It’s crucial for an Angel Investor to leverage the strengths of a group. Great groups are out there but how do you identify them? Here are three key questions:
- Are portfolio companies treated well? I believe it’s counterproductive to “fee startup companies to death.” A strong organization doesn’t need to impose nitpicking charges for pre-screening or presentation coaching. Those are irritations. A more serious problem is a deal structure loaded with early payouts and other land mines. Terms like those squelch growth during the early years—a time when the startup needs to run lean.
- Are the leadership and membership reputable and active? Good leadership behaves in certain identifiable ways that drive reputation. But if management does all the work, the group isn’t functioning efficiently. A laissez-faire membership is a red flag. Look for activity, diversity, and depth. That’s the strength of a group. How many of us, as individuals, hold significant experience in more than one or two fields?
- Are members treated well? Some Angel groups are set up like Venture Capital funds and charge a 2% Annual Management Fee and a 20% Carry (percentage of profit). To my way of thinking, that’s a disincentive. You can never charge enough in fees to replace a talented group because a healthy group is more diverse and deep than a manager and staff. That’s why many Angel Groups are volunteer-based and charge no fee at all—ZERO—except perhaps a nominal membership fee to cover the coffee and a meeting room. That’s a really good deal. Ask yourself, “When was the last time I bought a stock without paying a commission?”
The Healthy Group
In a healthy group, people get personally involved—highly focused on details—and fully engaged. They collectively work to ensure that a particular investment is precisely where they want to put their money. They vote with their wallets. What you end up with is a result that’s much better than a typical fund structure. Here’s a run-down on the process as I’ve seen it practiced:
- Each investment is pre-screened before they present to the membership. At the investment meeting, you see only the companies deemed investible. The company is coached using the same presentation template each time. That makes it easy for the members to compare one opportunity to another.
- Members speak up at investment meetings. You get the benefit of the entire group—people with incredible expertise, all engaged in grilling the company and drilling down to details. Things look good in that kind of group, and they will remain that way as long as the group continues to boast a deep talent pool that volunteers their time on a regular basis.
- If a presentation generates sufficient interest, the due diligence goes forward. A volunteer Point Person facilitates the entire process from start to finish. That person may very well sit on the board of that company.
All that remains is to ask oneself two questions: Do I want to invest in this company? Does it fit my personal risk/reward profile?
This article is adapted from the Journal of the Heartland Angels
NEWS FROM HEARTLAND – the Journal of the Heartland Angels, is published quarterly as an information service to its members. Articles may be reproduced in full with attribution for educational purposes.
Copyright © 2014 Heartland Angels – John Jonelis, Editor – John@HeartlandAngels.com
CAVEAT EMPTOR – These articles are for educational purposes and not investment advice. Investment involves substantial risk. Please perform your own due diligence. Contact Ron Kirschner – Ron@HeartlandAngels.com
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