The Key Reasons Affinity Angel Investing Produces Better Returns



Affinity investing to develop communities has incredible intrinsic value, however its value by the numbers should not be overlooked: angels investing through affinity groups produce some of the strongest results in the early-stage technology sector. There are two parts to the reason why: one, the critical importance of investing through a network and, two, the positive correlation between affinity and meaningful assistance. Excitingly, New York City affinity angel networks are pioneers in this area, and it should help grow Silicon Alley for the foreseeable future.

Investing through a network, as opposed to by yourself, carries a strong correlation to improved returns. There are many reasons for this, briefly summarized as deal size, deal flow volume, and quality of diligence. According to the American Capital Association (ACA), fully 73% of allocated angel capital in 2013 came through co-investment in groups, and the trend has been rising since at least 2011, when it was 67%. Because deal size often comes from co-investment, both between members and between groups, entrepreneurs tend to know certain groups by name and brand and flock to them, which increases deal flow volume to those groups. As a member, you certainly notice this: Golden Seeds, the number one angel group by deal volume according to the ACA, Sand Hill Angels, and others all receive deal flow both from entrepreneurs who recognize their brand and their own members’ referring deal flow and this combined network effect is very powerful over time. It also produces a positive due diligence correlation: high deal flow volume produces higher volumes of interested members who participate in diligence and the presence of a variety of skill sets.

“Large angel groups like Sand Hill Angels have been successful by bringing the collective expertise, resource and network to startup entrepreneurs.  Through a single point of contact, the founders can reach out to over 100 investing members with diverse background for help and advice.  A large angel network generates stronger deal flow, due diligence and syndication opportunities,” said Leo Chan, Director of Screening for Sand Hill Angels.

These critical factors, which most angels are aware of, are drastically amplified through affinity investing in community-specific networks; is a relatively new phenomenon whose positive results are giving it increased currency. Affinity networks, such as my own syndicates Gaingels, which invests in LGBT founders, and Blue Jay, which invests in Johns Hopkins alumni, are capable of serving as the primary first-line of desirable funding for their entire category. Over time, entrepreneurs learn to associate the affinity with the brand: for example, Berkeley Angel Network has become the primary early-stage funder of companies associated with Cal, which gives it unique and prior access to a deep pool of deal flow long before those founders seek out more traditional regional angel networks, and often months or years before they will seek out traditional venture capital.

“Angel groups provide individuals the ability to leverage the group’s time and expertise for diligence, collective bargaining power for better terms, and an extended network to source capable advisors for portfolio companies and potentially superior deal flow. Working with a group over time also gives one better insights about one’s fellow angels, an important factor in weighing other people’s inputs and judgment calls,” said Catherine Chiu, Co-President of the Berkeley Angel Network.

Moreover, the presence of affinity, with that between university alumni being a particularly strong example, helps to produce a warm relationship that makes traditionally more difficult things such as terms negotiation and board voting less acrimonious, which in turn makes affinity group members very willing to make real effort to assist portfolio companies. At many affinity networks, this has become the central tenant of membership: regardless of whether they are invested in a particular portfolio company, members are expected to open their rolodex and spend critical strategic time assisting portfolio companies. Over time, this additional mentorship and business development assistance from a wide pool of members has a very strong positive net effect on the performance of portfolio companies, particularly at the pre-institutional early-stage, where every strategic introduction helps on the path to success.

“There are many people who want to do more than invest and this desire materializes itself in many ways.  When dealing with early stage private companies, it can get personal.  Affinity investing is where one seeks to get a return on investment while investing in businesses where there is a personal affinity.  For example, an alma mater, a minority community.  It is exactly because it is more than just an investment, that the entrepreneur can expect more personal support from the investors than if it were just money,” said David Beatty, co-founder of Gaingels.

Image credit: CC by green umbrella

About the author: Paul Grossinger

Paul Grossinger is a twenty-six year old New York entrepreneur and early stage investor. He is the founder of Gaingels, the first affinity investment syndicate backing LGBT entrepreneurs, the founder of Blue Jay Syndicate, the first affinity investment syndicate backing Johns Hopkins alumni, a General Partner at A-Level Capital, and an angel investor in 61 companies. As an entrepreneur, he is Strategy Officer for Imperative and was co-founder of Pervasive Group and L&M Media. He is a graduate of Columbia University’s School of Journalism and the Johns Hopkins University.

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