Bringing Angel Investing Out of the Shadows (Dave Mangum)
The Silicon Flatirons Entrepreneurship Initiative put on dozens of great events this past school year, covering a wealth of topics and bringing, in aggregate, thousands of people to campus to better connect the entrepreneurial community to the CU-Boulder community. One of this year’s highlights has been our work on illuminating the world of angel investing. In addition to our Mile High Entrepreneurship conference on angel investing with Jeff Clavier, this past winter we conducted a private roundtable discussion on issues surrounding angel investing. The fruits of that discussion, coupled with additional research, led to the recent publication of our report on angel investing. Our report explores a handful of important issues:
- The Angel Investing Paradox
- Investments are made when uncertainty, information asymmetry, and the potential for agency costs are arguably highest, yet most angels obtain lighter and fewer contractual protections than do venture capitalists. Roundtable discussion, however, suggests that a lack of such investor protections in an angel investment contract may in fact be evidence of unsophisticated investor behavior.
- Convertible Debt
- The use of convertible debt in angel deals is a topic spurring considerable investor interest with widely divergent opinions. Some favor it, some do not, but all agree that it’s useful in at least one context: convertible debt enables parties to punt on the question of company valuation and quickly provide the company with capital.
- The Bridge to Nowhere Problem
- Angel investing in Colorado faces a “bridge to nowhere” problem: investing becomes riskier as the scarcity of Colorado-based VC funds means that more Colorado startups either fail or move to the location of the out-of-state VC that funds them. Colorado may attract a lot of VC money, but some maintain that we need more Colorado-based VCs.
- Unreliable Data About Angel Investing as an Asset Class
- Little reliable public information exists about how angels impact the operational, strategic, and interpersonal aspects of the startup companies that they fund, and about how angel investments perform as an asset class.
- The Potential for Better Information Sharing
- Better information sharing among Colorado angels and would-be angels strikes many Roundtable participants as a useful way to improve the broader startup ecosystem in Colorado.
Although certain aspects of angel investing – in particular, finding ways to better measure the performance of angel investing as an asset class – merit further inquiry and research, the issues listed above have sparked many conversations among Colorado entrepreneurs and investors. If you have thoughts of your own to share, please feel free to engage on this site or say hello at any of our upcoming events.
Dave Mangum is a Fellow at Silicon Flatirons Center and Executive Director of Startup Colorado. He hopes you like the photo of Angel Arch.