at least $1 million in 2013, according to the Spectrem Group, a research firm focused on affluent investors. More than 1.2 million U.S. households have a net worth of $5 million or more. “I think they’re the ones that are more inclined to be angel investors,” says Spectrem Group president George Walper Jr. Only 132,000 households have a net worth of $25 million or more, he adds.
The Center for Venture Research at the University of New Hampshire counted nearly 135,000 individual angel investors active in the first half of 2013, up about 3 percent from the same period in 2012 (PDF).
The pool of potential angel investors looks likely to change, but with several different regulations in play, it’s difficult to say whether the number will shrink or grow.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to review its accredited investor definition every four years, beginning this year. Last summer, the Government Accountability Office studied the current standard, which covered, by its analysis, about 8.5 million U.S. households in 2012 (PDF). It examined potential alternative criteria that would balance investor protection with efficient capital formation. Some suggested alternatives would make adjustments based on investors’ understanding of financial risks or set a minimum threshold of liquid assets.
Also, part of the JOBS Act passed in 2012 allows non-accredited individuals to invest small amounts in private companies, though regulations have yet to be finalized. Washington State also just passed a crowdfunding law allowing companies to raise up to $1 million a year from non-accredited Washington investors, with income limits on how much they could invest.
Once people have met the accredited investor threshold, what prompts them to delve into angel investing?
For Desney Tan it was the combination of having the necessary wealth, an interest in technology and innovation, and the desire to gain new skills and experience. It’s hard to claim that you do innovation “without understanding all the different ways of doing it,” he says.
Another common way in to angel investing is through social relationships.
The majority of new members in the Seattle-based Alliance of Angels, for example, come from referrals. “Existing members had a good experience and tell their friends all the fun they’re having,” says managing director Yi-Jian Ngo.
SAC also taps existing investors’ social networks and local events such as Geeks on a Trail and Open Coffee to connect with new participants—particularly those who might have self-selected out of angel investing because they believe that the buy-in is too high. “I think that there’s a fundamental breaking point for accredited investors,” Sechrest says. “People who are above $5 million can invest in ways that people below $5 million probably shouldn’t.”
SAC’s group-investing model is particularly suited to the latter category, he says. “We’re looking at people at Amazon or Google or Facebook or Microsoft who earn $200,000 and are [accredited] investors on income instead of net worth.”
How to become an angel
So how can you train a wealthy individual to be a savvy angel investor? Many angel groups, such as TiE Angels Group Seattle, don’t make this an emphasis. “TAGS members are typically accredited investors, who are corporate executives, serial entrepreneurs, academicians, community leaders or accomplished individuals who may not need training,” explains group chairman Haresh Ved in an e-mail.
For those who make the attempt, the standard approach is something akin to an apprenticeship.
“The only way that appears to be effective for learning how to be a good angel is to do this with more experienced angels,” Ngo says.
Element 8, a cleantech-focused angel group based in Seattle, provides mentoring, workshops, and collective due diligence sessions led by more experienced members. And the Keiretsu Forum Northwest has hosted a monthly due diligence training class over the last couple of years with over 800 attendees, says Northwest Region president Nathan McDonald.
There is of course an enlightened self-interest at play here. The experienced investors benefit when more of their fellow angel investors can lead deals. But the willingness to teach fits into a broader theme that everyone I talked to for this story underscored: Angel investing is about making money, yes, but it’s also about giving something back. “‘I want to help the next generation of entrepreneurs succeed.’ It’s a very common reason, or motivation,” Ngo says.
But even these efforts leave a clear gap, says entrepreneur and angel investor Libes, who began an incubator called Fledge to help educate social-enterprise entrepreneurs at about the same time that SAC was started. “We have so many programs in the city focused on the entrepreneurs,” he says. “And the angel groups, they have a little bit of training, guest speakers and so forth. But their method has been to drop [new investors] into the deep end of the pool and say ‘Go.'”
SAC was set up to fill that gap. It educates aspiring angels in a more formal way through workshops covering the basics of angel investing, due diligence, and term sheets. That’s followed by three months of weekly due diligence meetings during which participants evaluate dozens of nascent companies in a wide range of industries. Past winning companies include Illumagear, maker of a helmet safety lighting system for construction workers; Piper (previously called Daily Dollar), which offers a cloud service to replace paper receipts; and Booktrope, offering Web-based tools for various aspects of book publishing.
The program is designed with first-time angel investors in mind and offers a minimum investment level that allows them to experiment without feeling over-exposed. The idea is to learn by doing—with a lot of help, says Josh Maher, a SAC organizer who got involved after finding success as a real estate investor. “OK, you want to do an angel investment? Let’s do one,” he says.
Organizers aim for about half of the 20 to 40 people that participate in each program to be first-time angel investors.
The participants are guided through the process of winnowing down a pool of 40 to 50 applicant companies—each of which pays $100 to attend the culminating conference—by more experienced investors, and by newcomer peers with different perspectives. They read through business plans, listen to entrepreneur presentations, and attempt to independently validate everything the companies say about things like market size, competitors, customers, and revenue, says Sechrest, a former economic development director in Corvallis, where he helped set-up the Willamette Angel Conference six years ago, modeled on earlier programs elsewhere in Oregon. When he moved to Seattle in 2011 his goal was to replicate that success.
The process can give participants a new way of looking at businesses, among other things.
Desney Tan has spent most of his technology career at big companies that
