For the first time, I went to the National Business Incubator Association conference. This organization, which has been in existence for twenty years, has members from all over the world.
It was worth the trip: my friends from the Ewing Marion Kauffman Foundation were there, and Marianne Hudson, the executive director of the Angel Capital Association (run by the Kauffman Foundation) tells us that most business start ups in the US get their startup money from credit cards and the entrepreneur�s own resources. This is not news to me; I deliver this message to at least one would-be entrepreneur a day. Only about 200,000 businesses get friends and family funding every year, and a mere 50,000 get funding from angels.
However, angels are still responsible for up to 90% of the outside equity for startups. Although they get all the attention,VCs provide only about 2% of startup funding, having bailed on the startup arena. Better yet, if you�re outside Silicon Valley or Boston, although 85% of venture capital went to ten states last quarter, angel groups are more geographically diversified.
Entrepreneurs don�t really want to think about this, but angels are their neighbors, and they invest for profit. Most angels who have been active for any period of time are sadder but wiser as a result of the dot com debacle, during which they overvalued companies, lost big bucks, and got crammed down in the companies that survived..
Today, although an angel group typically sees up to one hundred business plans a month, they narrow their focus to ten companies to visit, and only one or two to fund. And angels come in two flavors: those who prefer the glitzier pre-VC activities and those who provide the only funding for a given company. With all the glitz attached to venture capital, the pre-VC investors are still worried about being crammed down by institutional investors coming into later rounds.
Kauffman has determined that there are 200,000 currently active angels, but between 1 and 5 million potential angels. Last year, angels invested 22.5 billion in 48,000 startups. And the really good ones are also outstanding mentors, because they were entrepreneurs themselves.
But angels are private and hard to find. They also have a wide variety of sophistication, so if they are not sophisticated, they�re not much use as mentors. Some of them can even mess up a startup. (Not all money is good money.) As an example, if an angel group doesn�t hold back some money for a follow-on round, you can start your company and then be left in the lurch if you�re not a candidate for venture capital. Dumb money is a bad investment, so angels are useless unless they aggregate brain power as well as money.
So the growth of angel organizations is helpful not only because it locates angels for entrepreneurs,but also because the organizations educate their members to make them more valuable resources for the businesses they fund. Typically, the angels do their own due diligence. In a group of angels, there�s invariably someone who knows the industry, someone who knows the management, and someone who knows the market.
Good news: there has been a tenfold increase in angel organizations over the past decade. And now that the Kauffman Foundation has stepped in to codify the processes and provide training, there will most likely be a proliferation of angels.
What do these angel groups look for? Someone who has done it before (experienced management); a thoughtful business plan; a good presenter; a strong, although not disruptive, technology; companies that run lean; companies with no debt; companies in which the entrepreneur has invested his or her own dollars; and a founder who is coachable. In the end, angels invest in people: �we back jockeys, not horses.�
One thing I�ve learned: as an incubator, we have to build good relationships with angel groups. I suspect we already have those, which is something in our favor. We�re probably a reliable source for angel groups. However, another thing I�ve learned is less fruitful: most angel groups make only 1-2 investments per quarter.
What does that mean? To me, it means the world needs more angel groups. You should hear how the Chinese government is getting behind business incubation in Hong Kong! One of the Hong Kong incubators is actually run by a former Phoenician, a Motorola engineer who got laid off and went back to China. To his surprise, the government gave him $20m to incubate companies in three specific niches. The R&D is done in China, which is using foreign IP now, but developing its own. In ten years, China will no longer be an importer of R&D.
The Angel Capital Association (www.angelcapitalassocation.org) says it only has 3100 angel investor members. The average size of an angel group is about 43 members, and its average investment $350,000. Come on angels�we need your help if we are to compete with China.
