Angel investment 2.0 (part two): The rise of group and online investing
In the previous blog we identified two key trends that are disrupting how business angels operate: they are increasingly investing in groups and moving processes online.
Here's a closer look at what impact these developments are having on the angel investment market in the UK:
Decrease in search costs due to a more transparent market
With no formalised way for business angels to meet founders seeking finance – and vice versa – angel investment activity has been described as ‘a giant game of hide and seek with everyone blindfolded’.
But the rules of the game are changing. The search for the right match – either angel or entrepreneur – is now becoming easier with business angel networks and angel syndicates offering the equivalent of dating services.
It’s a win-win situation. By being more visible to entrepreneurs, angels skip the deal-sourcing step and receive a steady flow of investment opportunities at pitching events. Entrepreneurs have a main point of contact to send their business plans to, rather than trying to find angels through their own networks.
But it doesn’t stop here. The rise of online networks such as AngelList, Gust or the London-based CapitalList brings further visibility to angels as well as early-stage companies. Angels can now discover a wide range of start-ups from the comfort of their own home.
It may only take a couple of years until we see 100% of investments being made online; this could have game-changing implications, such as allowing entrepreneurs outside the main investor hubs to have better access to finance.
Decrease in duplication of efforts
Previously, business angels would have to go through the multiple steps of the investment process on their own whereas now they can share their effort or get third parties to help them.
Deal sourcing, reading business plans, performing due diligence and contracting is not only time-consuming but also costly. Angel networks and syndicates are making this process more efficient and cheaper.
Both allow angels to skip the deal-sourcing step, while syndicates also appoint a ‘gatekeeper’ to be the external face of the group and manage some of the investment process. In syndicates, a ‘lead investor’ self-appoints himself or herself to take charge of performing due diligence and contracting with the business.
Crowdfunding platforms such as CrowdBnk spend tens of hours conducting due diligence before making their deal available online. Although there is an overall improvement in decreasing the duplication of effort, some limitations persist and new approaches ought to be questioned: will all business angels have the knowledge to be a lead investor? Will syndicates lead to the rise of a dichotomy between the ‘follower investor’ and the ‘lead investor’?
Also, does investing online imply the end of judging soft skills in entrepreneurs, such as team chemistry or founders’ confidence?
Increase in network effect
Instead of being constrained to one’s limited experience, syndicates offer a larger and more diversified deal flow and bigger networks that can provide better matching between angels and entrepreneurs. Instead of spending time and capital as an individual investor, syndicates provide more value through the wide pool of expertise and skill-sets of their members in the due diligence and post-investment stages.
Moving the processes online allows for even larger groups to come together and a potentially greater network effect. But one of the problems with networks is that investors may assign too much weight to each others’ activity, leading to the potential of a herding effect. In a group-based decision system, some angels might overly rely on super-angels and therefore provide a less objective analysis on deals themselves.
Increase in the professionalisation of angel investing
There is one final implication of angels investing in groups as well as the moving of angel activity online. It adds to the professionalisation of investing in this asset class. Business angel networks design classes to share best practices to newcomers while syndicates develop standardised processes and term sheets available to the public.
All of this shows that syndicates are behaving more like VCs, which may lead to more VCs and business angels co-investing. As angels spread their wings and eat into VC prestige, will they become the investor of choice for start-ups?