Should Angels break free from angel groups ?



I hear a lot of commentary in the Boston area about how VC’s have needed to replace angels in seed rounds.  In an area with some much technology wealth created over the years I always found this puzzling.

Angel groups in the Boston area are a force.  My simple question today is : do they work or are they de facto doing a disservice to the ecosystem ?

Entrepreneurs complain loudly about angel groups.  It seems that the typical process involves endless due diligence and months of process for check sizes that often end up being disappointing.  The experience leaves a sour taste for many, and the complexity of dealing with the groups requires dedication and even expertise in navigating what is perceived to be a tortuous process.  Angels should be expert funding available fast on the back of the demonstrated expertise of strong founders.  Instead they’re painful and convoluted education processes.

The quick list of gripes include:

  • worse overhead than VCs for a fraction of the capital
  • tortuous diligence process
  • slow consensus building and decision making
  • investor overhead in refinancing
  • difficulty in accessing the right talent / mentors post financing

The irony or the shame of this situation is that angel groups are full of individual stars; people who have deep expertise and accomplished much more than I ever will in my lifetime.

If you contrast this with say Dharmesh Shah, Dave Balter, Joe Caruso, Ty Danco or Jennifer Lum, you see fast acting money that gets engaged and delivers ad hoc but meaningful expertise, and delighted entrepreneurs.

I get the logic from an angel standpoint: carefully dip your toe into angel investing, get structure around the process and of course network with like minded individuals.  The issue is that it simply does not seem to work that well.  I suppose the root cause is that creating consensus from a large population of diverse and talented people with strong opinions is like herding Cheshire Cats.  I talk from experience: the investment committee of Atlas once numbered over 10 partners and it was completely suboptimal.  The process seems to get much worse when angel groups collaborate, with timelines extending for months in many cases.

I talked to one awesome individual who is a member of one of these groups and is an expert on databases.  His question to me was” “how do i get exposure to medical devices on my own ?”

My response to this is:

  • You should not use angel investing to get exposure to sectors you know nothing about
  • If the angel club process is that painful you are self selecting out of the best companies
  • You would make way more money going deep on a segment you know better than anyone
  • You could actually help companies and have more fun doing it

My thesis at this stage is that angels should break free of angel groups and invest in the stuff they know best, and make a real difference to the companies that they fund.  I am sure there are many examples of successes that started with angel group funding, but in the age of transparency that we live in, the model does not seem to stand up to the test of common sense.

By empowering a thousand strong angels who leverage what they know, we would get a much more vibrant and efficient angel ecosystem.  We’d bring fluidity into the system.  Jeff Clavier and others showed the way in terms of demonstrating how you should put together groups of individuals who each bring a facet of expertise to a startup.

My advice; get on Angellist, showcase what you are good at and start targeting the best next gen companies in spaces that you know.  Four $25K checks in A+ companies that you can help would make a world of difference.

 

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  • http://profile.typepad.com/colinhayhurst ColinHayhurst

    I find it hard to disagree with anything written here. So the answer from me is a resounding, Yes.

    I spent 4 years helping startups deal with angel groups and your comments and experiences resonate with mine. I also took part in one group which I was shocked to discover was largely a talking shop. The groups I dealt with became more risk averse, and moved further away from being risk takers the bigger or older they got. It still perplexes me why these entrepreneurs, who like myself built and sold businesses in the past, were not willing to take big risks, as they had personally in the past.

    Thankfully I got away from them, found my own deal flow (offline, largely since pre AngelList critical mass here in the UK) and invested, very modestly, on my own and/or alongside other independent investors. Right now I’m done investing but AngelList is proving more than useful in finding/securing smart investors for follow on rounds :)

  • http://profile.typepad.com/miketrap MikeTrap

    Needed to be said, Fred. Thanks for saying it.

  • http://profile.typepad.com/evanish Evanish

    Fred,

    Thanks for writing this. As someone who hears regularly, in confidence, from friends/founders going through the process, I’ve heard these complaints many times. It’s sad, because our early stage funding issues is a leading cause of losing companies to the place that shall not be named.

    Thanks for all the efforts you and Atlas are making to make Boston the best ecosystem it can be; you guys are talking the talk (posts like this, holding the AngelList event, etc) and walking the walk (investing in many great, young, often first time founder companies). I feel like the tide is turning thanks to you and a growing number of others working hard at building our ecosystem.

    Thanks,
    Jason

  • http://profile.typepad.com/d99923445720323853 A Facebook User

    This is an excellent post, thanks for writing it up. I personally pitched to nearly every Angel Group in Boston and had all the same negative results you state above. Once I (we) focused on courting individuals, we were able to get 30 individual Angels to write checks and close on $1.1M this past September. It was certainly a lot of work but no one ever said raising capital is easy. Next stop, VC’s in the Spring/ Summer!

  • http://www.talentgraphz.com Tom Summit

    I have heard members of said Angel groups describe it as a coffee klatch http://www.merriam-webster.com/dictionary/kaffeeklatsch rather than an investment group. Mostly a social group for wealthy individuals (that made their money not on the web) than an actual investment vehicle.

    Hope this post breaks a few out of the pack.

  • Been There, Done That, Still Got Better Returns Than the 95th Percentile Venture Fund

    Now, if only the VCs would stop cramming individual angels down to common and then kicking them to the curb in follow-on rounds…

  • E Pollazzo

    Bootstrap and/or go west