There are two barriers to angel investing. The first and most obvious one is capital. To invest in startups you naturally need to gather large enough funds. The second hurdle, which gets much less attention but is nonetheless crucial, is community. To get access to exciting investment opportunities, funds are not enough, you need to be part of an ecosystem, know people, get introduced to deals, and the list goes on. Capital is already a huge barrier for most, add community to the mix, and angel investing is only accessible to a very lucky few. If you have the funds but no connections, then you can say goodbye to your dreams of investing in the next Apple, Google, or Stripe.
In this article, I use Crunchbase data to show that community is key to active angel investing, and give some tips on what that means for founders, business angels, and funds.
Angel investing is a social game
The most active business angels are not alone when they invest. They tend to surround themselves with other business angels and together, co-invest in startups.
We’ve scoured publicly available deal data on Crunchbase and extracted a dataset connecting investors to start-ups through investments. Because we’re focusing on Business Angels, we removed VC funds.
We found that whether it’s in the UK, Germany, France, or Sweden, there exist smaller less active investors who have only invested in one deal tracked on Crunchbase, and much more active investors in the center, connected to each other through multiple co-investments.
The above graph clearly shows several small investors at the outskirts of the graph, who only invest in one deal, and multiple much more active investors in the center, connected to each other through multiple co-investments.
Why communities are central to angel investing
The reason business angels tend to frequently co-invest in deals is twofold and rather intuitive. If you’re a business angel and get access to what you deem to be a pretty good deal, then you might want to let your network of business angels know about it. Sharing deals with your network will make it likely they share deals in return. The second reason is that you might need to invest a large ticket to access a deal, co-investing with other business angels will make it easier to do so.
Using Crunchbase public data, we drew a graph of connected business angels. We define two business angels as being connected if they have co-invested in one start-up: they thus form a community. The more investments they have in common, the stronger the relationship. As expected, we can clearly see that communities emerge: there exist groups of Business Angels who frequently co-invest together.
In France, there is a total of 51 communities, including 6 communities with more than 4 members, with an average size of 19 members. In the United Kingdom, there is a total of 139 communities, including 11 communities with more than 4 members, with an average size of 26 members. While the number of communities with more than 4 members might seem low, the average size of members shows that these communities represent a large number of investors.
We also find that Business Angels who connect different communities together (who have a large betweenness centrality in graph theory lingua) invest in more deals.
This is obviously a self-reinforcing circle, as investing in more deals gives you the chance to connect with other communities, and being in several communities increases your deal flow.
A third finding is that in some countries, like in France, Business Angels and traditional investment Clubs are part of different communities. This means that some companies raise with Business Angels, others with Clubs, but Clubs usually don’t have access to the same deals as Business Angels.
It implies that retail investors participating in investment clubs don’t have exposure to all deals in the ecosystem, and the only way they would be able to, is if they were to co-invest with other BAs.
What does it mean for BAs and founders?
Communities yield power, and this has direct and real implications.
For founders, to maximize your reach in a given ecosystem, you should discuss with some very connected BAs in different communities. If you feel like you have consulted all BAs in your ecosystem, you may just have exhausted one community, but not been introduced yet to another: keep persevering!
For Business Angels, aim to share deals with people from diverse backgrounds, it will benefit you later. A top BA told me that his strategy is to always share new deals with his closest connections, and with a few people further away, so they would think of him next time. It’s a great strategy to replicate.
Finally, as an investor trying to get into Angel investing, try to co-invest with several BAs and not only with some traditional investment clubs, which have a skewed deal flow.
Angel investing is not within everyone’s reach, but there are steps we can take to democratize it. While increasing the amount of capital to the masses might be a complex endeavor (to say the least), I believe that making it easier for investors to create and join communities, and making the whole process as transparent as it can be, can make the closed world of angel investing accessible to the many.
Roundtable aims to democratize access to investments in private markets by powering communities of investors.
No data is perfect, and an analysis can only be as good as the data is based on.
In our case, even though the Crunchbase dataset is a gold mine, it is based on self-declaration from start-up founders after they have raised.
A lot of investments are therefore missing, about half based on some discussions we’ve had with some top French investors.
There is also certainly a survivor bias, prominent investors are more likely to be declared by founders than smaller ones, increasing even more their relative importance in the network.
Nonetheless, this shouldn’t prevent big patterns from emerging, and as long as we don’t pay too much attention to quantifying exactly the findings we find, we should be good.