Investors and Startups Alike Benefit from an Increase in Organized Angel Funds

A recent story in Business Week reported that angel investors are increasingly turning to the formation of funds through which they invest in startups.  Traditionally there are three ways that angels invest – individuals either invest alone or as part of a group of investors in a particular company.  Or they invest in a formal angel fund which then makes investments in early stage deals, typically alongside extra investments by individuals or other funds. 

According to John Huston, chairman of the Angel Capital Association (ACA), the formation of angel funds is significantly on the rise.  Half of the last 14 angel groups that joined the ACA were organized funds.  This compares to the 20 percent of existing ACA members who were organized as funds. 

Working within the context of a fund has advantages for investors and startups alike.  Eentrepreneurs know that when they approach a fund there’s a baseline amount of money available. It also limits the risk to investors, because angels have their money pooled across the group’s entire portfolio as well as their individual investments. 

Huston is also the managing partner of Ohio TechAngels, the second largest angel group in the nation.  He says that right now angels are looking for startups that are highly capital efficient. They want to invest in entrepreneurs that have a clear path to breaking even before the angel funding runs out. If they don’t, they need to prove they can raise venture capital when they need to. Companies that need to raise $5 million are out of the range of even the biggest angel groups, Huston says, and unless it’s clear from the start that they’ll be able to raise a VC round, angel investors are likely not to invest. 

For more information, see the full story in Business Week.