Pharma, Startups

Angel groups are investing more but making the money harder to get

This is the second of a two-part series on the evolution of angel investing. To […]

This is the second of a two-part series on the evolution of angel investing. To read part one, click here.

As groups of high-net-worth individuals continue to band together in the form of angel investment networks and funds, they’re creating new opportunities for funding for mid-stage startups. But to some entrepreneurs, they’re also starting to look an awful lot like VCs.

There are about 350 angel investing groups in the U.S. today, according to Marianne Hudson, executive director of the Angel Capital Association. Although most of the U.S.’s more than 300,000 angel investors still work as individuals, the influence of their networking is growing. The median angel round size in 2012 was somewhere around $600,000, according to the 2012 Halo Report, up from $500,000 in 2010.

Investors say being part of a group solves a lot of problems: They have access to more deals, don’t have to write huge checks to raise a lot of money for a company and can syndicate bigger rounds with other angel networks.

Clay Rankin, who manages Ohio’s North Coast Angel Fund, said his group tries collaborating in almost every deal it does – particularly when it comes to life science deals, where companies need $1.5 million or more.

“You still want to know and engage with the management team and help them in the growing process, but if you develop relationships with other networks that you know provide good governance and do good due diligence, you don’t have to be geographically near (to companies),” he said.

That means angels have access to a more broad expertise on the investing side, so due diligence is typically more thorough.

On the other side of the coin, that means more rigorous vetting than startups would typically undergo with individual investors. The process depends on the size of the investment group, and whether it’s structured as an angel fund where investors can also make sidecar investments, or as a network where investors contribute as individuals. Typically, if a company’s application makes it past an initial screening, the entrepreneur will have to present several times to various groups within the network.

A few entrepreneurs who talked with MedCity News for this story had been turned off from angel groups because of these VC-like processes that resulted in rigid deal terms, often times without the expectation of a follow-on investment. For some, a three-month application and vetting process ending in a take-it-or-leave-it deal that could be $200,000 or $1.5 million or anything in between, just wasn’t worth the time and effort.

And although angel networks might have a structured due diligence process, that doesn’t mean it’s a good one. One entrepreneur who had turned down an investment from a network in Ohio said that due diligence had been tasked to a person who was a designated “expert” in the healthcare industry, although he may not have known anything about the particular space the company was working in.


Looking for a VC to fund your healthcare startup? Check out our Money Map.


Shirley Gee, a member of the Keiretsu Forum, began to see this problem several years ago. She started a consulting firm called AngelPlus that works with entrepreneurs, including Rob Neville’s team from Savara Pharmaceuticals, who are looking to be more proactive about their due diligence. If startups have a report in-hand when talking to investors, she said, they may be able to at least partially avoid having that task fall into the hands of someone not well-suited for it. “We’re trying to encourage companies to add this due diligence as part of their business plan in the same way they would hire an IP attorney,” she said.

Although angel networks are increasingly formalizing the process of angel investing, Hudson of the Angel Capital Association reiterated that the vast majority of angel investments are still made independently of a group. It will be a while before it’s clear whether the formality imposed by the groups pays off in the form of more successful startups and bigger returns, or whether it will in turn create a new gap in funding for early-stage companies who look to angels for small rounds of seed capital.

“The angel industry is relatively young, and as we start to document more of the results of our investments, you’re going to see a much higher level of interest in working with those groups that have successful track records,” Rankin said. “It’s an emerging and evolving environment, and I think you will start to see more national focus.”

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