Dr Jeff Cornwall

Angel investors have been slowly changing the types of deals that they like to invest in. As Business Week pointed out a few months ago, they seem to be “moving up the food chain.”
One aspect of this change is that more angels are banding together into informal and even more formal networks for their deal making. In a talk this week at Belmont, Sid Chambless, Executive Director of the Nashville Capital Network, described how these angel networks work.
Traditionally, entrepreneurs have to find an interested angel through their own network of contacts. An intermediary, often an attorney or CPA, will usually make the introduction. Once introduced the angel will usually assess the entrepreneur and eventually evaluate the plan.
With an Angel network, the business plan first goes to the network staff. This makes the angel network more like a VC firm in how it evaluates deals. The staff will reject about 50% of business plans as soon as they arrive. They can usually tell quickly if a deal is just not suited for angel money or if the concept is just not viable.
For the remaining 50%, the network staff provide consultation and advice on how to prepare the plan and the pitch for the deal process. They help the entrepreneur get the presentation and the written plan up to standards that an experienced investor will expect to see.
About 50% of these deals get to the point that they are ready to go before an investment screening committee. This is a group of experts and angels who evaluate the deal for funding. The angels make their own individual decisions on whether or not they want in on the deal.
Only about 20% of these actually receive funding. The money normally comes from several sources, including one or more of the angels in the network. One investor usually serves as the lead or “champion” investor for the deal.
If you are keeping track, that mean for every 100 plans, 50 make it past first review, 25 get to the committee and about 5 might get funding.
On average, about 10% of the funded deals make it big, while about 45% muddle along and 45% fail. That means that an angel network may need to see 200 deals to find one that hits it big. The success rate of funded deals is about the same as we see with VCs, but venture capital funds only provide money for about 1% of the plans they see.
The changes in angel investing has also corresponded to more deal flow. Last year there was more money invested by angels that venture capitalists. Given that angle investments are often much smaller than those made by VCs, this means an significant increase in the number of entrepreneurs receiving angel financing over the past few years.
Part of the reason that angels have moved up in their criteria is that venture capitalists have also moved up. VCs continue to favor later stage financing. This has created a gap in smaller deals that need seed funding. As a result of this, more people are having to rely on their own money and investments from friends and family to get their businesses off the ground.