Fiendish Risks, Celestial Rewards
Studies show that successful angels can earn an average 250% return on their investments. The savviest angels can grow their investments 10 times or more. But the odds of losing all one’s capital are 30% to 40%. Moreover, 70% to 80% of investments fail to reach their projected returns.

Because all angel investing, whether impact or regular, is high risk, experts recommend an angel portfolio consisting of 10 to 15 carefully vetted investments selected over time. Angels typically allocate $10,000 to $100,000 per company. Most angels limit the size of their portfolios to 5% to 10% of total assets.
Lack of liquidity is another risk with investments in start-up private companies. Angels must generally wait for a return until a company gets acquired or goes public. The average time to exit is five to seven years.

Despite the risks, the rewards that motivate impact angels include helping to launch the next generation of innovators, having a more personal connection to their investments and supporting their local communities.

“The majority of impact angel investors have a background in being entrepreneurs themselves. They are very similar to regular [angel investors]. They just have a little bit more of a philanthropic motive,” says Elizabeth Kraus, a former higher-education software entrepreneur and managing director of the Impact Angel Group, a Boulder, Colo.-based network of about 45 investors that became a formal membership organization in August 2013.

“A lot of impact angel investors want to have an active role in the companies they invest in,” says Kraus. These former entrepreneurs often seek to contribute their time, talent and networks. They can provide guidance to fledgling businesses to help achieve financial and impact goals by shaping early choices regarding customers, strategic partnerships and revenue models.

Kraus says most of the impact angels that she knows also want more of a direct connection with their investments. “They’re investing in a person, rather than in a prospectus. They get to experience the passion and enthusiasm of the entrepreneur,” she says.

Rebuilding hometown economies is another motivation for impact angel investors. “We’re hearing from clients that they want their money out of Wall Street, into their local communities, and in particular into the food sector,” says Eric Becker, chief investment officer of Norwich, Vt.-based Clean Yield, a registered investment advisory firm that works exclusively with social investors.

While the bulk of its clients’ assets remain invested in socially screened stock and bond portfolios, Clean Yield helps clients target their impact investing dollars primarily in growth-stage food, agriculture and clean energy companies in New England. For early-stage impact investing, especially in the technology and health care sectors, Becker says he relies on outside funds, like those of the Patient Capital Collaborative. He says that staying focused locally is one of his firm’s risk-management strategies. “We can get to know people and keep tabs on the companies we invest in more easily.”

Becker says his firm has many clients who were uneasy about their investments well before 2008. “The financial crisis only confirmed their concerns about the long-term viability of the economic model that’s represented by Wall Street—sort of fast money and disconnected from the real economy. They perceive much more safety in the companies that they know and respect in their local communities.”

Where Angels Dare To Tread
Experienced angel investors often claim that the composition of the company’s founders is the key to successful start-ups. “Team, team, team” is perhaps the most popular truism in the angel community. More than having a brilliant product or service, the entrepreneurs must be able to persevere and change course when necessary to turn dreams into dollars. Entrepreneurs may need even more talent to achieve financial and impact goals simultaneously.

The Impact Angel Group uses its own impact metrics, partially based on the B Impact Assessment criteria, to evaluate the overall investment. But the quality of the founders is so critical to a start-up’s success that they also use an assessment tool from Denver-based Pairin to evaluate the entrepreneurs themselves. Pairin, an early-stage company in which the Impact Angel Group invested, provides pre-employment screening to determine whether a person is a good fit for a prospective type of job.

In addition to a strong management team, the Impact Angel Group looks for Colorado-based companies that have an ability to scale, execute and exit; a clear and sizable market for the product or service; legally defensible intellectual property; some degree of traction, as demonstrated by customer contracts, strategic partnerships and revenues; the capacity to grow the Colorado economy; and the potential to have a substantial, positive impact on a social or environmental issue.

“Early-stage investing is really a pretty risky area, especially on a direct basis,” says Balderston. Experts caution that investors new to the space are better off joining one of the hundreds of angel groups around the country, investing in a syndicate or buying into a fund.

Investors’ Circle is the largest nationwide group specializing in impact-oriented investing. Toniic is a well-known global network of impact investors.
Angel group membership gives new investors the chance to learn the ropes from more experienced angels and to get help with the often onerous due diligence process. The amount of time spent on due diligence positively correlates with increased returns to investors, according to a 2007 study funded by the Ewing Marion Kauffman Foundation and the Angel Capital Education Foundation (now the Angel Resource Institute).

When choosing an impact-focused angel group, it’s important to join one whose members agree, or at least agree to disagree, on the definition of “impact.” The Impact Angel Group, for example, filters opportunities based on their ability to generate a positive financial return. The group provides their investors with the results of the impact assessment, but leaves it to individual members to determine whether a particular company is impactful enough to warrant investment.

“There’s business-model impact, like producing a vaccine, for instance,” says Kraus. “But there’s also impact in the way that that the business is supporting the local community, the way that they’re treating their employees, the way that they’re understanding where the pieces of their product are coming from.”

“Impact is a very complicated subject,” says Sheila Lamont, an attorney who works with Kraus and serves as deal flow manager for the Impact Angel Group.
“Some of our members joined with a very personal view of impact investing and initially expressed concerns that investments being screened didn’t seem to fit into that framework since they weren’t curing cancer or addressing problems of world hunger. But after a great deal of group discussion and more time looking at our companies in screening, they acknowledged that impact can be multi-faceted.”

For one thing, Lamont says the downturn in the economy has led some members to focus more on job creation. “It’s not their sole criteria for impact, but it’s one of them. People want to know if the company will create a fair amount of jobs, not just employ five or six people,” she says.

New ventures generated almost two-thirds of the new jobs in the U.S. over the past two decades. During the first half of 2013, angel investments created 111,500 additional jobs, or 3.9 jobs per angel investment, according to the Center for Venture Research.

Besides joining an impact angel group, clients can find promising impact-oriented start-ups through accelerators or incubators that vet businesses, then select a small number to groom for pitching before potential investors. Boulder-based Unreasonable Institute and Chicago-based Impact Engine are accelerators that serve for-profit social and environmental entrepreneurs.

Many angel groups also syndicate deals. In a syndicate, a lead investor usually structures the deal, negotiates terms with the founders and works with the attorneys to get the appropriate documentation in place.

For investors who don’t want to participate directly or through a group, there are always funds. Properly constructed and professionally managed portfolios of angel investments can generate an IRR of 25% to 30% over three to five years, according to industry experts. Besides the Patient Capital Collaborative, funds that invest in early-stage impact ventures include Boulder-based Greenmont Capital Partners, San Francisco-based Pacific Community Ventures, Vancouver-based Renewal Funds and Toronto-based Investeco Capital.