Bill Payne, one of the top angel investors in the US who has successfully invested in more than 50 start-up companies including DoubleClick, says the syndication trend among angels and groups of angel investors needs to increase in order to plug the gap between seed funding and the scale of venture capital deals.
For three decades, Payne has successfully founded and invested in more than 50 start-up companies, including: Solid State Dielectrics, Inc. in 1971, an electronic materials company he founded and sold to E. I. DuPont in 1982; Novacap in 1980, a US$100m manufacturer of ceramic capacitors now operating as a stand-alone unit within Dover Companies; Vista Staffing Solutions in 1990, a private US$60m company providing temporary placement of physicians; and Email Publishing in 1996, a venture-funded company merged into DoubleClick.
Since 2000, he has assisted in founding four angel groups and has mentored over 100 companies in the past 25 years.
Payne points out that in the US the venture capital industry has grown dramatically in the past 15 years.
“It has grown to such an extent that the average investment by venture capital firms went from about US$3m up to US$8m.
“This has created a big gap because angel investment has remained the same for the last number of years in that the sums haven’t changed. Angels are putting in roughly US$500,00 to seed a promising company.
“What we are finding is we need to raise larger amounts of money for follow-on funding than we have for the last 15 years."
The nature of how angel investors operate has been changing in recent years, he explained, evolving from the altruistic endeavours of individuals operating alone to new syndicates and associations of angels willing to pool their resources.
It is also enabling angel investors to tackle the follow-on funding challenge. "One syndicate can go to the group next door and say ‘we’ve put in around US$300,000 and we need a few more people to group together to bring that round to US$1m’," Payne explained.
But he emphasised that is about more than just the money. "The perfect logic is let’s put together a bunch of expertise and if we want to study a deal we will always have somebody who knows about the business vertical, we can do term sheets, due diligence monitoring and that just makes it easier to organise for deal flow.
“It’s much easier than investors operating in ones or twos trying to collect money to invest in companies.
“The unintended outcome we never though of is that we are much easier to find for entrepreneurs because we create websites and establish an identity," Payne said.
The rise of the global angel investor network
Payne, who is an active founder of four angel organisations that include Aztec Venture Network, Tech Coast Angels, Vegas Valley Angels and the Frontier Angel Fund, takes a keen interest in the emergence of angel groups around the world. For example in 2010 he spent five months in New Zealand to share his knowledge and experience of angel investment.
In 1995 he was appointed Entrepreneur-in-Residence at the prestigious Kauffman Institute, a position he held for 12 years.
“I’m finding that countries outside the US are moving to put their start-up companies in a position to go global. In 1995 we could identify less than ten angel groups in the US and today there are over 350 and in Europe there are now over 400 angel investor groups. In a short period of time we have gone from a handful of angel organisations to more than 1,000 worldwide.
The population of New Zealand is about 4m and they have 18 or 19 active angel groups all over the country."
Payne says that angel investing is best characterized as a long-term personal strategy. "There’s the financial and an altruistic perspective to it. This is a class of investors who are active, investing time and money in portfolios of companies which is very different than public equity markets."
The return on investment and the nature of the investment is more than just financial. "For some of us it’s a way of giving back for perhaps someone who mentored us in our careers, and its also a method of honing and continuing to exercise our business skills."
He says that with the recession angel investors have all seen their net worth decline and as a result are pretty conservative. "Nonetheless I think it is a great time to write cheques, there’s a lot of companies to invest in.
“I don’t see the irrational exuberance I saw in the 1990s and yes we are seeing some foolish IPOs – I’m still trying to figure out the sustainable business model for Groupon."
Despite this he says it is nothing like the dot.com boom of 1999/2000.
“I think we are in a time when technology has taken an upswing again and there is a bunch of exciting entrepreneurs out there who are out to change the world – again – and so it is really a fun time to be an angel investor and try to keep your skin on this time."
Bill Payne is the keynote speaker at Angel Meetup 2012 on April 18 in Dublin. Click here for further information on the event and speaker biographies.