What about creating an angel fund?
The
term “angel investor” is a
misnomer, according to Henry Vehovec, founder and guiding light of Canada’s National Angel Organization, and principal of think-tank consulting firm Mindfirst Inc.
“Early stage companies seeking investment do themselves a disservice if they think of angels as benevolent, smiling patrons with infinite patience and bottomless deep pockets. We’re not!”
Vehovec advises us to abandon the cutesy “wing and a prayer” metaphors and think in terms of successful, pragmatic folks who may have a certain amount of money to burn, but have no intention of seeing it go up in smoke.
Sure, angels have the right to invest their own money, unlike venture capitalists who must adhere to strict criteria agreed with their investors, and sometimes angels will put money into a sexy project that may not have as strong legs as they would like, but, what the heck — it’s their money. Most of the time, though, they are examining with a critical eye the performance of the management team, and feel fully justified in second-guessing, criticizing and contributing to the strategic decisions being made.
The harsh rule of investing in early stage companies is that far fewer than one in 10 achieves enough success to warrant further major investment, and fewer still make it into the exalted ranks of seven- figure bottom lines.
But even the most hard- ass venture capital firms admit that they expect no better than a one in 10 success ratio — and that’s after putting their clients through the wringer in both directions to make sure they have minimized every conceivable risk. So the question is, How does the average angel mitigate the risk and increase his or her chances of successfully investing in early stage companies?
This question is often addressed by the idea of an angel “fund.” A large number of angel investors could put, say, $50,000 into a pool, with the application of some sensible investment criteria, risk assessment, and reasonable due diligence. Theoretically, the average outcome should be positive, as all would share in the success of the supernovas, and the half-dozen moderate successes that form the core of the TSX Venture Exchange.
Which finally brings me to the main point of this column. Vehovec completed an extensive study of Canadian angel investors and agreed to share it publicly for the first time here. He approached 800 angel investors, all successful, busy people, on the question of the value of an angel fund, and got a whopping 10.6% response.
To the statisticians among you this elite 85-person response makes the results highly significant, statistically speaking. In other words, the results can be extrapolated to the population of similar investors with something approaching 97.5% accuracy.
Respondents said they are currently invested in an average of four early stage companies, and look at an average of five new deals a year. He found first of all that 40.5% of angels are “very or extremely” interested in investing in an angel fund, highlighting their desire to spread both the risks and rewards across a large number of high-end investors.
Secondly, 41.3% would be interested in investing “up to $50,000” in such a fund, while another 30.2% would invest between $50,000 and $100,000 and 22.2% would invest even more. Take these numbers (an average of about $75K per investment) across all qualified investors in Canada, and you have enough seed capital to create many, many thousands of jobs in burgeoning, needy young companies.
The meatiest part of the study, however, examined the reasons why angels would be interested in investing in a fund. While a predictable 78% of respondents were “very or extremely interested” in improving their overall success ratio, a surprising 63% would look to such a fund to provide more cash to their existing investments. This is significant, as angels are typically thought of as independent minded and self- sufficient in their investments. They want a support structure. Eureka!
Personally I can think of no better reason for such a fund. Risk-taking professionals, who recognize that they do not make perfect decisions every time, want fellow angels to band around and take worthy investments across the chasm to success. This study is certainly worthy of more analysis, and I look forward to looking at it in more depth in future columns.