For startup entrepreneurs who need less than $5 million in capital, the venture capital industry might as well not exist. The average U.S. venture capital fund has doubled in size since 2000 to over $200 million, according to Dow Jones/VentureOne. That means most venture partners see investments of under $5 million as a waste of their time, according to James Geshwiler, managing director of Lexington, MA-based CommonAngels. Only a gigantic return on such an investment would “move the needle,” or provide adequate returns, for such a large fund, Geshwiler points out.
And that’s what has created an opening for the angel capital phenomenon. As of 2008 there were 168 angel capital groups nationwide with more than 6,500 members, says Geshwiler, who ran a well-attended tutorial on the angel investing business at the last Web Innovators Group meeting in Cambridge on December 9. That’s up from about 20 groups when CommonAngels got started in 1998—and it doesn’t even count the thousands of non-affiliated angels. Most of them are wealthy individuals who are industry veterans or former entrepreneurs themselves, who like to invest relatively small amounts (usually on the order of $25,000 to $100,000), and want to be more involved in their portfolio companies than they would be if they simply became limited partners in venture funds.
Angel groups have helped to get hundreds of new ventures off the ground—including Xconomy, which is a CommonAngels portfolio company. These types of groups, like Tech Coast Angels in San Diego and the Alliance of Angels in Seattle, just to name a couple, work by assembling many individual investments to fill what Geshwiler calls the “funding gap” between the $500,000 and $5 million levels. Geshwiler tailored his overview of the angel industry for startup entrepreneurs working to launch small, pre-venture-funded startups, focusing on questions like how to approach angels, what sectors are most interesting to these investors, what levels of equity they usually expect in return for their investments. (Geshwiler has posted the PowerPoint deck from his presentation here.)
The “very nature of angel funding has changed tremendously” over the past 10 years, with the Internet having a big impact, Geshwiler says. Most individual investors “are not interested in letting the world know that they have money,” he says. But organizing into regional groups with their own websites has given angels a new way to filter proposals and function almost like mini-venture funds. (Xconomy’s other bureaus have seen a couple examples of this in action recently, with Redmond, WA-based Healionics collecting $2.6 million from a syndicate of angels in the Northwest, and San Diego-based MicroPower Appliance scoring an interesting round of financing from the Tech Coast Angels.)
Angels, like all other investors, have been hit hard by the financial crisis, with most seeing their personal portfolios shrink by 30 to 50 percent in the last year, Geshwiler says. But the good news, he points out, is that the risks involved in angel investing aren’t necessarily any higher than in the past—they’re just different. It may be harder these days for small, growing companies to obtain follow-on investments, but on the other hand, there’s less competitive risk as fewer companies enter each niche. That also makes its easier for small companies to attract and hold on to great employees.
“This is not our recession, it’s Wall Street’s recession,” Geshwiler says. “You guys [entrepreneurs] haven’t bought into the story that the economy is over. I wish we’d just get over all this hand-wringing.”
Angel investors are a good resource for many startup entrepreneurs because they’re typically future-oriented, backing companies that can reach exits in five to
