Where Angels Fear To Tread

In an article published yesterday in the New York Times, Claire Cain Miller and Brad Stone provide a pretty good snapshot of the state of angel investing in the current economic climate.  Although the headline writer claimed that angels are "fleeing" from tech startups, the article explains that angels are indeed still investing, if less, and more selectively.  

Some angels who are still investing have become pickier, making demands of start-ups that they would not have a year ago. When David Levine started Wireless Environment, which makes motion-sensor light-emitting diode bulbs, in November 2006, he quickly raised $135,000 from family members and business school friends, with few questions asked.

The angel investors he met with this fall, though, were far more demanding. “I could not believe the complexity,” he said. “For small investments compared to their net worth, they brought in financial advisers and a whole list of questions.”

They are also investing more of their time and acumen, getting directly involved in the operation of their portfolio companies.

Some angels are considering only low-cost companies that could become profitable without venture financing. Others are acting less like angels and more like venture capitalists, spending much more time than is typical advising companies, including taking seats on boards.

Aydin Senkut, a former Google employee who has invested in 40 companies, is serving on the board of one of his investments, ImageShack, a media hosting site, and spends two hours a week working at the start-up. “Where I can really help is building the next growth stage,” he said.

Angels are also heeding the wisdom of the adage "safety in numbers", syndicating with other angels to reduce their individual exposure, while still getting the deal done.  While the caution about "too many cooks" has some relevance here, the entrepreneur undoubtedly benefits from the advice and counsel of many partners, and can leverage the "wisdom of crowds".

Some angel investors are putting less of their own money on the line by finding other people to invest with them. Co-investments increased in 2008, according to the Center for Venture Research, and half of those surveyed by the Angel Capital Association said they would increase co-investing with other angels this year.

While some of this restraint and prudence has the benefit of weeding out the knuckleheads and marginal deals, giving the stronger startups a quieter marketplace for seed money, the reduced pipeline is likely to result in fewer Series A opportunities for venture funds to consider.

Angel investors are a critical element to a healthy innovation economy.  It's not for nothing that their money is called "seed capital"; they water the economic garden when it first sprouts.  But they're also a vital source of expertise and experience many early stage entrepreneurs lack, giving their companies more of a chance of survival to the next round.  Indeed, the counsel of angel investors may be more valuable, in the final analysis, than their operational funding.  Fortunately, angels are organized into networks, so that they can not only spread the risk, but alert each other to opportunities they uncover.  In a down market like this, the benefit of having multiple eyes on the horizon is an intelligence asset.

The angels, and angel groups, that have been involved with Golden Capital Network over the past decade have been critical early support for the alumni from our programs that have gone on to lucrative exits.  While many angels are banking their fires and exercising more caution, they're still risk-tolerant by nature.  Why do they go out on a limb? Because that's where the fruit is.