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Angel Investing Outside of the Major Venture Centers: Unique Challenges and Opportunities

High-impact angel investing in the major venture centers is not without its special challenges. Problems like a target-rich environment of experienced entrepreneurs and a plethora of alternative funding options are pretty high quality problems to have. Outside of the major venture centers, angels face another set of problems; problems that on the whole make successful angel investing in these locales more challenging than it is for their venture center counterparts. Herewith some thoughts on the special challenges of high impact angel investing in places like the Midwest, and how those challenges might be addressed.

Challenge: Good angel investing “people” resources – experienced angels, venture investors, entrepreneurs and high-impact investing and entrepreneurship service providers – are much more scarce. This makes it harder for the new angel to learn about and keep up with “best practices.”

Addressing the Challenge: First, try to find locals who have venture center experience and/or perspective, and people who acknowledge and understand the special challenges of high impact angel investing outside of the major venture centers. Focus as well on other angels, lawyers, etc. who not only talk the talk but have a verifiable record of walking the walk.

Challenge: The supply of less sophisticated “wannabe” angel investors and advisers is relatively plentiful. These folks don’t know a lot about the subject but often think of themselves as experts and create a lot of noise in the market.

Addressing the Challenge: Be very careful who you take advice from. Be especially wary of folks who tell you their approach to an issue “isn’t the way they do it in Silicon Valley, but we know better around here. It stands to reason, even allowing for the occasional outlier that the venture centers are the more likely source of best practices than the hinterlands. Further, no matter how tempting, don’t get sucked into a good deal that a less sophisticated set of local investors have gone into at a ridiculous price. Finally, if you find yourself playing a follower role in a deal led by a local lead of questionable capabilities, discretely do your own due diligence as if you were instead leading the deal.

Challenge: Entrepreneurs outside of the major venture capital centers are generally much less experienced in terms of working with sophisticated angel and venture investors, and building startup high-impact businesses. Worse still, they have often sought the advice of well-meaning folks in the community who may have a lot of knowledge about small and big business management and investing, but little or no knowledge of high-impact entrepreneurship and investing (see preceding challenge).

Addressing the Challenge: This challenge is best thought of as an opportunity in disguise. If (i) you can sort spot the diamond in the rough entrepreneur among all the fool’s gold; and (ii) you are willing to invest the extra time and energy polishing that entrepreneur; you can often find and invest in hidden gems that other angels either can’t identify or can’t/won’t put the time and energy into value added mentoring. That can be a great way to get into great investments at below market prices.

Challenge: Venture capital – the primary source for post-angel, high-impact investment capital is very hard to find outside of the major venture centers. This is true in terms of the number of investors and the total investable capital under management. Unfortunately (if not altogether without justification) venture capital investors on the coasts are generally cautious to a fault about the notion of investing in post-seed but still early stage opportunities very far from their coastal homes.

Addressing the Challenge: Angels in venture-scarce locations must generally include elevated financing risk as a critical part of their investment decision making and management. That can be one reason deals outside of the major venture centers are generally done at lower valuations. But at least as important, it means that deals should be structured to match the likely limited supply of local downstream investors and capital. Think in terms of capital needs, early cash flow, and time to exit. Focus on business models that call less than $5 million of risk capital and three to five years to the exit.

While high impact angel investing outside of the major venture centers is not without special challenges, so it can have its special rewards. If you are thoughtful about dealing with these challenges, there are good investments to be had at good prices. An opportunity to help build a high impact entrepreneurship and investing community in a region not already blessed with the same.

©2020 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume III, Number 155


About this Author

Paul Jones, Michael Best, technology lawyer, life sciences attorney,
Of Counsel

Paul draws on his extensive business experience as a successful serial venture capital-backed entrepreneur, investor, and angel investor to represent emerging technology and life sciences companies, and venture capital firms in financing and other strategic transactions and general corporate matters. His focus includes:

  • Venture capital financing

  • Startup business and financial planning

  • Strategic business development planning and execution

  • ...