Episode 3 delivers a deep dive into angel groups. Pooling resources and working together has some expected and unexpected benefits. Dave explains each of the key considerations and how angel groups deliver value to investors. We also profile the different operating structures that angel groups employ to cover operating costs.
Hey Joe. How are you doing?
Doing well. We started off, episode one was looking at the ecosystem. And in episode two, we looked at some of the new Floridians that are coming down here, and some of the stages of investing. Now, here in episode three we’re going to get a little deeper into Angel groups. Specifically, what they are and what are some of the advantages of being part of an Angel group. Let’s kick things off with the definition. What is an Angel investment group?
Well, there are two ways to be an Angel investor. One is, to be an individual and invest in deals on yourself; you are an investor with a company, you’re on the Cap Table, you are basically an individual. The other way is, join a group such as SeedFunders, New World Angels or Bridge Angels. These groups are obviously just a lot of Angel investors that get together. They band their money. They band their time. They basically create a lot more synergies than just an individual Angel. All Angel investors regardless if they’re individual or a member of a group, have to be accredited investors. I said previously, an accredited investor is someone who’s worth a $1 million or more, not counting the value of their personal residence and/or makes $200,000 a year or $300,000 with a spouse. Each of these individual Angel groups that I mentioned have different processes and procedures as far as how people want to join. Each has a different location but basically, they all have the same goals. We all have the same goals one, for profit. We invest in equity for profit. We aren’t making loans or making grants to companies. We’re all for profit. I think with the exception of Miami Angels, but again their goal as well is to make profits for their investors and for their members. We also all want to help these startups. That includes funding and mentoring. Again, all these groups want to help startups. They want to fund them. They want to mentor them. The difference is, the group is on the Cap Table as a single investor. You might have five or 10 or 20 individuals in a group that all invest in a company. They all join into what’s called an SPV – Special Purpose Investment Vehicle that basically invest in the company as one. That group then has a lot more clout. It basically quite a bit different than an individual Angel investor.
And we say special purpose vehicle, that ends up being the LLC. Then the LLC actually does the investment.
That’s right. The actual investors are members of the LLC. And the LLC does the investment and manages the investment for the members.
Great, so when we compare those two; joining on your own or joining in a group, what are the advantages of joining in a group?
There are numerous advantages in a group. I’ll get into a few of those things. First of all, if you’re new to Angel investing, you learn a lot from a group. You have a lot of members that come to meetings, that share emails and share experiences. Just the learning experience alone in a group is tremendous compared to an individual. You also have more deal flow. These groups, we have websites, we’re well connected around the State. We have reputations. A SeedFunders example my one-liner is, “We’re looking for pre-revenue scalable technology to invest in.” If people are interested in that, we attract partners in SeedFunders who are interested in pre-revenue scalable technology. So, people can learn from that from other people. We have great deal flow. When it comes to that, people know what we’re looking for and they refer those deals to us. The deal flow is more in a group than individuals. An individual trying to find their own individual investments. We also follow best practices. The Angel Capital Association, which I believe all of us belong to. The Angel Capital Association has best-practice guides and procedures and things. We all follow that. We know what the best way to do is regarding due diligence procedures: standardized legal documents, accounting practices. All that is done by the group for the members versus an individual that would have to do that all themselves. Also, we have diversified experience of the members. As I said, many times we’re having a meeting and somebody’s presenting. One of our members says, “I have a question. I had a company that did something like that or did that.” It’s amazing the diversified experience of the members is a huge advantage versus an individual person. Also, we have fun. We meet like-minded people. We have lunches and dinners. Pre-COVID we did and we will continue to do those in the future. Lunches and dinners with each other. We see live pitch events and presentations. It’s just a great way to meet people and get involved, particularly if you’re new to an area versus being an individual Angel and trying to make individual connections.
The fun part is priceless, but when we look at the other advantages, how do those map over to expected returns in a group versus investing individually?
The expected returns actually are significantly higher. We will do a whole podcast on studies that had been done to document those expected returns, but there’s a number of reasons for that, for those expected returns being higher. First of all, is the due diligence. The amount of due diligences that are group can do is significantly higher than what an individual can do. That means that the deals are more vetted. They’re more vetted. They can bring higher returns, because there are fewer failures. It also spreads the risk. Basically, when you’re a member of an Angel group, you can invest in more deals. For example, if you’re an individual Angel, typically there’s the minimum investment for a company $25,000 or $50,000. When you’re an Angel group say SeedFunders, our minimum is $5,000 per deal. Instead of putting 25,000 to one company, you could put 5,000 to five companies. That spreads your risk and allows for higher returns, because a lot of these companies are going to fail. It’s a fact of early-stage investing like this. Other groups like New World Angels, they have a requirement of $10,000 per deal and three deals per year. For $30,000, you’re in three deals, not one. Again, diversifying your portfolio is really the best way to spread the risk and increase your return. There are a lot of studies that show you need about 10 deals to actually get a return on investment, because as I said, half are going to fail. It’s a risky business. And again, you hear a lot of people say, “90% of these companies fail.” That’s kind of exaggerated. That includes mom and pop pizza stores and consulting practice and things like that. But when you’re talking technology investment, the studies show about half of those fail not 90%, but half is a lot. So, you need to spread your risk out. I think 20 might be more feasible than 10, because then obviously you’re spreading your risk more. You think about it, if you invest 5000 in 20 deals, that’s not nearly as much as you have to invest 25,000 in 20 deals. A lot of people just can’t afford that. That kind of spreading the risk is an advantage that increases returns. The other two things I’ll talk about is industry experience. When a group has the experience in the industry, they can vet companies and vet potential deals a lot better than an individual who says, “Boy, this sounds really good. My brother-in-law said he’s been investing in this. It sounds good to me,” versus having a group that has the industry experience, you get better deals. You get better insight. Finally, after the deal is done, the participation with the portfolio company. If someone’s investing in 20 deals, you can’t possibly participate in 20 companies. We’re in a group with a number of people. Everybody participates in one or two yes, your group can participate with that portfolio companies. The stats show that the more investors participate with the actual investment, the higher the returns. As I said, there are studies that we can get into in another podcast that detail those.
Just to be clear, it’s not that the investment minimums change. It’s that because your pooling your money together, you can come in at $5000 and then pool it with other people in the group to get to that 50 or 100 or even higher minimum. That’s how you get that extra access to more deals.
That’s exactly right.
So, all this organization and all this infrastructure isn’t free. What are the costs of joining an Angel group?
Well, every group’s different. Most groups charge an annual membership fee that gives them the operating capital to run. Some have annual investment requirements where you have to invest a certain amount in a certain number of deals per year. SeedFunders, we’re quite different. Our investors buy equity in SeedFunders itself and become a partner. So, we have no annual fees or minimum investment amounts after you’re a member, but individuals need to choose what’s comfortable for them. If they want to join a SeedFunders group that has a capital requirement to buy in or make monthly annual payments to be a member of another group or a number of operating deals that they have to invest in, it’s up to them. Again, if you email me email@example.com I could point you in the right direction, based on your risk tolerance and the way you want to invest. Other advantages of the cost of joining a group are actually – as I said – joining the resources. Basically, an individual has to hire an attorney and an accountant to review deals in that. The group hires them and they represent everybody. Again, the costs are spread out among the entire group which saves money to the individual investors rather than being an individual Angel investor. Also, it saves for investors by doing deals faster. We have the experience. We have processes and procedures, standard documents. Basically, it’s less time for the investors. Less money than they have to spend and less time than they have to spend analyzing a deal because the group helps with all that. In summary, the groups pool the resources. It saves time. It saves money and you pay for it by either a membership fee or annual fee or being a partner.
All those resources: that buying power, that investing power, the network, the mentoring. All of that lends to the clout of the Angel group. Talk about why that’s important in investing.
Basically, the bigger the investment size, the more influence you have in the company, in the companies you’re investing in, the portfolio company. Again, if somebody as an individual investor puts in $25,000, they’re on the Cap Table. But if a group puts in $200,000 they basically have a lot of clouts. First of all, they get better deal terms. They can negotiate and say, “We’re putting 200 in,” versus somebody who’s putting 25. You get better terms. You can lead deals. Groups can lead deals and then the other investors have to follow along. Groups can lead deals. You have a better investment size. There’s also a potential for follow-on investment. Of SeedFunders of our 30 investments today, I think nine are follow-on deals. When a company is doing well, and then you made an original investment. Then you’re looking for more capital. The first place they come is to the groups that invested previously. We can then dictate terms or we can negotiate terms as far as what the follow-on investment is going to be, versus an individual who doesn’t have that kind of an influence. Also, we typically get a board seat in these companies. It’s hard for someone who puts $25,000 to actually sit on a board of directors of a startup, but as a group – and we’re putting in $150 or $200,000 – we typically get a board seat. In fact, two of our larger investments at SeedFunders, we have two board seats out of five. We do have a lot more clout. Groups have a lot more clout than individuals. Finally, after the investment as far as reports on updates, update pitches, and things like that, it’s pretty tough for an individual to ask a company to come in and pitch them on an update on where they stand and what their progress has been. But as a group and we have 10, 20 people involved, the companies are glad to come in and pitch on their progress.
We’ve been touching on a lot of information and covering a lot of ground. I think it’s worth checking back in on how someone connects with an Angel group.
Well, the first thing you would think is, do a Google search. Unfortunately, I did a Google search and typed in Florida Angel investment groups and appropriate terms like that. It’s actually not much help. With the one search I had, it wasn’t current. The first reference that came up was a two-year-old article on an investment that a group made. The second was over 10 years old. A lot of times, the internet just isn’t current on things. The better way to keep in touch with what’s going on and how to find these Angel groups is to subscribe to publications. Basically, there are a lot of online publications in the industry that deal with what is going on, who’s investing, what groups are active. That way, you can find out these groups. St. Pete Catalyst is one. Obviously, it’s a free online publication that talks about these investments. Florida Ventures Sourcing out of Orlando, another free online source. Refresh Miami, another source of online that tells you a lot about what’s going on in the Miami area, who’s doing the investing. There are other publications such as Tampa Bay Business & Wealth. Emerge America has a great newsletter that comes out quite regularly, at least once or twice a week that talks about things going on in the State and in the Miami area. The Night Foundation has a great newsletter that they come out and talk about the investments that are being made and who’s active. There are other publications like 83 Degrees, Palm Beach Tech which I think recently rebranded to South Florida Technology. Then you have the paid publications like the Business Journal. They’re basically Tampa Bay Business Journal, Orlando Business Journal, South Florida Business Journal. They charge about $4 per month per entity. But again, they do cover a lot of what’s going on in the startup area. Unfortunately, local newspapers have eliminated their local business reporters pretty much. So, they really are not a good source of information on startups. You’re rarely going to find local stories on startups in local newspaper publications. So, the online publications; search for those, look at those, read those and they’ll tell you which active groups are active in the State.
Wonderful, and while we’re checking back in on how to connect, we should also check back in on the value beyond profits, because they’re certainly there. How does an Angel investment group benefit the community in general?
There’s a lot of ways that the Angel investment groups do benefit the entire community. Start with funding startups. These companies wouldn’t exist if they don’t get that original funding from the Angel groups. These companies, they rent space, they hire people. That’s our mission, is to get these companies started and launched. That helps the overall general economy. Side benefits in addition to those direct benefits, there are a lot of side benefits. The first thing I’ll talk about in the press. You don’t know how great it feels when I read the announcement about an investment we made. The press that comes out, the community gets involved. They say, “Wow, that’s great!” I get congratulation emails from people who are not members. They just take pride in the fact that there are groups out there that are doing this. Even if they’re not involved, then they really aren’t Angel investors. That just creates a community price like winning the Superbowl, except we don’t have parades. But there is a civic pride in the investments that these groups do. We’re part of the community. In addition, our members join organizations, other organizations – non-profit organizations. We fund non-profit organizations. We donate to the causes of our members. Our goal is to be a part of the community, not just an investment group out to make money, but actually, be part. And it shows in the communities that these Angel groups are in. Those communities take pride. There is a lot of Angel investment groups that do for the community.
As you can tell, I love running an Angel investment group. We are capitalists. We are for-profit, but we do social good and we have fun. I said this before, but we’re having fun doing social good to make money. What more can you ask for in being part of an Angel group?