Matt Thompson, Senior Vice President, Private Equity And Venture Capital, Skyview Capital
The angel investing community is becoming much more diverse. Angel investing has historically been a very white male dominated cottage industry. Angel investing occurs when an accredited “Angel” investor invests early capital into very young startups. The Angel meets with founders, conducts their due diligence, funds the investment, and then has some level of ongoing involvement with the business.
Most angel investments are made through convertible notes or SAFE investments. Angel investing is very risky because the companies are very early stage. Many of the companies have little to no revenue, few employees, and are entering uncharted markets. Many angel investments fail, but some angel investments go on to be the next Google, Apple, or Facebook, which generate astronomical returns for the early investors.
Angel investors are very important for the startup ecosystem because they provide the first capital and advice to founders. This capital allows the initial scoping of the new venture and perhaps to gain some early market traction. When founders obtain angel investment, it gives their idea a shot to gain traction and provides some credibility for their subsequent rounds of institutional capital. In many ways, access to angel investment is the first gate on an entrepreneur’s journey. Traditionally, that gate has been less accessible to more diverse, under-represented entrepreneurs.
When founders obtain angel investment, it gives their idea a shot to gain traction and provides some credibility for their subsequent rounds of institutional capital
Recently there has been more concerted investment in diverse/under-represented founders of businesses. The Growth Equity firm TPG Capital recently backed a new VC firm called Harlem Capital Partners targeting investments in minority and female founders. Some other early stage venture firms and incubators such as BackStage capital and Halogen investors are building niches by investing in women and minority-backed ventures. There is a lot of sound rationale for investors to increase their investments in diverse founders. Diverse founders can understand an underserved customer segment. They may have a unique insight on a problem which is not understood by general investors. Diverse founders may also be able to attract new talent. In addition, many limited partner investors are requiring the VC firms that they partner with to increase their allocation of investments to more diverse founders. There have been more diverse founders raising capital including HopSkipDrive, which was founded by three mom’s searching for a solution to get their kids driven to afterschool activities. Mahmee was founded to help expectant mothers find lactation consultants and other baby care resources. Tristan Walker started Bevel to develop consumer products targeting African American males. This company raised significant capital and was then acquired by P&G. It is very likely that these founders would have had even harder times raising capital ten to fifteen years ago. “We have a great opportunity to diversify the community of investors in early-stage companies. We can do this by first demystifying the investing process and risk/reward profile. I also think highlighting the journey of other Angels and framing it as a path to generational wealth resonates well in communities of color,” said Kwame Ulmer, Venture Partner at Wavemaker Three-Sixty Health.
With these changing demographics of founders, the Angel community is changing as well. I am part of Tech Coast Angels, which is one of the largest Angel Groups in the country. TCA has been investing for almost 2 decades and has had several portfolio companies exit through mergers and initial public offerings. TCA is launching some initiatives to add more female and diverse angel investor members. TCA is also hosting panels appealing to more diverse founders. We recently held a panel called “How and Why Diverse Founders are Funded” in Santa Monica. This panel had lively discussion on how diverse founders can increase the odds that they can raise angel and venture capital. The audience and panel were very diverse which spurred some lively debate and productive networking.
There is also a trend towards more specialized angel groups like Harvard Angels, Stanford Angels, and Harvey Mudd College (Harvey’s) Angels. These Angel groups primarily invest in companies with alumni in leadership positions from these great institutions. As Harvard, Stanford, and Harvey Mudd increase their student diversity, these angel groups will invest in increasingly diverse founders.
By increasing the engagement between angels and diverse founders, it may increase the amount of capital invested in companies led by diverse founders. The typical angel investor is in his or her fifties or sixties and has experience leading a successful technology business. The average tech startup founder may be in their 20’s or 30’s and increasingly from non-traditional demographic groups (whether ethnicity, gender, education). A lot of angel investing is based on pattern recognition, so many investors tend to bias their investments toward what they see in the media or their previous experiences. Without fostering more activities to increase interactions between these groups it is difficult, if not impossible, to promote the introductions and, ultimately, trust building required to get to a completed angel investment