Angel investing-when individuals back privately held firms and receive convertible debt or equity-is undergoing changes, with more and more wealthy investors putting their money into industries where they made their fortune.
Along these lines, angel investors are adopting a more hands-on approach than ever before, concentrating their investments in areas where their background and expertise give them a meaningful role.
They're very much involved with helping set the strategic direction for growing middle-market companies, as well as periodically assisting in the operational aspects of the firms they're backing. This is an approach that often delivers the greatest returns.
One Family's Perspective
I invest my own and sometimes family money in private companies-both start-ups and ongoing businesses. I often make these investments with other families I bring to the table. However, for many of these deals, I'm intimately involved.
For most of my professional life I've put deals together. Because of my position and relationships, I see an awful lot of deal flow and most of the deals are awful. However, there are more than a few diamonds among the garbage. While I'm proficient at running the numbers or working through a term sheet, my real strength is in bringing together the right people to make the deal a success.
As opportunities cross my desk, I evaluate their viability and long-term potential with my team. The research takes different forms based on the nature of the business venture, as I'm willing to consider a company from any industry.
My network connects the businesses I invest in with potential clients, which is somewhat unique. Before I invest my money or my family's money in any business, I carefully study how I can help drive meaningful revenues to the business.
Sometimes it's pretty obvious. Most of the time, however, I have to critically consider the people and organizations in my network and whether the business and their interests fit well together. In every case to date, I've been able to use my network to help drive opportunities to the firms we have invested in.
The Rise Of Club Deals
The hands-on angel investor approach I'm describing-the one I've been pursuing for years-is becoming more common among angel investors. There are lots of firms looking for money. However, most of them are not good opportunities. Even the good financial deals don't always make sense for this highly cooperative approach. Potential angel investors are increasingly looking for situations where their involvement goes beyond writing a check.
More and more of the very wealthy are adopting this approach. There's a surge among the wealthy to actively pool their funds to invest in a company and to help that company succeed-in what are commonly referred to as "club deals." Among many family offices, for example, there is more interest in club deals than in private equity funds. These family offices are looking to employ their own skills and knowledge to not only select good companies to invest in, but to also help them become more successful.
A certain mentality and perspective is required to make club deals work out well. I think long-term. I actively nurture all the relationships I've developed with wealthy and successful people. I'm very concerned with making sure they're getting what they want out of every situation. And my concern goes far beyond any joint investment.
The people I do business with recognize my concern for their ongoing success. I'm always looking for people I can introduce them to who will help them professionally or personally. Being proactive and identifying ways the different people in my network can help each other leads to more opportunities for everyone-including me.
When I introduce people, I want them to understand I'm making the connection for their benefit. While I might also benefit, that's not the primary motivation. People take my calls and go to the meetings I set up because they know that it's to their advantage to do so. They know I'm thinking of them and they know I'm not wasting their time. I spend a lot of time and effort getting to know these people professionally and personally. So when I reach out to one of them, I'm absolutely confident they will appreciate the opportunity.
This approach, focused on delivering value to the people in my network, is characteristic of my family's approach to doing business. My ideas and introductions are designed to help everyone become more successful. By working this way, I've found that my network of contacts for everything from money to expertise continues to grow, creating a steady stream of new and interesting business opportunities.
Angel investors are becoming an increasingly important source of funds for start-ups as well as for more established, often middle-market, companies. Club deals among the wealthy, such as family offices, are on the rise and there's no indication that trend is abating. Furthermore, all the research shows that the number of angel investors as well as the money they control is growing rapidly.