US Angel Groups vs. European Business Angel Networks (BANs)

Bill Payne , Angel Investor , Frontier Angel Fund

5 Apr 2013

There seems to be a subtle but significant operational difference between many European BANs and US angel networks.  This is an attempt to describe those differences.

In general, BANs seem to have two primary focuses:

(1)   Soliciting a large mailing list of potential angel investor members (and others, such as service providers) and organizing pitching meetings for them.    Members have limited obligations to the group, that is, small or no annual dues, no duty to invest as part of the group (versus pocketing deals for themselves), no participation requirements (attendance, due diligence), no leadership mandate and no minimum investment expectations.

(2)   Engaging with the entrepreneurial community, sometimes by providing investor-ready services and pitch coaching, with a focus, for the most qualified entrepreneurs, on inviting them to pitching events.

After the pitching session, the entrepreneurs and investors are left to their own devices to do a deal.  There is no organized group deal processing; instead each angel engages with the entrepreneur, finds co-investors (within or outside the BAN), completes due diligence, negotiates a term sheet and closes the deal.

There appear to be two models for the BAN operational platform:  (a) a not-for-profit model, often driven by economic development agencies and (b) a for-profit model pursued by experienced investors and funded by success fees and tolls charged to entrepreneurs and investors.

Angel networks* in the US (and in some other countries) are primarily focused on recruiting members and managing deal flow for those members.  Education, social engagement, pitch coaching entrepreneurs and other activities may also be important functions.

(1)   Members are recruited to join the group, appealing to accredited investors with the deal flow and best practices offered by the network.  Members are often required to sign a rules of membership agreement stipulating their expected engagement (meeting attendance, participating in due diligence, annual investment numbers, etc.) and committing neither to “steal deals” nor to solicit entrepreneurs for consulting or members of business.

(2)   Entrepreneurs are solicited to pitch to the group, through websites and other networking activities in the community.   A small group of members or staff pre-screen deals for presentation to the members.  Investor-readiness training is seldom provided by US angel networks.

(3)   Once an entrepreneur has pitched to the members, a due diligence committee of members (and perhaps staff) is initiated, representing the group.  The deal lead negotiates a single term sheet for the round of investment with the entrepreneur.   Once the term sheet and due diligence are complete, the deal is offered to all members of the network for investment.  In some cases, very popular deals may offer a limited investment amount or time, on a first come, first served basis.  Members are investing for their own accounts, consequently members can invest larger or smaller sums, or pass on a deal.

There are several models for managing angel networks, including both member management and manager management.  The angel network does not make investments or recommend investments to members, rather members make their own decisions based on the shared due diligence and term sheets.

Both the BAN and the US network models result in entrepreneurs receiving funding from angel investors.  To outsiders, the models may seem quite similar but, to members and entrepreneurs, the two models are quite different.

*About 20% of US angel groups are organized as angel funds in which monies are pooled in advance of need and members vote up or down on deals.  Generally, the processing of deals by angel funds is similar to US angel networks.

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