Angel investing can be a risky and complicated process, but for many people the potential rewards angel investing offers outweigh the risks. As angel investing becomes an increasingly larger part of early-stage funding for startups, a growing trend shows that many angel investors choose to join a member-only angel network or group. In these groups, like-minded, high-net-worth individuals pay membership fees in order to share deal flow, due diligence and investments with others. Because of the shared nature of an angel group, they tend to help mitigate some of this risk and relieve some of the burden of investing while maximizing chances of success in an investor’s portfolio. But how exactly do angel groups work?
To answer this question, we must first understand the various types of angel groups, although most of them have the same basic processes and functions:
- A manager-led angel network allows each individual investor to make their own investment decisions, but much of the deal flow and due diligence is handled by the network’s manager.
- A member-led angel network is a group where the members are responsible for the entire process: the deal flow, due diligence and their individual investment decisions.
- Finally, angel funds are groups where investors’ money is pooled and then investment opportunities are voted on by members and are led and overseen by a manager.
Some angel groups also offer network-specific interests such as technology startups, impact investing, or for women-only investors such as WOMENA. For the purpose of this article, we will focus on the first two instances of angel groups, where the investors make their individual investment decisions.
Regardless of the type of angel network, the process for entrepreneurs to apply for funding and for members to make an investment is relatively similar. Entrepreneurs are first responsible for applying to the angel network for funding once they have determined that they fit the group’s basic criteria. Once applications are received, they are screened to determine investment potential and viability. When an application is deemed viable, initial due diligence on the company is performed by reviewing the business plan including the market opportunity and size, assumptions and financial projections.
Most angel groups meet regularly, whether quarterly, monthly or at other intervals. At these meetings, a select group of entrepreneurs that have made it through initial due diligence have the opportunity to pitch to the the entire membership. Members then have a chance to indicate their interest in the companies and ask any questions they need answered before making a commitment to invest.
In a manager-led group, the further due diligence and negotiations are then handled by the group’s staff, whereas in a member-led group, this stage is led by one of the members. In the former instance, the advantage is that it is less time consuming for the investors, as the research and communication with the entrepreneur is handled directly by the staff. In any case, the major advantage of belonging to an angel group is that members with specific knowledge and experience can be tapped to advise on any aspect of the due diligence. Proper due diligence is key to increasing the likelihood of making successful investments and having access to individuals with diverse and industry-specific knowledge to share their opinions and ideas about a potential investment is an invaluable resource.
Once the due diligence is complete and all the questions have been answered, members are then asked to make their official commitments. Because angel groups will only consider companies with a significant number (usually three or more) of interested investors, it allows for each individual to make smaller investments while still ensuring that the round will be completely financed. In the case that it is not, the angel group can tap its network of partners and co-investors to help complete the round.
At this point, the shareholder’s agreement is signed between the investors and the company and the money is transferred. Depending on how the group operates, each individual investor signs the agreement and transfers their funds directly to the company, or the group signs the agreement on behalf of all investing members and the investors transfer their funds to the group’s intermediary bank account which then transfers the entire amount to the company.
Finally, we reach what is perhaps the most important but most forgotten part of investing– post-investment engagement. Although the investment has been made, this is an area where angel groups have the most advantage. As angel investing happens so early in a company’s lifecycle, it is important to give entrepreneurs not only capital, but technical assistance as well. This could range from advice directly from investors on aspects of the business to introductions to the investors’ networks. Investing as an angel group means that the entrepreneur has access to a much larger pool of advisors and networks, increasing the likelihood of success of the investment.
Angel investing may seem like an intimidating road to navigate on your own but angel groups offer the opportunity to get involved with guidance and support from fellow investors and managers. With statistically better and consistent deal pipelines, collective negotiating power and combined resources, networks are an excellent choice for nascent and experienced angel investors alike. To learn more about WOMENA and how you can become part of our network of angel investors, please contact us.