Why do Angel Networks Exist?
Where angel networks started, what they do, and how to measure a good one
One Reason
To help members invest in promising startups.
That’s it.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
Angel investing is a young (45ish years) but growing investment approach (3.1% 20yr CAGR).
Angel networks are even younger (30ish years), and today there are roughly 400 angel groups around the world.
Angels fill a key funding gap in the startup ecosystem and serve as a "conveyor belt" for young companies. The purpose of an angel network is therefore to help its members invest in promising startups.
Angel networks are, at their core, a platform for startup founders and angel investors to interact, which is consummated in the closing of a deal. Therefore, the central value an angel network can offer to the market is to help its members and founders get deals done.
The average yield rate in 2022 was 26.7%.
A Recent Phenomenon
“Angel investors” have only been around for about 45 years, at least in the modern sense. But they’re a growing category.
According to data from the University of New Hampshire’s Center for Venture Research, the number of active angel investors in the US grew from 200,000 in 2002 to 368,000 in 2022. That represents a raw increase of 84% and a CAGR of 3.1%.
However, I think it’s more interesting to note that the percentage of angel investors relative to the total US population has increased by 59% during the same period (CAGR of 2.3%).*
So where did angel networks come from, and what role do they play in this ecosystem?
*For reference, in 2002 the US population was roughly 288 million, and by 2022 was up to 334 million, an increase of 16% with a CAGR of 0.75%.
The Dinner Club
Most sources indicate that the term “angel investor” was born in the early 1980s when William (Bill) Wetzel, the founder of the University of New Hampshire’s Center for Venture Research, published findings from a transformative study about how entrepreneurs raised capital in the US that used the term “angel” to describe the individual investors writing direct checks.
Angel groups are even younger.
According to a fascinating research article (beginning on page 1443) published by Darian M. Ibrahim from the William & Mary Law School, “In the mid-to late-1990s, angels began to depart from their longstanding mode of informal, secretive operation and moved into the open by creating regional angel groups. In 1994, Hans Severiens (now deceased) founded the first prominent and probably still best-known angel group-Silicon Valley's ‘Band of Angels.’”
This move quickly caught on around the country. As of this writing, the Angel Capital Association’s FAQ page states there are over 400 angel groups within its database and many more unregistered across the globe.
The Academic Perspective: What Do These Groups Do for Angels?
According to Ibrahim’s publication, “Angels fill the funding gap as to both time and capital, functioning as a "conveyor belt" that moves young start-ups toward waiting venture capitalists.” They fill 3 main roles:
Angels invest when VCs will not.
Angels offer appropriate (read: smaller) amounts of funding.
Angels provide value-added services to entrepreneurs.
Angel networks assist members in their fulfillment of these roles through several mechanisms, including:
Steadier stream of deal flow.
Increased opportunity for interaction with other angels & VCs.
Chance to pool resources and fund larger deals while minimizing transaction costs.
The Practitioner Perspective: What Do These Groups Do for Angels?
I’m not nearly as smart or well-researched as Ibrahim. If you’re interested, I highly recommend giving the article a deeper read.
My team and I have looked at about 400 deals in the last 9 months on behalf of our clients. I’ve thought, read, and written extensively on the topic, and even developed the Angel Ops framework to help operators consider what it looks like to run a network well.
What do I think the purpose of an angel network is?
I think the purpose of an angel network is to help its members invest in promising startups.
The Core Interaction
Last year I read “Platform Revolution: How Networked Markets Are Transforming the Economy―and How to Make Them Work for You” by Geoffrey G. Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary thanks to a recommendation from my MBA Operations professor.
The book expounds on the power of double-sided markets aided by technology (think Uber, Airbnb, etc.), and points to the importance of understanding and maniacally defending the integrity of the “core interaction”. This interaction is the fundamental building block of the platform. For Uber, it’s the interaction between driver and passenger. For Airbnb, the interaction between host and guest.
The value of the platform is measured by the effectiveness with which it executes this core interaction. Everything else is supplemental.
I believe angel networks are, at their core, a platform for startup founders and angel investors to interact. That interaction is consummated in the closing of a deal. Therefore, the central value an angel network can offer to the market is to help its members and founders get deals done.
How Good Are Angel Networks at Their Job?
On average, they’re batting about .270.
The UNH Center for Venture Research defines “yield rate” as “the percentage of investment opportunities that are brought to the attention of investors that result in an investment.” This is tracked every year, and according to the latest annual report, the 2022 yield rate was 26.7%, meaning about 1 in 4 startups introduced to angel network members receive some measure of funding.
Want to be a great angel network? Beat 26.7%.
Final Thoughts
Angel networks exist to help their members invest in promising startups.
Building and running a great platform is really, really hard. The platform operator can never force a connection between buyer and seller, only build great systems and processes to support it. To be an effective angel network operator, maintaining a laser focus on this core purpose is essential. Every opportunity that comes across the table must be evaluated through the lens of “Is this a deal that our members might actually close?” If not, eliminate it from consideration and move on.
We have an average yield rate to beat.
What do you think?
Are there other contenders for “core interaction”? Are there other outcomes that are more important than closing deals? What does the yield rate look like in your community?
Weekly Observations: 3 Lessons Learned
Clear communication is hard to learn, but essential to master. 📢
This week I overwhelmed our team. I did not communicate well. They entered a meeting to have a focused, tactical discussion, and I caught everyone off guard by taking it in a high-level strategic direction that was only semi-structured. I reprioritized in isolation without taking the time to explain why. Our time was not particularly well spent as a result, and everyone left disappointed. Lesson learned: Setting clear expectations for meetings ahead of time and presenting information in a well-structured format drives greater productivity. Yes it’s my job to set the vision and direction for the firm, but engaging our partners to develop collective buy-in and evolving based on our collective expertise is
Talk to the founder ASAP. 🗨️
This week we were evaluating the market and competition for a client. We got started on the work just based on the deck we were provided, but after meeting with the founder to ask a few questions and hear more about their vision, we realized we were barking up the wrong tree. Meeting with the founder ASAP to really understand what they’re going for is a very good idea.
Nobody cares about the what. All they care about is their problem: the why. 👊
I had one of those “I feel like I just got punched in the mouth” moments this week. I realized some of the language I’ve been using to describe our products and services to the world is product-focused rather than problem-focused. Why do clients hire us? To help them close or eliminate deals more effectively - not to write diligence reports or run a great process (though that’s what we do). Might be time for me to go re-read Simon Sinek’s “Start with Why.”
Thanks for reading, have a great week.
-Andrew