may not be current or relevant to the startup’s specific needs.
- Limited Follow-On Investments: Angel groups may not have the capacity to provide follow-on investments, which can be crucial for future funding rounds.
Understanding these pros and cons can help you make an informed decision about whether raising funding from an angel group is the right move for your startup.
Angel Investors Are Valuable to Startups
Ultimately, for a startup founder, particularly a founder who’s not in Silicon Valley, but who’s in a different area where there’s less of a pool of seed and pre-seed funded funds, angel syndicates and angel groups can be pretty valuable: They offer financial backing and they probably have some experienced and amazing individuals in them who have great networks.
As you’re getting ready to raise funds, particularly at the very early stage, choosing an angel group is not a bad idea. You just need to be aware of the potential downsides and ask them questions to make sure that they’re going to fit with you.
And if you do raise money from professional investors, or professional angel groups, please reach out to Kruze Consulting. We have helped hundreds of venture capital-backed startups get ready for the next round, understand how to account for their revenue, prepare for taxes, and much more.
If you have any other questions on angel groups, valuations, startup investing, startup accounting, or taxes, please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!
