Why You Should Avoid Angel Groups
One of the entities you’ll encounter early on in your startup journey are Angel Groups because there are a lot of them and they often have events for startups. However, something always seemed to be off to me and that feeling was confirmed by a recent experience with an Angel Group.
For example, their portfolios never seemed to have companies that I had heard of or that were successful (became valued at >$1B). If they did have companies that exited, it was always hard to find the amount they exited for, which is often an indicator of a smaller exit.
Often the few successful logos are often from investments the group has made outside the normal deal flow process (i.e. through Special Purpose Vehicles, which are often much later in a startups life). For the record, individual angels are completely different, I’m just referring to formal Angel Groups where they have a pitch process and often make group decisions.
I didn’t understand why they were never successful until I recently tried to raise from one and realized the fundamental problem is:
Angel Groups ask for a lot more than they can give. By the time they have what they want (more traction) VCs are much more attractive for startups.
First, they don’t invest early enough
Angel Groups want you to have the traction that most VCs would expect. They are investing with the mentality of what do they have to lose, as opposed to what do they have to gain. Especially when investing as a group it is very easy to think in terms of ‘what could go wrong’ vs ‘what could go right’. The ‘what could go wrongs’ will always have more evidence and are statistically right. The challenge is that if you’re investing in startups with that mindset, you’ll never make any money. When an investor has a chance to look at an early-stage company, there is always a lot that can go wrong and many logical reasons not to invest, but that isn’t how you make money investing.
Returns are made when you have conviction about a company that few other investors do. If you invest when others have conviction, the valuation will be higher and the return lower.
So that is why Angel Groups don’t make good investments early on.
Remember: If they do have home runs in their portfolio. Make sure to ask when they invested (how much traction and at what valuation) and how they invested (through the normal process or through an SPV or other processes). Very often they will tout their home runs, but the ‘home runs’ they have aren’t actually that great of returns and they obfuscate that those companies weren’t invested in through their normal process.
Second, by the time they want to invest, they can’t
The reason they almost never make good investments is because by the time the company does have the traction the Angel Group would like it to, VCs are now willing to invest in the company. VCs can add a lot more value than Angel Groups (more money and more connections) and have much faster processes. This is why Angel Groups get squeezed on the backend and almost inevitably end up never getting a chance to invest in the best companies — even if they saw them first.
As a result
So what do Angel Groups end up investing in?
First, I don’t think they actually do much investing. They often just become social clubs, but they won’t tell you that because if word got out no one would pitch to them which is their source of entertainment.
Second, if they do invest, they end up investing in companies that do have a lot of traction but have no real potential of being startups (>$1B valuation) as they can’t get funding anywhere else. They end up being bad returns because these companies don’t exit anytime soon (if ever) or they slowly die.
Additionally, if you do make progress with an Angel Group they often have 3+ month timelines that ensure the good companies find other ways to raise money, the companies that are able to wait that long shouldn’t be venture-backed and sadly probably some good startups die exerting scarce resources in this fruitless effort.
At their worst though, interacting with Angel Groups can be a very soul-crushing experience because they can have a tendency to sit around and grill you. Some even charge founders to pitch! I’m not sure if it’s because they’re cynical they have probably lost money or it’s just what they think ‘right’ looks like, but it can be really depressing for a new startup founder, so you should realize that it’s not your company and you should just stay away. YC Partner Aaron Harris sums it up well:
The one last thing I would say about angels is that you should be careful of angel groups. I forget what they’re called, but there are basically these groups of angels that like to get together for meals and grill new founders and then not invest. It’s this sport of ripping people apart because they are successful investors or something, and they just want to show you how good they are.
In contrast, the best investors
If you are wondering what right looks like at this stage, interact with a successful Seed stage VC firm that has raised multiple funds.
- If they are interested, once they learn about you they will try to schedule a call or meeting within days.
- They often make a decision in a week or so.
- The decision is based on principled logic, rather than what other investors are doing. In fact, they often have a disdain for other investors.
Of course, there are great investors who pass because they don’t invest in your stage, but when you are in their stage, that is exactly how you’ll get treated which is for the benefit of everyone as it is fast, but thorough around what matters.