This is the first installment of a three article series focused on launching an angel group.
Angel investing has long been a popular way for individuals to support and invest in early-stage startups. One effective way to amplify the impact of individual angel investors is by forming an angel group. In this article, we will explore why angel groups exist, who can and should start one, the steps and considerations involved in starting an angel group, and how to build a community of investors to support promising startups.
Why do angel groups exist?
Angel groups exist to combine resources, expertise and networks to invest in early-stage startups, providing them with the necessary capital and mentorship to grow. These groups help mitigate individual risk by spreading investments across multiple ventures, leveraging the collective knowledge of their members to make more informed decisions, and providing general support and camaraderie for angel investors.
According to Investopedia, The Center for Venture Research estimates that there were more than 300,000 individual angel investors in the United States in 2019, which provide funding for over 60,000 companies per year. Research studies from the National Bureau of Economic Research have also shown that angels are beneficial to the growth, performance, and survival of startups, even if they are located in economies that are not friendly to entrepreneurs. Startups that have angel backing are at least 14 percent more likely to survive for 18 months or more after funding than firms that do not. Additionally, angel groups can help bridge the funding gap between seed-stage and venture capital investments, providing crucial capital and support to promising startups.
So, who can start an angel group?
Anyone with a passion for investing in startups and supporting early-stage entrepreneurs can viably start an angel group. Typically, angel groups are formed by high-net-worth individuals, successful entrepreneurs, venture capitalists, or professionals with expertise in specific industries. These individuals come together to pool their resources, share knowledge and experience, and collectively invest in promising startups.
To start an angel group, individuals should have a strong understanding of the startup ecosystem, investment principles, and risk management. They should also have a network of potential members or investors who are interested in participating in the group. Additionally, having a clear vision, mission, and structure for the angel group is essential to attract members and ensure the group's success.
Overall, while there are no strict requirements for who can start an angel group, individuals should have the financial capacity, expertise, and network to effectively launch and manage the group - undertaking the launch of any new community is not a small task.
Who should start an angel group?
Broadly speaking, anyone that has the time, passion, and dedication to do so should be welcome to start their own investment group/network. Starting an angel group might be best suited for experienced investors, successful entrepreneurs, industry experts, high net-worth individuals, networked professionals, philanthropists, and collaborative leaders. These individuals possess the typical qualities of an angel group manager. Between having industry insights, financial resources, and strong networks, they are well-suited to establish and lead an angel group.
Things to consider when starting an angel group
There are many factors to consider when setting up your angel group, a few key points include:
Legal Structure: Determine the legal structure of the angel group, such as forming a limited liability company (LLC), partnership, or other entity to accept dues and payments, and establish governance and decision-making processes.
Membership Criteria: Define clear criteria for a membership, such as investment experience, financial capacity, and industry knowledge. You should also consider whether or not to charge membership fees, or having a minimum annual investment amount for members. This ensures that all members bring valuable insights and resources to the group. We have seen angel group membership fees range from $500-$3,000/year, depending on the involvement and management required.
Accreditation: Many angel groups require members to meet the criteria of an accredited investor as defined by the Securities and Exchange Commission. This includes having a certain level of income or net worth to participate in private investment opportunities. Accreditation requirements for starting an angel group as well as the need for verifying accreditation as an angel group manager can vary depending on the country in which the group operates. It is important to research and understand the specific regulations and guidelines related to angel investing in your country to ensure compliance and ethical practices within the industry.
At present in the United States, angel investors must have at least $1 million in net worth (excluding their primary residence), or have an income over $200K/yr each of the last two years. There are a number of other ways to qualify as an angel investor, however, and these requirements change over time. See the full information on accreditation from the SEC here.
Investment Strategy: Establish a clear investment strategy, including the types of startups the group will invest in, geographical focus, the typical investment size, and the desired stage of investment (e.g., seed, early-stage) and the overall goals of the group. Deciding whether to formally syndicate deals via SPVs, vs allowing members to invest individually is also important.
Governance Structure: Create a governance structure for the angel group, including roles and responsibilities of members, decision-making processes, and investment guidelines. Consider forming a board of directors or an advisory board to provide guidance and oversight for the group's activities.
Meeting and Communications Cadence: Establishing a structured meeting and communications cadence is essential for fostering collaboration, transparency, and efficiency within the group. Regular meetings provide a platform for discussing investment opportunities, conducting due diligence, making decisions, and evaluating portfolio performance. Clear communication channels, such as email updates, newsletters, and online platforms, help keep members informed and engaged. We will have additional information on this topic in a further article in this series called Managing Your Angel Group.
Time requirement to manage: As the manager of an angel group, it is essential to consider the time commitment required to effectively oversee the group's operations. Managing an angel group involves, at a minimum, dedicating a few hours per week to tasks such as organizing meetings, communicating with members, and handling administrative responsibilities. In addition to regular weekly commitments, there are also annual housekeeping tasks (maintaining records, financial transactions, legal documents, and ensuring compliance with regulations) and member tracking that require attention. It is crucial for the angel group manager to have the capacity and willingness to invest the necessary time and effort to ensure the success of the community.
Recruiting New Members
Recruiting members for an angel group can be difficult without the right network. Most angel groups are location or association based, and drive new memberships through various means, including attending networking events like industry conferences and startup pitch events to connect with potential members, joining professional associations such as the Angel Capital Association, and using online platforms like Linkedin to reach out to individuals with relevant backgrounds.
You’ll have to be creative in how you recruit these days, however. At this point, there are a number of angel groups, both local and virtual, for investors to participate in. Asking for referrals from existing members or your professional network, hosting educational workshops on angel investing, and clearly articulating the benefits of joining your group, such as access to high-quality deal flow, shared due diligence, and networking opportunities, can effectively attract new members, but, again, this will take some brainstorming on your part.
Conclusion:
Although there are many factors to consider before starting an angel group, like regulations, strategies, recruiting members and time, there are actually some benefits to starting one as well. Starting an angel group can be a rewarding way to engage with the startup ecosystem, support early-stage companies, and build a community of like-minded investors. If you read this article and still think to yourself, “Yes, I can do this and I’m ready!” you will next need to build out a workflow for your angel group.
Next, we’ll cover Building Workflows for Your Angel Group.
