Angel Investors filling the void for seed and early stage capital

I spent the morning at the monthly Keiretsu Forum , an angel investor group in the Boston area. Keiretsu Forum in a nationwide organization of accredited angel investors with 13 local chapters. Other angel groups in the Boston area include eCoast Angels, Launchpad, and Common Angels.

Angel investors are typically wealthy retired CEO's, corporate executives, serial entrepreneurs, and former venture capitalists. They invest in very early stage deals and often spend a lot of personal time helping the company succeed. Many times one of the angels has relevant work experience, contacts in the industry, and can provide introductions to big customers.

The Boston chapter of Keiretsu Forum has 50 to 75 people attend each monthly meeting.  Typically five companies will present for 20 minutes each. There is a short Q&A after the presentation, and then a closed door meeting for members only, to discuss the pros and cons of each company. If there is interest a "due diligence" team is formed. The DD team reports back to the full group, and negotiates terms on behalf of the Keiretsu. Any member can participate in the deal for any amount, up to the allotment.

Angel investing provides the earliest look into "The Next Big Thing" and trends in the industry. We see all kinds of companies.  Most have a technology component but they can be hardware, software, services, consumer products, bio-tech, medical products, and even e-commerce.

Today we saw 5 companies, two in the drug research space, one in tele-medicine delivery, one that has innovative patents in the food sanitation and preservation, and one that is developing a product to help with sleep disorders.

Over the past year bio-tech and drug research has been most popular. There are some amazing discoveries and applications being developed in this space. We see a fair number of software companies, mostly in the security and compliance space.

These companies are usually looking for $500K to $2M which is usually too small for a traditional VC to be interested. Angels often make follow on investments, or participate side by side with VC's in the early rounds.

Venture Capitalists are now focusing on larger investments and on later stages. There are a few VC's who focus on first round investments. Notable in Boston are Highland Capital, Sigma Partners, and Polaris Ventures.

The past four or five years have been pretty tough for VC's. The angels have stepped up to fill the void. In the next few years I expect to see lots of angel funded companies moving to the next stage with VC investment, and eventually to IPO's. Some of these companies will be The Next Big Thing.

Comments

[sean]

There are many smaller (than Polaris and Highland) VCs in the Boston area that do early stage deals. This is a great city in which to get funded.

[Jeff Bussgang]

The test as to whether a VC is willing to do early-stage deals is the size of their current fund and their average deal size. For example, we (IDG Ventures Boston) are currently investing out of a $180M fund and our average "first check" is $2-5M. Hence, our sweet spot is early-stage deals ranging from $4-10M if we're co-leading and $2-5M if we're solo. In contrast, an $800M fund has a harder time justifying doing deals that small.

[Michael]

Don,

Are you familiar with any gatherings (angels) in Florida? And if not would you have any suggestions of online sites to search/read to find angels in my area?

I'm sure if I google enough I might be able to find something, but who knows what. I'd rather touch base with you to see if you are aware of groups down here, networked with others down here or can recommend sites online to checkout.

Thanks in advance for your time.

[DonDodge]

Thank you all for your comments.

Sean, you are correct that there are other VC's in the Boston area that do early stage deals, including your firm, Longworth Venture Partners. Forgive me for not mentioning Longworth initially. I know Paul Margolis well.

Jeff, thank you for your comments. I enjoy your blog, Seeing Both Sides. You do a great job of explaining the dynamics of VC investing. I absolutely agree with your comments.

[DonDodge]

Michael,

There are several Angel Investor groups in Florida, in fact I talked to Val Livada from Boston just a week ago about him starting a group in the Naples area.

There are three groups that I know of, but I'm sure there are more. Startup Florida is based in Sarasota. http://www.startupflorida.com/index.cfm

Florida Angel Investors are in Miami and Boca Raton. http://www.newideacenter.com/fa/index.htm

GAIN is a network of angels in the Gainesville area. http://www.gain-net.org/public/index.asp

[Mic Williams]

Don, thank you for your comments and participation in our forum. Our community (Keiretsu Forum, over 375 members) is growing rapidly throughout the US & Canada and is performing an important need for investors and emerging entrepreneurs. Members and guests provide invaluable insights into these nascent companies. This involvement allows us to make better investment decisions along with supplying feedback critical to the entrepreneurial community.

The Center for Venture Research at the University of New Hampshire has reported “Small Business Administration estimates that there are at least 250,000 angels active in the country, funding about 30,000 small companies a year. The total investment from angels has been estimated at anywhere from $20 billion to $50 billion as compared to the $3 to $5 billion per year that the formal venture capital community invests.”

[Michael]

Mic,
Thanks for the info. Much appreciated!