If you’re in the process of raising your first round of capital, you’ve likely found that it’s difficult to raise all you need to build, launch and grow your startup from a single investor. This is exactly why angel groups exist, and why startups turn to them for financing. But what is an angel group and how does it work? In this article, we explore the different aspects of raising capital from angel groups and the benefits and drawbacks of doing so.
What is an angel group?
An angel group is a group of accredited investors, and high-net-worth individuals, such as entrepreneurs, executives, and other experienced businesspeople, who pool their resources to invest in early-stage companies. Angel groups offer a variety of benefits to startups, including access to capital, mentorship, and connections to potential customers and partners.
How are angel groups structured?
Angel groups typically have a formal structure. They have a managing partner or general partner who is responsible for the day-to-day operations of the group, and a group of associates or analysts that help conduct due diligence on deals. The members and investors in the group cut checks for $25-100k, and act as silent partners. They can present deals for the group’s consideration, but they are not responsible for sourcing/closing their deals. The funds gathered from each of the members are pooled together into a “fund”, which is distributed to startups by the managing partners.
How much capital do startups raise from an angel group?
The amount of capital that a startup can raise from angel groups depends on a variety of factors including the industry, the size of the market opportunity, and current traction. That said, these forms of groups typically invest up to $1M, but the average is closer to $300k.
How much equity do startups give up by raising capital from an angel group?
The amount of equity that a startup must give up to raise capital from an angel group depends on the size and terms of the deal. Generally speaking, they will take between 10% and 20% of the equity in the startup for their investment.
Compared: angel groups vs angel syndicates?
While angel groups and angel syndicates are similar, there are some key differences. Angel groups are typically made up of individual investors who pool their resources together to write a single check to an early-stage company, whereas angel syndicates are made up of multiple angels who write individual checks to the same startup. The individual investors in an angel syndicate can choose which opportunities they invest in, whereas the individuals in a group cannot. Also, angel syndicates often focus on investing in later-stage companies, while angel groups are more likely to invest in earlier-stage startups.
Compared: angel group vs venture capital?
While angel groups and venture capital firms take a similar approach to investing in startups, there are some key differences. They typically invest smaller amounts of money, into earlier-stage companies than venture capital firms. Angel groups also typically take a more hands-on approach to investing, are more willing to take risks, and have less stringent requirements than venture capitalists. Finally, whereas angel groups are typically backed by wealthy individuals, VC firms are usually made up of institutional investors.
What are the benefits of raising capital from an angel group?
There are many benefits to raising capital from an angel group.
- Lower qualification requirements compared to venture capital
- Higher appetite for risk, meaning they’re more likely to invest in a startup with a less-than-perfect business plan
- Access to higher sums of capital compared to friends and family round
- Access to extensive networks of experienced entrepreneurs, executives, and other businesspeople
What are the drawbacks of raising capital from an angel group?
As with any form of fundraising, there are some drawbacks to raising capital from an angel group.
- More dilutive: these groups typically take a larger percentage of ownership in the company compared to venture capital firms. Angel groups often take between 10% and 20% of the equity in the startup, while venture capital firms typically take 5-10%.
- Higher cost: As mentioned above, these groups are more dilutive than some of the alternatives. This dilution comes at a higher cost in the event of an eventual exit.
- Loss of control: As part of the deal, these groups will typically ask for some kind of control over the company through board seats, voting rights…etc.
Tips to raise money as a startup from an angel group?
Raising money from an angel group is no small feat, but it is possible with the right strategy. Here are some tips to help ensure success when raising capital from one:
- Know the angel group’s criteria: It is important to understand the angel group’s criteria for investing to ensure that you meet their requirements.
- Prepare a compelling pitch deck: It is essential to have a well-crafted pitch deck that outlines your vision and value proposition, and the potential return on investment.
- Ask for feedback: Before submitting your pitch deck, consider seeking feedback from other investors and industry experts.
- Negotiate the terms: Don’t agree to any terms that you do not understand or those that will put your company at risk in the future. Instead, seek legal counsel and then negotiate.
What are the top angel groups in the United States
There are several angel groups in the United States who provide early-stage capital for startups.
- Golden Seeds: Golden Seeds is one of the most active groups in the United States, with over 400 members and offices in New York, Boston, Dallas, and San Francisco.
- Band of Angels: Band of Angels is one of the oldest groups in the United States, with over 70 members and offices in Silicon Valley and San Francisco.
- Tech Coast Angels: Tech Coast Angels is one of the largest groups in the United States, with over 400 members and offices in Los Angeles, Orange County, San Diego, and San Francisco.
- Keiretsu Forum: Keiretsu Forum is one of the most well-known groups in the United States, with over 1100 members and offices in New York, Los Angeles, San Francisco, and Seattle.
- New York Angels: New York Angels is one of the most reputable groups in the United States, with over 200 members and offices in New York City.
Final thoughts on raising capital from an angel group?
Raising capital from an angel group can be a great way for startups to access the capital they need to get off the ground. They offer a variety of benefits, including industry expertise, mentorship, and connections to potential partners and customers. However, it’s important to understand the drawbacks of raising capital from one. Consider researching the top groups in your area and before signing any term sheets ensure that they align with the direction in which you want to take the company.