How Technology is Rapidly Reshaping The World of Angel Investing
No...I didn’t see them on demo day. In fact, I’d never actually met them. But along with roughly 95 other investors, I played a small role in enabling a team of young entrepreneurs to hit the ground running and grow their business.
I’m talking about my initial investment in a FundersClub-backed startup. For anyone new to this space, FundersClub is the world’s first online venture capital firm. Its members invest in individual funds that typically represent a single startup. Each startup that the company decides to fund is thoroughly vetted and curated from more than one thousand startups that FundersClub screens each year. Once a startup is chosen for funding, it is featured on the FC site where its members review its profile and make an investment. From a traditional angel investing standpoint, this approach may sound less than “hands-on”. However, I believe there are a number of reasons why this model will lead to a new generation of angel investing.
I joined FundersClub in the middle of 2012, after reading an article describing this method of curated access to startup opportunities. Living on the east coast, I found it intriguing to gain access to early stage Silicon Valley deal flow. Don’t get me wrong, there is compelling innovation occurring in Boston, NYC and other parts of the world. But let’s face it, this “best of Y-Combinator” club, had a certain cachet coming from a part of the country largely considered a wellspring of innovation.
I also serve on the FundersClub Panel, joined by a number of really interesting individuals with business and technical credentials from around the globe. The process of evaluating business plans remotely has gotten increasingly more streamlined. The deal flow passes through a lot of scrutiny before ever making it onto the FundersClub platform. The ability to use all types of digital tools from common pitch presentations, to video and signature gathering increases our ability to spot anomalies and speed up transactions.
Virtual Vs. “Hands-on” Angel Investing
I’m also a member of a local angel group here in Connecticut, the Angel Investor Forum (AIF). AIF is a very active group based in New Haven that meets locally. I have certainly developed an appreciation for being in close proximity to the entrepreneurial teams that we evaluate. After all, team quality is of paramount importance. In our forum, we have the ability to look them in the eye, assessing qualities not found in the PowerPoint as one way to rule out personnel risk. My peers in CT bring a tremendous breadth of experience when evaluating early stage companies of interest. Most of the members are successful executives, investors and serial entrepreneurs. They also come from all walks of life, manufacturing, sales, finance, and consumer products. They thoroughly enjoy screening startups and guide them as needed. The notion of mentoring startup entrepreneurs through the formative years has a history that has proven at times to be invaluable, whether for the networking, customer introductions or the subject matter expertise that it brings. It also doesn’t hurt having some local experts know when to spot and stop a dreaded train wreck before it occurs.
Not Mutually Exclusive
In Boston on October 2013, I attended the Angel Capital Association Leadership Workshop and had the opportunity to hear several panels on angel investing. The topics of the day ranged from recruiting new members to crowdfunding and general solicitation. Several times this subject of being “hands-on” versus online investing drove a good deal of spirited discussion. There were valid points all around.
One thing was crystal clear – angels liked to get plenty of face time with their entrepreneurs! This seemed to be the primary reservation people had for online investing. But aren't there multiple roles on a team doing due diligence? Couldn't someone’s role on a large distributed due diligence team be to spend time with the entrepreneurs, while others look at other metrics or other areas in which they have subject matter expertise? I definitely feel there is a powerful hybrid approach in the making. Here are a few examples why:
Timing and Tools
I believe that traditional angel groups could benefit greatly from the innovation in digital tools. After all the appropriate due diligence is done, wouldn’t it be good to get the administrative work done faster? Consistent pitch formats, entrepreneur video and electronic signatures are all best practices that FundersClub uses to communicate to a huge membership very expeditiously. Angel groups could all benefit from this innovation.
The charter of our local angel group is mainly to invest in local ventures, ie, the Northeast US corridor, with special consideration to startups in CT. As you might guess we don’t have quite the volume to draw from. We do ok because we are sandwiched between Boston and NYC, but there is a finite local supply. We screen, invest and mentor companies where we actually do have direct access to the entrepreneurs. Our deal flow is locally cultivated by the membership.
Local angel groups know their backyard markets like the back of their hands. But some may be landlocked by a certain concentration of technology and may see fit to round out that concentration by drawing upon outside technology themes. An online platform can be complementary by improving portfolio diversity.
FundersClub on the other hand, is well connected in Silicon Valley, to be sure, but there is no such geographic limitation to constrain them. Deal flow can spring from anywhere globally.
Angel groups are always looking to syndicate with others to round out deals. Some groups have the benefit of well-heeled neighbors that pile on. What about those locales that don’t? Why not syndicate with a group like FundersClub to top off an opportunity?
Value-add Comes in Different Forms
In summary, there’s a new frontier of investing emerging, one I believe blends trusted tradition with digital tools. I think about some of the local deals we’ve done diligence on and approved. Then I wonder how much more successful that local deal might become if it then passed muster in the FundersClub process where it gets even greater exposure plus an extended network of thousands looking to reinforce success. Yes, the two approaches can definitely coexist and the best of both makes us all better investors.
Joe O’Connor is a father, business advisor, and private investor.