Sifting For Success - Pitching Angels In Groups

Adapted from an article originally published by the author in Inc. Magazine.

Image by Jonathan Lassoff

There can be tremendous advantages to working with angels in groups. The key is the speed with which an entrepreneur can find her champions. There is more process, but the results justify the effort.

Company growth doesn’t produce cash, it consumes cash. Behind every headline about a hot, thriving company is a team furiously shoveling cash into the furnace to keep it all going. Building a rapid growth company requires capital from somewhere.

For young, risky, high-potential companies, the source of necessary capital is equity: cash in exchange for a share of ownership of the business. About 4,000 US companies a year get this equity capital from VCs - professional investors who collect money from limited partners and put it into start-ups. But nearly 20 times as many startups, about 70,000 per year, get their equity investment from angels - people investing their own money in startups.

Where do these angel investors come from? There are two kinds of serious angels. Solo angels and members of angel groups. Solo angels can be great because they can be the first to validate an idea. They can make decisions quickly. They are not afraid to break with convention and back an unproven idea. But these same tendencies mean they typically do not lead rounds, and they can rarely fund a company single-handedly (which an entrepreneur wouldn’t want them to do anyway). And they can also be a nightmare if an entrepreneur gets mixed up with the wrong kind.

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Angel groups, in contrast, can bring much greater depth of capital by pooling the money of many investors together. They also bring a broad spectrum of talent, experience and contacts. Angel groups do this kind of investing constantly, so they know how to stage capital into a company in the early years and not mess up the capital structure or deal terms for later rounds. They also self-select and organize around good angels. Many of these groups are excellent at leading rounds. And, unlike spreading a round of investment across an equal number of solo angels, groups will centralize the oversight and management of the investment, acting more like a single large investor than a handful of individuals.

However, groups do present some challenges. The groups tend to have more process and will likely put an entrepreneur through a more organized due diligence review process. The well-known ones get a lot of deal flow, much of it consisting of companies which are reasonably far along, so they can have relatively high expectations in terms of an entrepreneur’s understanding of her business. And it can take a bit more work to manufacture a consensus around an idea than to convince a single iconoclast.   

The potential rewards are significant, however. In addition to a larger, more deliberately-structured round and capital-staging plan, the group can open doors for syndicating amongst other groups and seed funds, which can bring in even larger amounts of money (a single large groups can easily put $1M into a company and with syndication, several times that amount is common). But there are more subtle and important advantages to working with large groups - advantages that many entrepreneurs don’t understand.

When an entrepreneur goes shopping for investors one at a time, there is an element of serendipity to it, which can be very costly in terms of time and effort. Using her networking skills she is going to bounce around and try to collect the best folks. She might find some great investors this way, but depending on her luck or connections, it can be tremendously inefficient, requiring many 1:1 meetings over an extended period of time. And the resulting round is a bit of a patchwork quilt in which no one is really in charge, and there is no overall plan for the capitalization of the company.

In contrast, when an entrepreneur presents to a large group, an extremely valuable stratification or sorting effect occurs. The majority, maybe even as much as 90-95% of the investors, might have some interest, but in a lean-back kind of a way. However, the remaining 5-10% of them will be leaning forward and hanging on her every word. These are the folks who really get what she is talking about and have the skills, interest and experience to help turbo-charge her growth. Those sound like low odds, but when you are talking about a large angel group with 100-150+ members, these odds are extremely powerful. In one pitch an entrepreneur may find 10 or 15 really experienced, active investors who are part of, and influential in, a large pool of capital and can champion her through the group’s diligence process, term sheet process, raising money from other group members, and the subsequent syndication process. And they can provide years of counsel, advice and connections as the company grows. Working with their network, they can also help her land subsequent rounds of capital down the road.

How many gallons of coffee would an entrepreneur have to drink in face-to-face meetings to find 15 such valuable investors? That, in a nutshell, is the power of working with angel groups. It can take a little more upfront work to get started, but if she can find a champion to bring her in and set her up to pitch, she can quickly build a big funding round and surround herself with a deep bench of expertise.

These groups are easy to find. Most major cities have at least one if not several well-known groups. The Angel Capital Association publishes a directory of member groups organized by region. But there is a technique to approaching these groups. An entrepreneur should NOT simply apply cold. The trick is to review a group’s website and portfolio and select the group(s) which invest in her specific kind of company and then go to work on LinkedIn and her personal network to find someone in the group she can talk to. She should then use her networking skills to get to that person and then get their advice, a referral to the group, or an introduction to a better-suited member who can help refer her in. Once she has the right champion, she will want to work with the group to follow its process and secure and prepare for a pitch slot. 

It is a bit more work up front to get through the filter with a big established group. But there is a lot an entrepreneur can control by researching and finding the right group and the right person to champion her. And the potential outcome can be game-changing in the round and quality of the investor base, so the effort will be well worth it. Besides, who wants to drink a thousand gallons of coffee?