VC 101: The Angel Investor's Guide to Startup Investing
Chapter 4
Chapter 4
Angel Investors
The “angel” moniker is a hat tip to the increased risk that angel investors assume by investing in business that are often still proving that they have a good shot at success.

What is angel investing?

Angel investors are high net worth individuals (with assets over $1 million) who invest their own money into startups.

The “angel” moniker is a hat tip to the increased risk that angel investors assume by investing in business that are often still proving that they have a good shot at success, and need investor support to make it big.

Angel investors will generally invest in seed stage startups, giving these companies the extra cash flow that they need to get to the last stage of technical development and market entry.

EXAMPLE

In June 2004, “theFacebook” was picking up traction at a smattering of colleges across the US. But Mark Zuckerberg and his cofounders had bigger goals in mind – international expansion and rapid user acquisition.

Zuck and his co-founders dropped out of Harvard and moved the fledgling social media site to Silicon Valley, where they teamed up with Sean Parker, dropped the “the”, and started their search for funding.

Parker soon brought on PayPal founder and angel investor Peter Thiel, who [invested $500,000](http://dealbook.nytimes.com/2012/02/01/tracking-facebooks-valuation/?_r=0) in Facebook’s Seed round to help the team reach their goal of acquiring 1.5 million users by the end of 2004. (Spoiler Alert: close, but no cigar)

Any person who qualifies as an accredited investor can become an an angel investor – the name simply reflects the individual’s financial wealth.

To qualify as an accredited investor, an individual needs to make $200,000 per year or more of income (or $300,000 or more when combined with a spouse), or have $1 million in liquid assets (excluding one’s home).

Typically, an angel investor will invest between $25,000 to $100,000 in each startup investment deal, though smaller and larger check sizes (like Thiel’s) do occur.

In 2015, all US angel investors pumped about $24.6 billion into 71,110 startups, according to a survey of US angel investments by the Center for Venture Research at the University of New Hampshire.

What are angel groups?

Individual investors within a geographic area sometimes form angel groups that regularly convene, usually in person, to evaluate and collectively invest in startups. There are at least 200 angel groups in the US, representing over 12,000 individual angel investors.

Angel groups typically focus on a concentrated geographic region, often a single state or part of a state, or a particular city in metropolitan areas. Occasionally, angel groups will couple their regional focus with an industry sector (for example, fintech or healthtech). Some angel groups will focus on both a particular geographic region and a specific industry sector.

Angel groups try to use the group members’ collective knowledge and diverse skill sets to their advantage. Angel groups typically invest in Seed Stage startups, though some participate in later stages of funding, as well.

Angel investors generally invest around $750,000, amassed from its various members, into each startup that the group chooses to invest in.

According to the Angel Capital Association, 13,000 individuals belong to an angel group, out of the 250,000 US-based investors in private companies. This means that approximately 5% of all startup investors are members of angel groups.

Pros of Joining an Angel Group:

  • Intense focus on a single geographic area allows for an organized and specialized approach
  • Diverse group of like-minded individuals who can lend their skills and expertise, including connections, industry-experience, and advice to the entire group, and to the companies they fund

Cons of Joining an Angel Group:

  • Some angel investors feel that their group does not expose them to the best opportunities, as many groups are limited to a single geographic area, thwarting diversification
  • Group membership can be very time-consuming
  • Ability of group to perform adequate due-diligence on every single deal can be limited
  • Some entrepreneurs complain of receiving insufficient check sizes and experiencing unusually prolonged and time-intensive evaluation periods when working with angel groups. This can be a huge problem for startups that are relying on the promise of new funding to keep afloat.
  • It is in the best interest of an angel group’s leadership to address these issues, and for VCs and online investment platforms to partner only with angel groups that do their best to uphold best practices when evaluating and investing in startups.