Funding 101, Part 5: Angels & Angel Networks

Part V of Elizabeth's excellent series about finding investment. Click here to read Part IV on Business Plan Competitions.

Almost everybody would be happy to have an angel on her shoulder, and in high growth industries, angel investors are a likely path to funding.  But who are angel investors, and how do they work?

Angels come individually or in networks and they are a well-established component of the funding ecosystem. Apart from friends and family, angel investors are usually the first investors to put money behind an aspiring entrepreneur's idea.

While researching this article, I found conflicting data in a number of categories – but however you slice and dice it, angels typically invest in seed or very early-stage companies, many of which have yet to earn a dime.

Angels are a diverse bunch, but most share several characteristics. They are accredited investors, which means they have a high enough net worth that the SEC isn't too worried about them losing their money investing in unproven ideas or companies.

More than their tolerance for risk, a common trait is their willingness and flat-out desire to interact directly with entrepreneurs.

In addition to their dollars, they may offer mentorship, contacts and connections. As Brian Cohen, seasoned angel investor and author of What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea says, angels aren't always successful. But they are passionate and committed to helping young businesses grow and flourish. This is perhaps best explained by the fact that many angels were once, or still are, entrepreneurs themselves, and they know first-hand exactly what it takes to bring an idea to fruition.

Many angels invest via angel networks, even if they invest in deals of their own too.

Being part of a network helps the angels keep a steady deal flow in the pipeline, as well as sharing the burdensome and consuming work of due diligence. Expect an angel investment worth its salt to dedicate upwards of 80+ hours to the process of due diligence, which essentially means getting under the hood of a prospective business to assess if it has a shot in hell of succeeding.  As an entrepreneur, you should be forthcoming with all answers and information. Some angels also require background checks on the founders before an investment is sealed.

The investment itself can take many shapes and forms. The most common is an equity stake, where the angel gives the entrepreneur cash in exchange for a piece of ownership in the business.

Technically, angels buy shares, albeit shares they can’t readily trade, since the companies are private, not public.

Of course, in order for an angel to buy a stake in a company, the investor and entrepreneur will need to agree on a price for the company. Founders are going to want a high valuation, or agreed-to value, while the angel will want a lower, more reasonable one. Eventually, a sensible compromise will be reached....or not.  Both angels and entrepreneurs should be prepared to walk away from a deal if it isn't meeting key criteria.

Convertible debt is a rising alternative to an equity stake. This is simply a loan to a company for a given period of time, at the end of which the investor can choose to cash out or convert the loan into equity. According to a Halo report, released in April 2013, 11% of deals in the US are done as convertible debt, a near doubling from the year before. Royalty payments are another form of investment that is gaining traction. In this case, an investor gives a company money in exchange for a percentage of revenue over a defined period, which is sometimes for the life of the company.

Seeking investment from angel networks over individual angels has its advantages. Some networks offer training and mentoring for interested companies. This helps to prepare entrepreneurs for investment from their own group or from the investment community at-large. The Astia Network's Astia Access, for example, provides educational events and programs, some of which are specifically designed for the first-time entrepreneur. Recently formed Astia Angels focuses on women-led businesses in high-growth industries, regardless of sector. Unlike many angel groups, Astia formally pairs the founding team with advisors who assist them throughout the life cycle of the company. The Astia Venture Lunch, held alternately in NYC and Silicon Valley each month, puts fund-raising entrepreneurs into a room full of a variety of highly targeted prospects, such as angels and venture capitalists, as well as potential mentors.

Beyond education and mega-exposure, angel networks also bring numerous investors with their own funds to the negotiating table.

At Golden Seeds, an angel network that focuses on women-led businesses in life sciences, consumer, and technology sectors, members must commit to a yearly minimum investment amount and are encouraged to invest in Golden Seeds’ own investment fund, which invests in nearly every Golden Seeds deal. Also common among angel groups are provisions known as side cars, which automatically trigger additional funds for investment when a certain deal dollar amount is reached.

Golden Seeds encourages entrepreneurs to come to their Office Hours, a less formal session of pitching and feedback that acts as a screening but also training ground for the high-stakes Golden Seeds Forum. Golden Seeds also offers a pipeline program for very early, usually pre-revenue, companies at a lower investment buy-in of $10K per investor.

Securing angel money isn't easy. Golden Seeds funds about 3% of the companies that pitch, which, believe it or not, is above the norm for most angel groups.

Angel rounds in 2013 had a median size of $600K, and as any entrepreneur will tell you, finding 24 angels at the $25K level is a lot harder than finding one or two super-angels or working with an angel group. Many angel groups have a staff to take the lead on deal management, which is also beneficial to the entrepreneur.

The downside to working with an angel group is, well, working with a group; it can sometimes feel like the process is grinding the proceedings to a standstill.

Both the entrepreneur and the angel must assess whether the deal is the right fit – not only from a quantitative, but also qualitative perspective. Be cautious of high-maintenance investors who may cost more in time than their dollars are worth. I have heard of entrepreneurs "firing" investors for being too meddlesome, by returning their investment. The ideal match will tap the wallets of the angels but also their knowledge and willingness to participate as needed. In many cases, angels supplement an area lacking within the current team or board. Speaking of the board, you should expect to negotiate a board seat for angels or networks that lead or contribute a significant portion of any given round.

It's important to understand that many businesses don't fit the angel investment model. Angels are willing to make this type of risky, private investment because there is a significant upside. To make most angel portfolios work, angels aim for a minimum of a 10X return. This means a business with $1 million valuation needs to sell, merge or go public with at least a $10 million valuation. Angels are looking for the "hockey stick" growth curve in a massive market. Lifestyle businesses, such as consulting or mom-and-pop ventures, usually don't fit the bill. In order to attract angels to businesses like those, you must plan to disrupt the status quo or take your idea to a regional, national or global level.

Perhaps the best news for female entrepreneurs is the increasing number of female angles.

According to the Center for Venture Research at the University of New Hampshire, the number of female angels grew 50% last year. This is certainly a trend worth celebrating.


  • Angel Capital Association – listing of active angel networks by region
  • – virtually pitch your business to hundreds of angel investors
  • – upload your business idea and gain exposure to 750 investment groups in 65 countries
  • Pipeline Fellowship – trains women to invest in women-led triple bottom line ventures with an actual investment. Accepts entrepreneur pitches on a rolling basis. 

Elizabeth Crowell is the co-owner of Sterling Place, a multichannel retail company that sells eclectic antiques, fine home decor and specialty gifts. Profitable from year two, the business has steadily grown, with two store locations in Brooklyn, as well as a website. Sterling Place has been profiled by the NY Times and Elizabeth has been a repeat guest expert on Martha Stewart Living Radio. In 2011, Elizabeth was selected as one of 10 in the inaugural class of Pipeline Fellows, a program designed to train women to angel invest in women-led triple bottom line ventures, ie. profitable, environmentally responsible and delivering social impact. She is in the process of building out her own angel portfolio. For more information on Elizabeth, see her profile.

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