Where are all the Angel Investors?
I get asked this question all the time and the answer is simple – “They’re all around you.” But identifying them and building a collective network of angels to pool funds together to invest in deals is not easy in Colorado. We’re lacking in Google and Facebook millionaires, and yet we have thousands of “Accredited Investors” in the state (with a net worth of $1 million or more excluding their primary residence, or income over $200K per year)
How Angels Invest
The first thing for entrepreneurs to understand is how angels invest. Many first time entrepreneurs believe that their idea is so exciting that if only they could meet an angel investor, they could convince that angel to sign over their entire net worth to fund the complete round without so much as a lick of due diligence (to save time for the entrepreneur)
Smart angels don’t invest all their money in one deal – in fact, angel investors are usually in ten or more deals in order to diversify their risk. With just one or two investments, the probability of loss is high, but with 10 or more investments, the probability of loss goes down exponentially and the probability of reaching a significant gain goes way up.
The average angel in Colorado invests $25,000 in a deal. What this means is that it will cost them at least $250,000 to have a diversified portfolio, and since angels typically invest only about 10% of their investable assets in angel deals, that means that an angel needs to have a net worth of more like $2.5 million. Many angel groups, such as Colorado’s Rockies Venture Club, are now organizing single purpose LLCs so that angels can invest as little as $10,000 in each deal, so the overall net worth needed for diversification goes down significantly. The single purpose LLCs allow investors to pool their funds and negotiate as a larger entity with greater bargaining power, while each individual may have relatively smaller amounts of money in the deal.
Due diligence can take several months and smart angels know that there is a direct reflection of overall returns based on how much due diligence is done. Some groups propose a “spray and pray” method of investing, claiming that because there is uncertainty in angel investing, you can’t improve your odds by doing due diligence. Research shows these groups to be wrong. Angels investing in groups that perform 40 hours or more of due diligence have between five and six times higher returns than those who spend less time. Some angel groups like RVC have specialized due diligence teams that work hard to make sure investments have a high chance of succeeding, and that work benefits the group overall by spreading the work out among several people, rather than having individuals recreate the wheel in doing their own due diligence.
Looking to Meet Angels?
The best place to meet angels, or to learn about becoming one, is at RVC’s Angel Capital Summit. Here you will see over 25 high quality early stage companies pitching to up to 100 angel investors. The summit also features Colorado business and venture capital leaders in panels talking about this year’s theme “Colorado Startups Scale Up.” Learn how successful Colorado companies got big and what strategies they employed to get there. This is the event for angels to see lots of great deal flow all in one place in just two days. Find out more at www.angelcapitalsummit.org March 16-17 at the University of Denver’s Davis Auditorium.