NVCA Today

By Ian Patrick Sobieski
Band of Angels and ACA Board Vice Chair

Many of you will know something about angels because most deals that venture capitalists fund have received at least some money from individual investors. Frequently these investments are considered the "friends and family" round, despite the fact that they often include neither friends nor family but rather simply individuals known to the entrepreneur and willing to bet on making a monetary return by investing in him or her.

These "angels" have been a large source of investment dollars for startups, and yet they come from a source which has been historically diffuse and unbranded and therefore difficult for VCs to work with in a professional and consistent way. But, about 15 years ago, angel investors began to become more organized.

Hundreds of Organized Angel Groups throughout North America

Currently the Angel Capital Association (ACA), a trade association for angel organizations, has 165 member organized angel groups and another 22 affiliated organizations and associations. ACA member angel groups represent about 7,000 accredited investors who fund about 700 companies a year and have an ongoing portfolio of more than 5,000 companies across the US and Canada.

ACA has a permanent executive director, national office, board of directors, and staff. Serving angel groups in the US and Canada, ACA's goals are to share best practices and education and build relationships and collaborations between angel groups. ACA and NVCA have agreed to cooperate in a number of ways including working together on public policy issues of mutual benefit such as capital gains tax treatment. And, we have established mutual liaisons to each other's boards, I am the ACA Liaison to NVCA and David Spreng of Crescendo Ventures is the NVCA Liaison to ACA.

Angel Group Organization and Focus

In contrast to VC firms with serious sounding names, angel groups have historically adopted somewhat self-effacing names-Band of Angels, Active Angel Investor Network, CommonAngels. These names belie how seriously angel groups strive for a level of professionalism and sophistication that would compare favorably to that of a small venture fund. While organized angel groups do not have the infrastructural depth of Sequoia Capital or Crescendo Ventures, they do have structures and processes, diligence mechanisms, and negotiating power, and often small paid staffs, that make them behave similarly to smaller professional VC funds.

The mathematician Alan Turing proposed evaluating the success of an artificial intelligence machine by placing the mechanism inside a box. If a human user interacted with it in such a way that the user could not discern whether the occupant of the box was another human or a machine, the machine was deemed to be "intelligent" in the same way humans are. Similarly angel groups have been developing structures and processes, with the help of ACA, so that if one looks only at their inputs and outputs more and more groups are, from a strict examination of their inputs and outputs, indistinguishable from small VC funds.

Angel groups bring to bear a substantial level of diligence that draws from the business experience of the members. Most angel groups negotiate standard equity term sheets with the same protective provisions a VC would propose such as liquidation preference, drag along rights, and anti-dilution terms. Most startups receiving investment from angel groups have a competent angel join the startup's board of directors.

Whereas most readers of this article will naturally know how to interact with small venture funds because the business model of carried interest and management fees is comparable to what a larger VC fund has, there is a lack of knowledge on the part of many VCs about what angel groups actually are, how they work, what makes them tick, and how best to work with them.

VCs and Angel Groups Working Together to Enhance Deal Flow and Returns

This is the first in a series of articles to help VCs learn about angel groups as their colleagues in the same financial food chain. Some VCs are angels themselves; in a recent ACA survey, more than 66 percent of the responding groups did a deal with a VC firm in 2007. The growing trend of angel groups developing standard investment processes and terms is leading to increased syndication with other angel groups and early stage VCs. However, many VCs still may not realize how close organized angel groups are to the VC line of business and way of thinking and operating.

Organized angel groups are an emerging part of the entrepreneurial food chain and have an appropriate place alongside small VCs. We are establishing a brand and creating a legacy and reputation as the kind of professional investors that entrepreneurs and venture capitalists can and want to work with.

Ian Sobieski may be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . A list of ACA members by region is available at www.angelcapitalassociation.org. We welcome NVCA members to join us at our annual conference in Atlanta, April 15-17, 2009.