Startable – Healy Jones’ & Prasad Thammineni’s Blog

Yesterday I attended a meeting of the Northeast chapter of the ACA, the Angel Capital Association. Holy cow. Angel groups are getting really sophisticated and I’m not sure most Northeast VCs are aware of it. These investors have great deal flow and the ability to completely fund companies with VC-type potential. Angel investing isn’t just for seed investments anymore. 

But enough about VCs, let’s talk about what this means for the startup founder seeking capital:

• I’ve said this before, you may not need venture capital. If you get the right angels involved you may be able to raise an appropriate amount of capital from angel groups, assuming you are building a capital efficient business.
• Angel groups are different than individual angel investors. These groups don’t write checks after a coffee discussion; they take steps to make sure your idea is seen by other members of the group and do due diligence on you and the company/product/idea.
• Angel groups very actively syndicate investments. This has a number of implications for the startup seeking capital:
  • If you impress an influential angel group you are likely to get a champion who can REALLY help you get in front of other angels for syndicate dollars. This should probably be your goal when first starting an angel fund raising process.
  • Angel groups talk with each other about deal flow. This is either their job or their hobby, and they like hearing what others in their community are doing. If you start to create buzz for your startup in the angel community you really increase the chance of investors mentioning your startup to each other. Just like in the VC world, a bit of excitement around your deal increases the chances of you receiving investment dollars.
  • They also share diligence findings, so take each angel investor’s diligence quite seriously. If you show badly for one it might easily get around to the others. 
  • Valuation. Actually, this deserves its own, free standing bullet point:
• Once one group sets a pre-money valuation I don’t think the other angel groups are going to get into an auction type-process. These groups need each other to fill in bigger financing rounds. One group can’t outbid another aggressively, or they will not be able to find enough capital to meet most startup’s financing needs. A startup can get different syndicates of venture capitalists in a bidding war; I don’t know if this is as easily possible in the angel financing world. It may be a better idea to try to pit a VC against the angel groups if you are really valuation sensitive. (I realize it’s not that easy! Just trying to make the point that the typical “get a ton of investors interested and the valuation will go up” model may not work as easily in the angel world.) If your startup only needs a small amount of capital, enough that can be provided by a single angel group, then you may be able to say that you are not open to syndicating to other angel groups and that you ask that the group not discuss the opportunity with others.  But I really don’t know if that can work in the angel community or not.  
• Angel groups use the same term sheets and have the same caliber of attorneys as VCs. If you get experienced angels involved with your startup you are going to see terms, provisions and likely the same level of negotiation sophistication you’ll see from a venture capitalist. (If it seems like the angel doesn’t have a sophisticated attorney or is asking for terms that YOUR sophisticated attorney says are not standard then you may have a serious problem and are quite possibly involved with the wrong angel.)
• Some angel investors can be value-added board members. Many of these investors are retired/half-retired successful executives, and they probably have some interesting insights and connections. You should make sure you know who from the group will be nominated for the board, and just as you would for a VC partner, make sure you like the person. I saw Chris Sheenan from CommonAngels in action on a board and he was an important member of that company’s BOD. 
• You’re going to have to really hoof it to get angel financing. Expect the angel financing to be a real, full-time position for the CEO. This is a lot of work.

I hope that these angel groups continue to do well. Their success can really help drive innovation in the Northeast. It’s exciting to see so many successful people willing to put their time and capital into helping new startups grow. Don’t forget about angel investors as you start to get your company going. Seek out the organized angel groups once you have your pitch and business model down. Just like when you approach a VC, get introduced to the angel group through a trusted third party. Good luck as you try to raise funding for your company and Go Angels!