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Angel Funds on the Rise

Posted by: John Tozzi on October 9, 2009

Entrepreneurs who want to raise angel funding can approach three types of potential investors: individuals, angel networks, and angel funds.

Individual angels are wealthy people looking to invest in private companies on their own. Angel networks are affiliated groups of individual investors who meet regularly to consider potential deals, but invest individually rather than as a group. Angel funds are groups of investors who pool money to invest together, usually alongside extra investments from individual members.

There’s some indication that the last type is on the rise. Of the last 14 angel groups that joined the Angel Capital Association, half of them have organized funds, according to John Huston, the group’s chairman, who visited BW in New York this week. On average, only 20% of the ACA’s existing member groups have angel funds, he says.

Huston is also founder of Ohio TechAngels, which he says is the second-largest angel group in North America, with more than 250 members. Ohio TechAngels is organized as a fund (they’re actually closing their third fund now). The group always invests $200,000, with individual angels co-investing alongside the fund and taking seats on the company’s board.

Working as a fund has advantages for both the investors and their portfolio companies. Entrepreneurs know that when they approach a fund there’s a baseline amount of money available. It also limits the risk to investors, because angels have their money pooled across the group’s entire portfolio as well as their individual investments.

The rise of angel funds further blurs the line between sophisticated angel investment and early-stage venture capital. BW’s Spencer Ante has documented the rise of “super-angels” like First Round Capital, which recently saw a big payoff when Intuit acquired Mint.

Here’s what Huston says angel investors are looking for right now: startups that are highly capital efficient. They want to invest in entrepreneurs that have a clear path to breaking even before the angel funding runs out. If they don’t, they need to prove they can raise venture capital when they need to. Companies that need to raise $5 million are out of the range of even the biggest angel groups, Huston says, and unless it’s clear from the start that they’ll be able to raise a VC round, angel investors are not going to bite.

Reader Comments

Sam Thacker

October 10, 2009 4:04 PM

You are 100% correct that angel funds are on the rise. Individual investors are nursing their existing investments, VCs and equity funds are trying to save what they have invested too. With a little money sitting on the sidelines, angel funds make sense for investors who want to stay in the game without having a huge exposure. By investing alongside an angel that has domain expertise and who sits on the board, the fund helps protect its investment.

Sam Thacker
Business Finance Solutions

Joe Phelan

November 20, 2009 4:15 PM

Friends and Family and Angels do seem to be the best way forward at the moment. Sharing and distributing business plans and due diligence reports are often still limited by who you know, however. Look into Funding Roadmap, a cloud-based business plan reporting platform that can be shared and networked to a larger pool of potential investors.

Joe Phelan

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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