New Angel Alliance Aims to Keep Startups Out of Venture Capital’s Clutches Longer

9/14/11Follow @wroush

[Updated 5:15 pm PT with fresh quotes from Richard Sudek, see below] Regional angel investing groups in Southern California, Northern California, and New York say they’re banding together in an effort to lengthen the financial runway for early-stage startups before their founders are forced to turn to venture capital firms.

Tech Coast Angels, based in Irvine, CA, said in an announcement today that it’s joining with Band of Angels in Menlo Park, CA, and Golden Seeds in New York City to form a new alliance called the Angel Syndication Network. The idea is to lower the barriers to funding, so that companies that have already won early stage investments from one regional angel group can get pre-screened introductions to other groups in the network without having to restart the due-diligence process.

Richard Sudek of Tech Coast Angels, who helped instigate the new alliance, says it’s partly a response to increased competition from the venture industry. “As we have made investments over the last five to eight years, we have found a few things that are not in our favor as VCs have come in,” Sudek says. “What we realized was that we needed to provide more money for companies and get them further along before they went to the next level, the level where they need funding that is outside the angel range. We also found that companies need small follow-on rounds to get to the next milestone, and that sometimes these rounds are beyond beyond the capacity of any particular angel group. By creating this network, we are able to help the entrepreneur get more funding in the initial round, and we are able to provide more capacity in follow-on rounds.”

Sudek says several additional angel groups are in the process of joining the Angel Syndication Network, including the Alliance of Angels in Seattle and Pasadena Angels in Southern California. Eventually the network could include 10 or more angel groups, he says. “As we get different groups, we also get different expertise,” Sudek says. “Let’s say the Alliance of Angels is working on a digital media deal that might have a deeper connection to LA and the Hollywood area. Tech Coast Angels has members who are conected there, so we might be able to provide more board representation and networking into strategic partners and customers.”

While the new network may improve life for early stage entrepreneurs, it also makes sense for investors. As individual “super-angel” investors such as Ron Conway, Mike Maples, and Aydin Senkut have evolved into micro-VCs, and as more and more traditional VC firms have accelerated their seed-stage investing efforts, angel investing groups are feeling the pinch. A syndication network could provide one way to keep startups within the angel-funded ecosystem longer. That could give them time to grow bigger before they turn to venture funds, which typically require large chunks of equity that significantly dilute early investors’ ownership stakes.

“Syndicating investments within the angel group ecosystem is essential in our quest to aggregate capital for early-stage companies that have high-growth potential,” Golden Seeds founder Stephanie Hanbury-Brown said in a statement. “In this way, angel groups across the country are supporting the innovation economy and job growth, without losing sight of the imperative for high returns on our investments.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • Tom

    I suspect a large part of this is the individual angel groups having enough “dry powder” to keep their investments going.

    If they form a syndicate, they are able to draw on a larger pool of resources to keep companies alive that VCs can’t (size of investment round) or won’t (too early stage or not seen as unique enough) currently fund.

    Maybe 1/2 of this is keeping VCs away, but the other 1/2 is keeping these group’s investments viable until VCs want to participate or they can shop the company for M&A.

    I’d also offer: a “larger” organization isn’t necessarily a “better* organization.

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