December 17, 2018
Types of Angel Investors
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As with any class of investor, there are many types of Angel investors. Broadly, they can be classified by their level of investee involvement and the type of expertise they can offer an investee. As will be discussed below, the proportion of Angels within each classification will vary by local economy.
Active Angels are those who choose to spend time with investees after the deal is done. What they do and how they do it will depend on their areas of expertise, the nature of support they offer, and how much time they choose to spend. Active Angels normally “set aside” $250,000 or more for private company investments. Active Angels tend to prefer to make their own investment decisions, even when part of a co-investment syndicate. They are unlikely to invest in a fund, not wanting to let “someone else” make their investment decisions. Equally, these types of Angels are often the “lead” investors or champions in an Angel syndicate. Other Angels will often be attracted to their level of commitment (before and after a deal) and their due diligence contributions. Active Angels comprise about 15% to 20% of Ottawa’s Angel community.
A unique subset of the Active Angels group is the Super Angels, who are comparable to venture capitalists. In Ottawa, this group would include Terry Mathews, Mike Potter, Rod Bryden, and Antoine Paquin. Individuals such as these have no real minimum investment. These Angels have invested modest amounts in friends’ ventures. They have also invested millions in others. And while they have no standard return expectations, Super Angels clearly intend each investment to be profitable. By their nature, Super Angels have the financial staying power to support a company for many years and to participate in even larger issue sizes. Super Angels are also capable of providing important mentorship to their investee companies, including a wide base of industry contacts and market clout.
Passive Angels essentially provide their capital to a deal and monitor its “progress” from a distance. Generally, these types of investors are gainfully employed in other occupations that preclude them from spending a lot of time with their investees, even if they could otherwise make significant contributions. Lacking the time or ability to help an investee, Passive Angels tend to be more risk-averse than Active Angels. While they may avoid opportunities where greater due diligence is required (say, for a new technology), Passive Angels are also more likely to appreciate the due diligence and/or involvement of a trusted third party (e.g. an Active Angel). Hence, Passive Angels tend to be the ones to “round out” a syndicate. As well, their risk aversion usually translates into a desire to invest smaller dollar amounts per transaction than Active Angels (i.e. they pursue more of a “Sprinkle and Sprout” investment approach – see below).
In addition to the Active Angels and Passive Angels, there is another group that is noteworthy. This group is the Near Angels, those individuals that have the financial wherewithal and the interest to invest in private companies, but don’t – for a myriad of reasons (e.g. time required for due diligence and mentorship). This group is estimated to be as large as that of the Active and Passive Angels combined. In particular, this group is more likely to be interested in fixed income investment structures – an appeal to their risk aversions.
Essentially, there are three types of added value that an Angel can bring to an investee:
Angels that have had prior exposure to an investee’s industry can offer considerable help to a company specific to that industry. Examples include market knowledge, customer contacts, and senior staff recruiting. Most Active Angels are also Domain Experts.
Process expertise refers to an Angel’s knowledge of certain activity streams facing the investee. For example, the Angel may be familiar with the product development process, marketing and sales management, or the entire startup process. An Angel’s process expertise is often related to their prior working experience. An important opportunity to recognize here is that many lessons in start-up experience from one sector are transferable as process expertise to another sector. For example, Ottawa’s life sciences sector is benefiting from Angels’ start-up expertise from the city’s telecom sector.
There are some Angels whose most important value-add is the ability to attract future investors. These Angels tend to be the “thought leaders” among their peer-Angels and/or well-respected among other investor types (e.g. venture capitalists, corporate investors).
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