VC Experts on the different types of angel investors

VC Experts produces a weekly email newsletter (no RSS feed :-) that often contains interesting tidbits of information on the Private Equity and  Venture Capital world. This week’s contains a piece that attempts to frame the different types of angel investors, suggesting an interesting classification. In a second part, the authors are trying to rationalize angel investing as alternative an asset class that potentially produces better returns than other instruments through a comparison of DCFs and IRRs.

I will say this: I don’t see angel investing as an financial instrument part of a diversified portfolio strategy. Either you have a passion to support entrepreneurs and help build companies – with a high kill rate if you invest very early – and you have enough dealflow to pick the right opportunities. Or you might want to find a safer asset class that does not involve putting your capital at risk of total obliteration. My 2 cents.

Coming back to the classification, the first part of the piece is worth the read, and I am reproducing a lot of it verbatim:

• Serial angels are perhaps the most productive angel type to the sense that these angels often add significant value to the companies in which they invest. A serial angel has done it before - he or she has put money on the table for an investment in an early-stage opportunity, cashed out (or "harvested," as they say) the investment, and then put the profits into the next opportunity.
  A subset of serial angels (also known as celebrity angels) consists of former entrepreneurs - people like Netscape's Jim Clark and Microsoft's Paul Allen. Although their fortunes take them way beyond typical angels, entrepreneurs who have built major companies and sold them usually retain their appetite for the game.

• Tire kickers are the opposite of serial agents. They lack a genuine commitment to angel investing - at least at present - but they're using the process as a means of educating themselves.

• Trailblazer angels are experienced investors, typically partners in investment banks and venture capital firms. Although their firms may not trouble themselves with any deal worth less than $50 million (the breakpoint for the VCs these days is a round of more than $8 million, which means a premoney valuation between $12 and $20 million), the individual partners, usually with the blessing of their employers, are often interested in incubating deals that show exceptional promise, with an eye on keeping a link to the company until it reaches adolescence and becomes a desirable client for the angels' host organization.
  Some venture capital firms and investment banks have rules against this practice because conflicts of interest can get tricky. For example, the VC firm and individual partner may invest in the same enterprise but a different price levels. However, many banks and firms encourage angel investing as a way to keep the pipeline flowing.
  These angels are often the most desirable because of the so-called chaperone rule, which states that the odds of a startup company succeeding are significantly enhanced when the company has a chaperone from the get-go, an experienced guide on the trip from the embryo to the IPO.

• Retired angels (the "Godfathers") are a common phenomenon. A number of business executive have been able to generate enough personal capital to enable them to quit their jobs and "retire." As a group, they are vigorous, in full possession of their faculties, sometimes young (in their late 40s or early 50s), and perfectly capable of keeping up in the so-called rat race.
  Often restless and looking for something to do - charitable and other pro bono activities soak up only a portion of their energy - many naturally turn to angel investing, but with a distinct point of view. They aren't looking to become passive investors; they're looking t add their skills and experience to the companies in which they invest, often serving on their boards and, in most cases, at least as advisors.

• Angel syndicates are groups who episodically invest together, joining their capital for more influence in more material deals. The best-known syndicate, the Band of Angels in Palo Alto, California, has 120 members, averages $600,000 per investment, and has invested close to $50 million total. Syndicates such as the Band of Angels have helped legitimize this particular form of collective investing. […]

Based on these definitions, I guess that I am between the Serial and the Trailblazer.

Another interesting data point can be found later in the piece:

Angels are significantly more entrepreneurial than venture capitalists, with 75 percent to 83 percent having operational start-up experience, compared with only about a third of venture capitalists. One study found that the average number of entrepreneurial investments made by business angels during the last five years was 2.45, while two West Coast studies claim that angels typically make two or three investments every three years.

Around 75 percent of angels claim that their principal source of wealth is their own past business, while the remaining 25 percent earned it from quoted investments. The size of angel investments ranges as follows: 20 percent of less than $25,000; 40 percent of $25,000 to $99,000; 25 percent of $100,000 to $250,000; and 15 percent of more than $250,000.

Image credit: Corante

Tags: angelinvesting, businessangels, angelinvestors

Comments

[Jeremy]

Thanks you for this extremely useful information Jeff. I also believe that aspiring business angels shouldn´t see their investments as a way to allocate their portfolio, but as a mean to improve their investing acumen, and most of all as a path to helping entrepreneurs become successful - allowing the latter to make use of the business angels´skills, networks, past experience, etc.

[Jeremy Fain]

I wrote a little something about the necessary backing of Venture Capitalists in high-growth environments start-ups. I think you might find it interesting: http://itaddict.blogspot.com/2006/07/entrepreneurial-finance-for-fast.html#links

[Mike Myatt]

Angel investors have two distinct advantages in that they almost always have some presence in the market, and entrepreneurs can often times cut better deals with non-institutional investors. That being said, angel investors are rarely anything more than a band-aid solution to capital formation as they rarely have deep enough pockets to carry and enterprise to sustainability. Furthermore early stage angel investors can muck-up a capital structure such that they actually create a barrier to entry for VC's and private equity firms. I would suggest reading the following two articles posted on the N2growth Blog: The first piece entitled Private Equity vs. Venture Capital and the second piece entitled My Philosophy on Valuations.