Flight plan for angel investors looking for a network
NEW YORK (Reuters) - As a successful Wall Street investment banker, Kathryn Swintek is skilled in the art of doing deals.
That's why Swintek has used her own funds to provide seed capital to early-stage companies throughout her career. But three years ago, she teamed up with Golden Seeds, a large angel investor network, for some extra support.
"As a solo investor, deal access is 'catch as catch can,' while in a group, deal flow is more consistent and plentiful," says Swintek, now one of the network's nine managing partners. "The other informed perspectives are valuable."
Overall, there are more than 330 angel groups in the United States and Canada that are active in start-ups, and funding hit $22.9 billion in 2012 - up 1.8 percent from 2011, when investments totaled $22.5 billion, according to the University of New Hampshire Center for Venture Research. Some 67,030 entrepreneurial ventures received angel funding in 2012.
Swintek considers her foray into angel investing as part of a well-rounded asset-allocation strategy. The minimum investment may not seem that high at first - many angel groups require only $25,000 invested in one deal per year.
But don't let that lure you into thinking that angel investing is for everyone. You must first be an accredited investor with a minimum net worth of $1 million - excluding your home - or earn an annual income of $200,000 or $300,000 if married and filing jointly.
Angel investing takes an enormous amount of time - up to hundreds of hours on screening deals and doing due diligence - along with a stomach for risk. Plus, just 10 percent of deals have a likelihood of success.
Of 10 deals, a reasonable number of investments for an angel portfolio, investors can expect to "get a nice return on one, get their money back on four, and lose everything on three or four," says Jeffrey Sohl, director of the Center for Venture Research, and a professor of entrepreneurship at the University of New Hampshire.
What is considered a "nice return?" About a 20 percent to 30 percent annual return over a five-year period, Sohl says. Every investor expects to find the next Google, but the odds are extremely low, he warns.
Still interested in diving into angel investing? Here are a few things to consider before you join a network.
CHOOSE YOUR GROUP WISELY
Each angel group is a little bit different. Perhaps most important is to share the same vision as the group. Are you interested in investing only in technology, women-owned companies or healthcare and life sciences?
You'll also want to join a group in your area. Boston, New York, Silicon Valley, Southern California and Washington, D.C., are active cities and regions.
Larger groups typically see more deals because these groups are often the first stop for an early-stage company. One of the largest, Tech Coast Angels, based in Southern California, has invested over $120 million in more than 200 companies. It asks members to invest a minimum of $50,000 annually, typically two rounds of $25,000 each.
Another group, New Vantage, based in McLean, Virginia, has invested $50 million in more than 55 primarily mid-Atlantic-based companies.
Get to know the group's expectations for financial and time commitment. Go to a few events of several different groups and get a feel for the dynamic and their due-diligence process.
For a well-rounded portfolio, you need to be able to consistently invest between $150,000 and $300,000 - which shouldn't reflect more than 5 percent to 10 percent of your total investment portfolio, financial advisers say.
You can expect your capital to be tied up between five and seven years before there is a liquidity event, such as a buyout, initial public offering or other exit strategy, Sohl says. In other words, this essentially needs to be money you can afford to do without.
Some groups offer educational courses for a fee. Golden Seeds, for example, offers two courses to accredited investors outside their network for $350 each. You'll learn how to screen deals, conduct due diligence, understand deal structure and negotiation, perform post-investment monitoring, and know about state tax credit and government incentives for angel investing, among other topics.
Maverick Angels, in Agoura Hills, California, offers free seminars for members and prospective members.
For more information, tap resources like the Angel Capital Association, National Capital Angel Organization, The Kauffman Foundation or the Center for Venture Research.
BIG TIME COMMITMENT
There are many reasons people become angel investors - to mentor entrepreneurs, get into a company on the ground floor, or learn about the private equity world. Universally, they are all willing to commit their time.
Prepare to spend 40 to 50 hours to do due diligence on at least one company the group is considering or to attend networking or screening events.
Most angel groups will take a deep dive into a company's business model, marketing plan, technology platform, capital structure, competition, and financial performance along with the quality of management team.
At Golden Seeds, there are generally five to 10 members, each with representative expertise in each key area, including marketing, technology, finance and the relevant industry knowledge, who comprise a deal team on any given transaction.
Among the nascent companies funded by Golden Seeds, which backs women entrepreneurs, are Bespoke Global, an ecommerce platform for custom home furnishings, and HitFix, an entertainment web platform focusing on hard news.
All investments are making positive progress, with Bespoke and HitFix generating revenues that are growing year over year.
The process for angel investors to select companies to back generally requires two months before it is complete. Deal team members have many meetings and frequent calls with management in the course of due diligence.
(Editing By Lauren Young and Jan Paschal)