The Importance of Robust Angel Ecosystems

Earlier this week I gave the keynote address at the Colorado Angel Capital Summit. While the audience was Colorado focused, the overall message I delivered about the angel ecosystem is very relevant to all entrepreneurial communities. I thought I’d share both the presentation and the key thoughts here.

The overall trend around angel investing is a pretty interesting one. I’ve talked about this trend before – specifically the acceleration of angel investing in 2011-2014. I think what we’re really seeing here is market excitement around angel investing leading to a quick surge, followed by (I hope) a more normal and sustained level of activity. The sharp rise in angel activity also coincided with the raise of platforms such as AngelList which more easily allowed investors to find interesting companies and to some extent broadened the geographic reach of angels, extending what had been a more localized activity. If you’ve ever participated in a running or cycling race your heart rate graph probably looked similar – you’re excited at the start of the race and go out a bit strong, only to settle back into the right rhythm. I suspect that’s a bit of what we’re seeing here.

FundingI’ve always felt that a robust angel financing market was important to startup ecosystems and the data on the next two charts really brings that home. These data are specific to Colorado (since my presentation was to a CO audience) but the trend holds true across startup ecosystems. Looking at the dollar share of investing, not surprisingly investing at the Angel/Seed level barely registers, with well less than 10% share (under 5% in a few years).

Colorado Financing Dollar ShareColorado Financing Deal Share

But looking at Seed investing on a deal share basis shows just how impactful this money is to a startup ecosystem – a significant number of companies in any given year raise capital from Angel/Seed investors. Clearly access to capital at this stage has been, and continues to be, critical to the success of the Colorado (and national) startup ecosystem.

While there’s a lot of seed stage investing going on in Colorado and other markets, there are some clear challenges to how many angel investors are approaching the market. I hit these hard in my talk and I’m going to reinforce them here. Angel investors need to do a better job aligning their outcomes with that of the companies in which they invest and the ecosystems they support. Many are approaching the market in ways that are antithetical to successful startup investing.  Specifically:

Put Entrepreneurs First. We talk about this a lot at Foundry because it’s the core of our investment philosophy. It’s reflected in how we treat entrepreneurs, how we work with our portfolio companies and the kind of structures we use for our investments. Too many angels don’t embody this and it creates misalignment between them, the companies in which they invest, and between them and later round investors. Even at the angel level terms should be clean, fair and align with management (preference multiples, “$50k for half your company”, etc are neither clean nor fair – to use specific examples that I’ve seen in the market).

Angels are often unorganized and have scattered and burdensome investment processes. Most angel deals happen in syndicates (meaning multiple investors participate), yet many angels are extremely poor at working together with other potential investors. The results are burdensome on a company, result in the duplication and overlap of due diligence and force too much of the syndication work on the company itself. Good angel investors develop a thesis around an investment, bring in the appropriate resources to reach an investment decision, are secure in that opinion without the need for other investors to validate their belief and then work with a company to bring a deal together rather than sit on the sidelines and see what happens. Too many angel investors waste company time, wait for others to validate their decisions and aren’t helpful in getting a round to come together even after they’ve nominally decided to invest.

Successful angel investing requires diversification. I (somewhat) jokingly said during my talk that angel investors should pick an amount of money that they’re willing to light on fire, then divide by at least 10 (better yet 20) to figure out how much they should invest in any given deal. While I know there are some that like to concentrate their bets, the history of angel investing suggests otherwise – there’s such a high mortality rate among early stage companies that a successful angel portfolio needs some level of diversification (baring that, you’re just playing the lottery and hoping to get lucky).

Successful angel ecosystems have active angel mentor networks. With the explosion of accelerators most startup communities around the country and the world are developing very robust mentor networks for companies. Very few of these markets have any even remotely similar at the investor level. That’s a problem, as the same kind of mentoring that takes place between seasoned executives and startups needs to also take place between successful angel investors and new investors. In my view, angel investors are not at all competitive with one another in a market (although many wrongly believe that they are competing for the “best” deals) – they can only make their own investment portfolios stronger by strengthening the overall angel ecosystem in their market.

There’s quite a bit more from the presentation but these are some of the important ideas that I wanted to highlight. The full presentation is embedded below for you to click through if you’re interested. There’s also some interesting data that we haven’t published yet on the 66 companies that ended up being a part of our AngelList Syndicate. I’ll pull those out in a separate post, but if you’d like a preview you’ll find that on pages 11 – 17 below.


  • Shai Ben-Tovim

    Seth, what’s your view on platforms delivering more than just access to deal flow but providing frameworks of organisation, communication, diversification and community. Foundry famously decided to stop making new investments on Angellist but do you think the platforms can add significant value and help address the angel investing issues you mention?

    • I think they could do a significantly better job at providing that kind of organization. I think the problem is that they’re built for volume and lack the desire to really work on the social graph of connections between and among entrepreneurs and investors (prime example is the lack of any kind of search tool for entrepreneurs to research potential investors based on their stated investment interests or prior investments).

  • DavesBlend

    Seth, thanks for putting this information together. One thing I have noticed is a bifurcation of Angel personalities: local Angels that invest largely for the opportunity to be involved with interesting things (and potential upside) vs Angel groups that are adoptioning a more “institutional” approach, either as national syndication platforms or as active feeder partners to early stage venture (more coastal and industry specific).

    The other trend I see is the move to broaden intra angel syndication across regions. But, it feels like many Angel investors/groups are still reluctant to invest with other platforms outside of their backyard. When you consider that the aggregate amount of angel capital exceeds venture, it seems to be a missed opportunity. And in my relatively short time on the ground in CO, it feels like angel groups directing larger capital deployments could fill part of the gap in early stage capital (seed/new school Series A) for CO.

    • Both are interesting observations. There are two broad things going on at the angel level, which you touch on above – 1) more angel investors are looking outside of their local ecosystem (through platforms like AngelList which are enabling this) and 2) more angels are looking to syndicate their deals and acting more like mini funds. In general these are both good trends for the ecosystem but they risk losing that local flavor/feel/help as well as becoming a bit detached (and group think) about investing. Agree that there’s a real opportunity here in CO for more collaboration and much more momentum at the angel level.

  • Charlie Youakim

    I agree with Dave’s point on the “institutional” approach. This is my 2nd time through the process and this time around we’re hearing some angels asking for customer traction examples, etc. We didn’t hear this the first time around. This is generally coming from angel groups, though.

    The conversations feel very series-A like.

    I also agree on the geographic point. AngelList largely doesn’t even work as a platform for fundraising (although I’d say it does work for investing). Most deals originate offline and become funded online only after public syndicate backing.

    We’ve used AngelList for recruiting rather than fundraising at both companies. As a fundraising platform it really fails for entrepreneurs (unless you are located in the bay area, Boston or NYC).

    Go here: (pic attached)

    The 10 companies they advertise as getting funding all exist in the bay area.

    In any case, the difficult fundraising process through angel rounds probably just helps to keep things in a natural order. The strong make it through and the weak die. Maybe nothing needs to change.

    • All good points. Especially the comment around AL as a platform for deal processing vs. actually rounding up investors. I tell this to companies all the time – you still need to go raise your round; AngelList isn’t a marketing platform, it’s a fulfillment one.