Syndication & Angels Groups
For an investor, there’s no greater thrill than getting behind a promising new business early on and helping to make it a success. Today, there are roughly 300,000 Americans who, as angel investors for startups, attempt to do just that.
The amount of active angel investors in the United States continues to grow. The Small Business Administration (SBA) estimates that there are more than 300,000 individual angel investors and growing fast in the United States in 2019, which provides funding for about 30,000 companies per year.
But because we all cannot be a Jeff Bezos, it’s generally wise to team up with an investor group. Even if you make it over the SEC’s regulatory hurdle, having any real success usually means joining a group of other “angels” who can share the due diligence responsibilities as well as the initial seed capital.
Traditional Angel Investor Groups
The good news for early-stage investors is that the number of angel funding groups in the U.S. has exploded over the past couple of decades. According to the Angel Capital Association (ACA), there are now three times as many groups as there were in 1999. In 2019, ACA membership consisted of 275 angel groups, with an estimated 400 total groups in the U.S.
Still, it helps to have personal connections, as most of these groups allow membership by invitation only. That doesn’t mean you’re necessarily out of luck if you don’t have an “in” with any of the current members, however. Some will allow newer angel investors to participate in a couple of meetings as a guest. Once they get a sense of your commitment level and what you bring to the table, they may ask you to join.
Most investor groups require membership fees—typically of around $1,000 or more per year—and hold periodic meetings where they hear pitches from entrepreneurs in need of capital.
Advantages of Angel Groups
Though attending monthly or quarterly meetings might sound like a lot of work, there are some important reasons why the team approach is popular among angel investors. Most young companies are seeking more cash than any single investor is willing to put up—often upward of $1 million. By dividing that ownership stake among several investors, an individual may only need to kick in say $25,000 to $50,000 on a single deal.
Investors who band together can also split the considerable due diligence work that any major investment requires. Beyond being a huge time-saver, a collaborative operation allows the funders to draw on each other’s experience and expertise. The decision to invest in a business is still up to the individual, but in this way, prospective investors get input from others in the group before they decide whether to get involved.
Perhaps the biggest advantage of joining a well-organized group, however, is being able to learn about more deals and more critically have a full stack backroom support with all the necessary resources. Angel investing is by its nature a high-risk high-reward proposition. As such, most experts suggest having a portfolio of at least 10 companies in order to protect your capital. It certainly helps to have access to a steady flow of highly qualified and vetted deals —something that’s hard to achieve if you’re going solo with regard to angel investing.
Online Investing Syndicates
If you like the idea of joining up with other investors but don’t want the commitment of a traditional investing group, you do have an alternative. Online syndicates such as AngelList and others to allow high-net-worth individuals to work together on deals, often with no annual fees and no meetings.
Online groups are also attractive to those who aren’t ready to put up large sums of cash. Some syndicates let you contribute as little as $1,000 to a particular business venture, significantly lowering your exposure to risk.
Typically, a lead investor will put up a substantial amount of the total investment— often around 20%—and let other syndicate members kick in smaller amounts. To compensate the lead investor for their larger role in the deal, the other investors agree to pay the lead a “carry”—a percentage of the profit from their investment.
Some syndicates cover a fairly broad range of deals and others specialize in a specific industry, such as technology or healthcare. If you’re interested in connecting with other investors, the ACA website is a good place to start. There, you’ll find a convenient directory of online and traditional groups across the U.S.
The Bottom Line
If you’re new to angel investing, it often helps to join a group that can partner up on deals and spread out the due diligence work. And with online syndicates, you don’t necessarily need to meet face-to-face with other members to get your crack at early-stage investment opportunities.