The following article is a summary of information reported in “Angel Investment Groups, Networks, and Funds: A Guidebook to Developing the Right Angel Organization for Your Community” by Susan Preston in association with Kauffman Foundation. September 2004.
Angel Investors – Part 2
Before You Begin
Angel networks have several advantages over individual investors. Angel groups have the capability to meet the needs of individual investors while overcoming the limitations associated with solo angel investing.
- Angel groups provide more efficient match of entrepreneurs and investors, enhancing deal flow.
- Group due diligence and investment support is more efficient through groups.
- New angels can learn from experienced angel investors.
- The increased potential investment dollars gives greater economic power and influence.
- Organizations provide the “intangible values of camaraderie and sharing of common goals.”
If you’re interested in setting up an angel network the first thing your group needs is a clear set of reasons for creating the organization.
As you begin setting up your fund, Preston recommends keeping the following nearly universal truisms in mind:
- Angel organizations are generally made up entirely of individuals.
- Angel organizations represent an active investment process.
- The groups are made up of individuals with common interests, typically early-stage investments.
- Members have a mixture of experience and backgrounds.
- Typically, angels prefer to invest locally. (But, angel organizations typically invest on a regional basis, being interested in personal relationships with companies and employees, as well as in giving back to their communities.)
- An angel group must have a champion (leader) to be successful.
- Members value angel group dynamics and access to superior deal flow.
- A primary reason that people become angel investors is a keen interest in capitalizing on high-return potentials.
Developing an Angel Organization
Developing an angel organization requires a multi-stage analysis that builds the framework of the organization. Selecting the correct organizational, management and membership structure is difficult. The following steps are a brief outline for building the framework:
- Community Assessment – conduct a community assessment to better understand the nature of your investment community and potential group members.
- Organizational Structure - determine the correct organizational structure for your group.
- Organizational Structure includes:
- Member-Managed vs. Manager-Managed
- Member-managed required active member participation in nearly all aspects of the operation.
- Manager-managed employs a professional(s) with experience in the investment process or targeted industry. The manager handles much of the deal flow work.
- Legal Structure
- Nonprofit Corporation
- Limited Liability Corporation (LLC)
- Corporation and Subchapter S Corporation
- Limited (Liability) Partnership
- Investment Process
- Group Investment
- Pooled investment
- Pledged or committed funds
- Individual Investment
- Based on group due diligence
- Based on individual assessment
- Side-fund investment with individual additional investments
- Membership numbers
- Membership by invitation only
- Membership tiers
- Dues and/or investment pledge
- Desired culture
- Financial Resources – funding your angel organization
- Membership dues
- Percentage of committed capital or pooled funds
- Events and programs
- Company fees
Once you have decided on the structure of your organization you are ready to implement your angel group. Successful implementation will determine the future of your group. Look for Angel Investing – Part 3 in late August, focused on implementing an angel group.