Angels Networks and Startups

Here is a briefing from the panel - Partnership of Startups and Angels

TL;DR

Angel investors have become a special category of investors, not by check size and stage in the traditional sense, but by a more collaborative process for investment decision-making and venture building. There is more collective intelligence built up in the processes of top angel networks (hundreds of members) than in most VC firms with very lean teams. Some angel networks have built processes that have created "higher-than-average" IRR over long years of operation. And, in the U.S., angel networks share deals with each other, which means more data is collected. Angels are high-net-worth professionals and executives. Their insights and networks can be helpful in reviewing deals and helping with critical decisions in a startup journey, but don't handhold. They also have participated beyond angel rounds now.

Introduction to angel networks

The umbrella of all angel networks in the U.S. is Angel Capital Association (ACA). There are over 300 angel networks registered in the ACA. Different groups have different business models, decision-making processes, and collaboration models. Both Central Texas Angel Networks (CTAN, since 2006) and Tech Coast Angels (TCA, since 1997) have very impressive cash-on-cash returns or IRR. From 1997 to 2022, TCA reported an average IRR of 25%. CTAN had an annualized IRR of around 33% this year, according to Joseph.

What is the secret sauce of successful angel networks??How do angel investors evaluate and invest in startups??

Joseph is a board director of CTAN. During the panel, he explained that Texas (CTAN) and California (TCA) have different styles. CTAN was the most active angel network in the U.S. before the pandemic. Angels in CTAN collaborate on due diligence (DD) and negotiation but make decisions on their own. "In Texas, we trust no one but accept all information," Joseph said. Members even go out to the market to survey customers. CTAN just set up a fund this year, not to make any decisions for members, but to act as a sidecar for members to diversify portfolios. The fund will invest in all deals led by members' decisions. Joseph said angels appreciate DD reports shared by other groups but prefer collective works better than a report done by a firm. The signal of how many members write their own checks could be more meaningful than a report done by an employee being paid to do so.

TCA has a different model, he continued. It uses its funds as a collective investment vehicle. First, if there is enough interest from members after the first pitch, their own staff and experts will do DD and list all pros and cons. They will recommend it to the fund, and the board of the fund will decide on go/no-go and tiers of the investment amount. Then, the fund will introduce it to the members. Every member can vote based on the equity of the fund. After the fund decides whether to invest and how much to invest, members can write their own checks on top of it. Other angel networks have their own screening processes.

Joseph noted that an investment committee (IC) has basic functions, such as red flag checks, but it's never enough to rely solely on ICs for DD. There are many considerations in a good deal.

How might angel investors help and support entrepreneurs?

Bryan is co-founder of Taiwan Global Angels (TGA), which is an angel group, not a fund. Members evaluate cases that are selected by partners (4 co-founders working in VC or mentoring at Stanford, MIT, Berkeley, and other accelerators). "TGA only invests in startups that we can help with, especially with Taiwan resources," Bryan said. Taiwan has strengths in semiconductor and electronics manufacturing, which can help startups create advanced hardware. Half of the members have medical-related backgrounds and VC experience in the medical industry. Thus, they have the industry insights to evaluate opportunities in that vertical. TGA forms a Special Purpose Vehicle (SPV) for each deal, and the decision speed can be as fast as 6 weeks, according to Bryan.

Michelle is the chair of the Singapore chapter of Taiwan ITRI New Venture Association (TINVA). She said some angel groups can be less structured. Some hire an investment committee to do deal reviews and decision-making because angels are too busy. TINVA is associated with the top deep-tech research institute ITRI, which is backed by the Taiwanese government and works with a lot of startups.

What do you observe in the current angel investing climate?

The SEC is raising the bar for the definition of accredited investors, which could change the mentality of angel investors and hit startups, Joseph said. On the other hand, angel investing is squeezed at both ends - VCs and crowd-funding. Traditionally, there are clear lines between angel and institutional investors by the nature of the check sizes. Now, many VCs join the early-stage investment to write the first checks. Secondly, crowd-funding is now a resource. But crowd-funding could send a negative signal to future institutional investors. Crowd-funding valuations may also be too high since retail investors aren't professionals. Joseph said angels don't fight and compete for good deals. They value their personal wealth, and there are many opportunities out there. In the COVID period, valuations were jacked up and angel investing was slowed down. Now that it has ended, angels might become more active since more good deals with reasonable valuations might appear.

Michelle shared that in Singapore, she has seen a rise in syndicates of angel investors in recent years. There are more sector-focused small angel groups emerging, including female-only angel groups. Also, angels are becoming more conservative and not investing in ideas anymore. They prefer deals that already have lead investors. She has also seen more co-investments from angel investors in different regions to build strategic investors to help startups scale up globally. On the other hand, impact investing is gaining attention. More investors care about making a positive impact on the world instead of only financial returns.

Bryan added that angels might invest more in startups in their neighborhood or from countries they understand better. Also, angels such as ones in TGA are investing not only in angel rounds but also A, B, or later rounds.

How can a startup raise funding from angel investors?

Getting an endorsement from an angel group member is the best way to connect with the group for fundraising, Bryan said. Though startups still need to go through the process, members feel more confident if there is a member endorsement.

Jessie added that different angels or angel groups have different processes, and different regions have different cultures. She advised startups to do their homework before reaching out by looking at their websites and portfolios to ensure a good potential fit.

What does angels' involvement look like after investments?

Ideally, angels don't have a majority of shares, so they don't play an active role after investments, Joseph said. However, CTAN and TCA do get board seats when they write the first checks, which might take 25% or so for startups. They usually play a passive role. Members only vote to collect inputs when there is an argument about a critical decision such as an acquisition opportunity or a deal. It is possible for some members to support startups with a deep commitment.

Bryan said TGA helps startups they invest in by offering their resources, but founders need to know how to use them. They don't get too involved in their management but might help them get to next-stage investors.

How should startups prepare when starting fundraising?

Bryan's advice was that it's not necessary to be a perfect performer. He likes to see the authentic side of founders.

Michelle encouraged Taiwan founders to improve their English in pitching and pitch decks. Being able to write professional emails to prospective investors is also important. Pitch decks should have key elements but shouldn't be too long.

Finally, Jessie added that she usually asks startups to prepare one sentence (the subject of the email), one paragraph (an elevator pitch or body of the email), and one short deck to communicate with investors. She also urged founders to make sure their data room is ready. Key elements in the deck are explained in this video from Paul, a super angel and anchor mentor with a16z. Founders should also make sure to visit investors' websites and read all instructions, such as the criteria, process, and DD checklist (examples from CTAN).

NEXT: Join our next panel here - How Deep Tech Startups Are Evaluated by VCs