Last week TechStars Brad Feld posed this question on his blog - What is the definition of an Angel Investor?
The obvious answer is someone that actually makes angel investments but as Feld points out that is not always easy to determine.
I’ve been exposed to many “angel investors” who have actually never written a check for an equity investment. These non-angels come in many shapes and sizes and often end up either offering to become “advisors” for equity (or worse – a retainer), “brokers” (where they help you raise money for a percentage raised), or employees (where the end up trying to get a job).
Now, there is nothing wrong with this, other than them presenting themselves as “angel investors.” Oh, and some people just like to be in clubs with other people who presumably make investments hang out.
Feld concludes that an angel investor is someone who makes at least one equity investment in a seed or early stage company each year of at least $25,000. But most importantly he stresses that if the investor can't or doesn't invest at least $25,000 per year, they shouldn't call themselves an Angel Investor.
Does this logic hold true for Canada? Are our most active Angels investing a minimum of $25K per year?
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Every time I go to a local venture or angel conference the audience is beset by "investors" who are really just VP- or C-level job-seekers who are hoping to latch on to fast-rising startups when they are in most desperate need of momentum builders. This happens in Silicon Valley, New York, Vancouver... wherever.
This is fine for the organizers I GUESS as it fills the room but taking an investment of $25K and then paying out a $150K/yr salary to the same guy during the months following is not really a great model -- it gets you an expensive employee who is difficult to dislodge.
Looking out from the podium and trying to figure out which 5% of the audience are actually real Angels becomes the real challenge of these things. I say flip the model and have the Angels present to the startups.
Great post, Rob. And an important question. Just last week, I was exploring this question on Brad's blog (and having some fun with him).
http://www.feld.com/wp/archives/2010/01/you-dont-mean-average-you-mean-median.html#idc-container
My reply to Brad included:
"I have believed for a while now that you have an identity crisis. You call yourself a VC but you act and think like an angel investor. Yeah, I know you have written about your angel deals, but you still think of yourself primarily as a VC."
Brad responded:
"Re: Identity Crisis: I’m very comfortable with my identity! Having been an entrepreneur, and angel investor, and a VC, I’m most definitely a VC. I just happen to be an “early stage VC”.
Brad is one of the most important "Big Thinkers" in the world today. I was not just having fun with him. I was making an important point. Self identity aside, Brad really is an angel investor and an important one.
In my opinion, one of the most important elements in the definition of an angel investor is that they invest their own money.
Angel investors are also by far the most important seed and start- up investors. Many entrepreneurs don't appreciate this but Angels fund 27x more startups than VCs.
I remember being part of a conversation among entrepreneurs who decided the term 'angel investor' was so worn out that a new one got invented: cheque writers.
That's what the entrepreneurs were seeking: cheque writers. Because the 'angel investors' they kept seeing didn't happen to write any cheques.
I also commented on Brad's original post and will raise the same comment here.
The thing that I constantly come across in Western Canada is people, on both side of the fence - entrepreneurs and investors, who don't really understand the difference between an angel investor and a sophisticated angel investor.
I think that startups need both, but having a couple sophisticated angel investors, especially with startup experience, is so valuable to a founder.
I would be interested to see a list of Angel investors in Canada and then parse this down to sophisticated angel investors. I think we would all be shocked at how small the list becomes.
Feld is bang on. Most "Angels" have no money or are still riding the reputation of the ONE big exit they did 12 years ago.
Vancouver is full of advisors, authors, and brokers that shouldn't be calling themsleves Angels.
That's the beauty of the title though. Claim you're an Angel and when some asks what you've invested in just say its confidential. Unlike VC who have to report their investments to someone, Angels write their own rules.
Shit. Maybe I can be an Angel too. ;-)
Of the many angels in Ontario who have written 6 figure and larger checks over the last , I don't think any one of them would call himself an angel, let alone attend an angel forum. I have found this to be the case in other regions as well. If you want to find a check writer, it seems you are better off focussing your time who people who believe in the business cause youa re prusuing - this seems to lead to the right kind of check writer
Good point, Suzie.
I've been an angel here in Vancouver for 15 years now. Many times when I've seen a local company's share register, I've been amazed that I don't know three quarters of the cheque writers. They are usually the ones who have written the biggest cheques.
That puzzled me until I read Scott Shane's book "Fools Gold" He did some sophisticated research and one his conclusions was that only 3% of all angels attend organized angel events.
In my experience, the biggest cheque writers are the most elusive and maintain the lowest profile. In part of necessity to avoid being hounded by entrepreneurs, stock brokers, etc.
In my opinion, this is a significant factor in the frustration voiced by Angel's Advocate and James.
Great comments - and as usual, great data from Basil.
Going back to Rob's question of "What is the Canadian definition of an Angel Investor?" ... Canadian or not, the key is that an Angel Investor invests his/her own money (unlike VCs and other institutional funds) and is not part of the entrepreneur's "friends and family" source of funding.
It's not the size of the cheque that matters either. In my own experience with the local angels, I've frequently found that the angel investors most capable of writing big cheques don't; and a surprising number of smaller net-worth angel investors do. Go figure!
In my opinion, there is greater concern with risk mitigation. The growing momentum of groups of angel investors pooling their money - either on their own accord or through one of the many angel funds - reflects this trend; even if they have the wherewithal to fund the entire venture on their own.
What will get the Angel Investors' to be cheque writers? #1 is a great business to believe in; and #2 (as confided by many angel investors) is to realize EXITS on previous investments so they can write those cheques for more entrepreneurial ventures.
This is such a fascinating discussion for me, an Ontario person. I do not consider any angel group functioning in my region right now to be looking for start up opportunities,as we woudl generally think of them. The shift has clerly been towards backing companies that are stable, and may never need additional company. Angel groups here are really SME funders, not start-up investors - this year, at least.
The Canadian definition should be no different. The fact that we may have LESS of them is the part that is different.
I would love to connect with more "cheque writers", but as Basil points out, most don't attend organized angel events.
I will continue to advocate for no "pay to pitch" events in 2010, and will continue to encourage digital media startups to NOT attend / pay for such events.
