Sharks & Minnows: What is Angel Investing?
Sharks & Minnows: What is Angel Investing?
I, like many parents, have spent countless hours spent standing on the sideline of a soccer field watching my kids play. One drill, favored by our local club, required players of one team to dribble a ball from one end to the other, while protecting it from a group of opposing players. Should the player lose control of the ball, they would then join the team of hunters, leaving the survivors to regroup for another attempt. The game, known as “Sharks and Minnows”, concludes when all the minnows have been “eaten” by the Sharks.
Today, the average American’s impression of Angel investors is strongly influenced by ABC’s “Shark Tank”. In the show, hopeful companies make a five-minute presentation to a small group of potential investors, aka The Sharks. Unfortunately, this, overly combative, made-for-television, event is in fact closer to the children’s soccer game than the reality of Angel Investing today.
So, what is Angel Investing and why should you care?
Let us assume that you have a business idea that you want to turn into a reality. If you wish to turn your vision into something significant, by definition, you will not be able manage it by yourself — you will need help. This necessarily, means hiring people, and unless you are very persuasive, you will need to pay salaries. Consequently, you are going to need money. This money can come from a variety of places. For example, your own savings (e.g. from a previous successful venture), or investments from people that you already know (generically referred to as “friends and family”), or…
Well, that’s the point. If you don’t have significant assets yourself, or don’t have access to generational wealth (as is specifically the case for many minority founders), then where can you go? You can’t ask a bank[1] and you probably do not meet the criteria that the Venture Capital firms require (nor need that level of funding), so, what do you do?
Enter the Angels. Angel investing was born out of a genuine market need to bridge the gap between funding from “friends and family” (usually ~$100k or less) and institutional venture capital (funding well in excess of $1million). The name, incidentally, was originally borrowed from the arts. “Angels” referred to patrons of Broadway shows whose investments funded performances — and has stuck. Angel Investing has become a necessary part of the start-up ecosystem with anywhere between $3B to $24B was invested into early stage companies[2] each year. For the New York Angels, our members have invested into our portfolio companies at the rate of more than $1million per month for the past 3 years.
However, there would be no need for this level of Angel funding without a strong demand. This demand is driven in large part by the fact that it has never been easier to start a company. Technology, remote working and outsourcing (anything from graphic design to laboratory space) mean that the capital requirements of a start-up are so much less than they were 10 or 20 years ago, and are getting lower each year. Start-ups have also benefited from enhanced “exit” possibilities, since Fortune 500 companies now look to acquire solutions as opposed to building themselves, and the IPO market is at last returning.
Also, with “unicorn” companies now front-page news, far more of the best talent emerging from Universities is being attracted to start-ups. All of these factors mean that the demand for early-stage funding has never been greater, and the evolution of funding models is just another aspect of this trend. Start-up companies now have the ability to raise funds from family-offices or from crowd funding campaigns, however Angel investments remain the leading source of funding for start-ups.
So, who are Angels?
Angels are defined only by their ability to invest in a speculative venture. This suggests a level of investment dollars and a high tolerance for risk (and generally this carries the designation of an “Accredited Investor”). The ACA (Angel Capital Association) believes there to be 14,000 Angel investors in the USA, most of whom are members of at least one Angel Group, such as the New York Angels, which has 130 members. Angel Groups have increased in popularity in line with the rise in demand for early stage funding, resulting in a 4x increase in Angel Groups since 2000.
Angels can come from any background but generally you will encounter Angels whose previous experience comes from any of three distinct areas:
Previous entrepreneurs (with at least one successful exit)
Former corporate executives (generally with a specific area of interest or expertise)
Financial Services Professionals (with a background in funding, e.g. bankers, fund managers)
Each set of investors has a particular set of expertise and experience that they can draw upon both in evaluation of an investment and for the benefit of the funded company. In this way, the benefit of a diverse Angel Group, over an individual investor becomes clearer.
The big difference between Angel financing and other forms of investment is that the Angel is investing his/her own money. Where as institutional investors, are in business to create a return for their own LP investors, the Angel investor could well be evaluating writing your company a check, verses their next vacation, fast car or kitchen upgrade. Angel investing can be very personal.
Consequently, the levels of diligence conducted by Angel groups like ours may surprise some founders (some of who naively expect to walk away with a 6-figure check based upon a 5-minute presentation — thanks Mr. Wonderful!). The New York Angels is proud of its investment process, and I believe that nearly all founders (even the ones who failed to get funded) would agree that the experience had enhanced their understanding of their own business and had helped them think about some of their challenges in a different way.
The personal connection that many Angels feel can be very beneficial for the founder. Many Angels are willing to become hands-on helpers with the business in an advisory or in some cases an operational role. Leveraging decades of industry experience and contacts can prove to be a powerful driving force for the organization. This is the reason why many Angel investments are referred to as “smart money”. The founder is not just getting funding but is gaining some significant help for his/her business.
Once Angels are on the Cap Table of a company, there is a genuine feeling of shared responsibility to work towards a successful outcome. We believe that the funding event is not a singularity, rather just one milestone on a journey. This is backed up by the numbers, which show that the majority of dollars invested by New York Angel members in 2020 went into “follow-on” funding (i.e. re-investing in portfolio companies) as opposed to new opportunities.
Angel investors are not Sharks, and founders are not Minnows. The reality is that not only is Angel investing a necessary part of the funding landscape, there can be a symbiotic relationship between Angel investors and their portfolio companies not seen in other classes of lending. These Sharks help their Minnows reach the other side of the field, still in possession of the soccer ball. Unfortunately, this version of reality wouldn’t make for great television ratings.
-Simon Hopkins, NYA Board Member
[1] Actually, you could approach a bank, but without collateral, it will be a very short meeting. You could offer use an asset, such as your home as collateral, but then technically the bank is then loaning money to you and not your business.
[2] This broad range of “Seed/Angel” funding is taken from the ACA 2020 Report, and demonstrates that a precise figure is difficult to obtain since the total includes money from individual Angels, family offices and institutions, as well as Angel groups
