Turning the Corner: Trends in Angel Investing

by John May, Managing Partner New Vantage Group and Vice Chairman Angel Capital Association

Ray Marvin, John May, Cal Simmons and TJ Jubeir network during a meeting of the Washington Dinner Club, an early stage venture fund administered by New Vantage Group.

In the United States, the United Kingdom, the European continent, Australia and New Zealand, a consensus has arisen that innovative, high-growth private companies are being confronted with a widening gap of growth capital available to entrepreneurs – after their friends and family and solo angel support, but before institutional, venture capitalists will touch them. Startup companies, whether spinouts from universities or innovative new service models in this Internet age, are seeing their market penetration slowed by risk capital shortages. A little-known answer to the dilemma is arising throughout the world from the growth of second generation “structured angel groups” – groups of accredited investors who make personal investments of $10,000 and upward in non-family member enterprises, and mentor as well as create wealth. We are past the research and invention stage of structured angel group formation – best practices and sample documents are available on Web sites and from published research. Communities now need to encourage customized solutions for their unique economic environment executed by the best and most passionate local angels.

This article sets out to shine a light on the current state of the sophisticated, non-family provision of growth capital to struggling entrepreneurs. It is clear that individual business angels have been and will continue to be integral to funding the gap after exhaustion of start-up and proof of concept funding, and prior to venture, strategic or customer financing. However, a more effective market – a more transparent market – is evolving with the growth of several second-generation, structured angel groups. The dominance of structured angel groups on the two coasts, founded by successful high tech entrepreneurs and the Internet wealth generation, is giving way to varied groups being formed by business men and women of all types who are sadder but wiser after losing billions in the aftermath of the telecom and Internet crash.

What entrepreneurs should know about angels who were burned after the bubble

A mighty learning came out of four summit meetings held by leaders of existing investment groups and sponsored by the Kauffman Foundation of Kansas City in 2002 and 2003. Excessive enthusiasm and a 5,000 NASDAQ had blinded us to the common sense principals of growing businesses, rather than playing at financial engineering; of doing deep due diligence and mentoring entrepreneurs, instead of investing and hoping. Twenty million dollar pre-money valuations for common stock investments, with few protections, were not uncommon. What the heck, venture capitalists were obtaining buyouts of $900 million for $1 million-revenue e-commerce startups!

After the crash, the decline in individual disposable investment capital impacted high-tech, service, lifestyle and family private businesses alike. Thus began the retrenchment of seed and early stage investment in 2001 that declined further in 2003, only showing signs of new life in 2004. Members of the Angel Capital Association (ACA) are reporting growth – more dollars are being invested and new investment groups are in formation than since the heady days of 1999-2001.

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