Angel investors provide the fuel — the capital — that promising startups need to scale. Fewer than 5% of people who qualify as an accredited investor, aka wealthy person, become an angel investor. Some angels do more than hand over a check. Realizing that both financial and human capital are key to helping a high-potential startup succeed, these angels roll up their sleeves and provide introductions to customers, key employees, vendors and other funders. They also may mentor founders and provide advice.
The overall state of the angel market
“The angel market is in a bit of a retreat,” said Alicia Syrett, founder and CEO of Pantegrion Capital, an angel investment vehicle focused on seed and early-stage investments. She is on the board of New York Angels and a CNBC contributor. Angel dollars invested from 2013 to 2015 range from $24.1 billion to $24.8 per year, which was near peak levels, according to the Center for Venture Research (CVR). In 2016, invested dollars dipped to $21.3 billion. “Valuations were frothy,” she explained. Some angels stayed on the sidelines, while others invested less per deal.
Still others, after not being successful at making their first investment, don't try again, explained Brian Cohen, chairmen of New York Angels, entrepreneur and author of What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea. "Angel investing is hard work," he continued.
How women angels change the game
Unfortunately, people are more likely to invest in founders who are like them and the strongest similarity people see is gender. Men invest in men.
But women are now in what was once a man’s game. In 2016, more than one in four angels were women — 26%. The percentage of angels who are women has more than doubled since 2011 when it was only 12%. This is a reflection of women’s growing wealth and their interest in making an impact, which includes investing in other women and solving the world’s most pressing problems.
The influx of women angels is correlated by a nearly 60% rise in the number of female founders who received funding between 2011 and 2016. In 2016, 22% of angel-backed companies were female-founded. This number may be understated because unlike men, women may rely more on friends and family angels than traditional ones, according to Sharon Vosmek, member of Astia Angels. Astia Angels average two to three investments per month in women-led companies. They are now the most active group investing in women-led companies. She is also CEO of Astia, which provides access to capital and networks for women-led companies. CVR measures traditional investors.
What VCs overlook become opportunities for smaller and wiser investors
“VC’s failure to invest in promising companies led by women, minorities and in areas outside of Silicon Valley, New York and Boston, provides a greater opportunity for profit,” said Alicia Robb, CEO and founder, Next Wave Ventures, which provides investors with an ability to build a diversified portfolio while learning about angel investing. She is also author of The Next Wave: Financing Women's Growth-Oriented Firms. So, while companies led by white men from these areas have valuations too high for many angels, other ventures led by women, minorities or from other parts of the country are not overvalued. For example, California angel groups make 42% of their investments outside their state, according to the 2016 HALO Report by Angel Resource Institute/ PitchBook. "Making an angel investment is a bottom line decision," said Cohen. "Gender, race, ethnicity or company location shouldn't enter the decision making process." ”Good ideas are everywhere and from everyone,” Robb continued.
If you think women are just starting companies aimed at consumers, think again. “Women are starting B2B companies, fintech, artificial intelligence and other technology types of companies,” said Syrett.
Angels need help, too
Being an angel can be financially and personally rewarding. However, it is not without risk, which is why the SEC limits who can and cannot be accredited angel investors.
To reduce the risk and increase the enjoyment, some angels invest with others. They like collaborating on due diligence, benefiting from the diverse perspectives that a group provides and even the social aspect. “More and more angel groups recognize that [overall] the best decisions and the best deal flow comes from a diverse membership,” said Marianne Hudson, Executive Director at Angel Capital Association (ACA ). She is also a Forbes contributor. Also reducing the risk are the number and quality of accelerators, boot camps and entrepreneurial training programs that are increasing and improving the quality of entrepreneurial ventures.
Best practices have emerged. Angel groups recognize the role they play in helping an entrepreneur find additional money for the round she is currently raising as well as future rounds. Angel groups syndicate their deals with others, including venture capital firms. They may also provide follow-on funding.
From an angel’s perspective, one of the most important best practices is investing in multiple deals. Success in angel investing is based on the law of averages. No single investment is a guaranteed winner but, by investing in 10 to 20 companies over the course of 5 years, odds are that you’ll get some winners. It’s not just the number of deals that matter. Diversity of deal types mitigates risk, too. Accredited investor crowdfunding platforms, such as AngelList, SeedInvest and Portfolia, make it easy to diversify your portfolio by making smaller investments spread across geography, sector and founder gender.
Women invest in values as well as value
Interestingly, women take a holistic approach to managing wealth, which includes their investment portfolio and philanthropy, aligning both with their values, commented Robb. For example, a woman who donates to a cancer research institute may fund a startup that is developing an early-stage cancer detection technology, Vosmek noted.
During the past 10 years, a concerted effort has been made to attract women as angel investors. Angel groups like Golden Seeds and Plum Alley, which includes men, invest exclusively in women-led companies. Other groups, such as 37 Angels and Broadway Angels, are exclusively for women investors but invest in both male and female-founded companies. Importantly, many of these groups, like Pipeline Angels, have formal training programs for women who want to become angel investors. Even the gender-neutral groups recognize the importance of diverse membership when sourcing and vetting deals and have begun actively recruiting women and minorities, commented Hudson. Angel activity is expanding outside of Silicon Valley, New York and Boston. Angels groups are everywhere including Atlanta, Austin, Houston, Kansas City, Memphis, Minneapolis, New Orleans and Omaha.
Let’s hear it for angels
Even with a slight increase in the number of women becoming angels — 1% from 2015 to 2016 — there are too few to support the pipeline of quality female founders who are seeking funding. The number of women becoming investors spiked in 2012 and 2014. Vosmek hypothesizes that this interest was driven by the media, which were talking about the JOBS Act and the importance of startups and angel investors to the economy.
Local, state and national politicians can shine a light on the very important role angels and, more specifically, underrepresented entrepreneurial segments, have in spurring economic activity by acting as a megaphone for them. Angels have a role to play in upping their own profile. Sharing with other accredited investors why they became angels and how it benefited them could be just the inspiration those who don’t do angel investing need to put on wings. More people need to know that there are tax breaks for making some investments in startups, said Cohen.
The bottom line is that an angel investor can be anyone (who meets the SEC guidelines), anywhere … maybe even you. If you’re interested in becoming an angel, here are nine questions that you should ask yourself before diving in, an inspirational book (Impact With Wings: Stories to Inspire and Mobilize Women Angel Investors and Entrepreneurs) and a list of some angel group and training programs.
