Talk with experienced angel investors, and you’ll realize that unless they have a trusted syndication partner across the border, proximity still matters.
True, tech advancement and the falling cost of communication might have enabled investors to invest farther from home, but the effect might not be as significant as we think.
After all, trust and face-to-face contacts are essential in angel investing.
Entrepreneurial angel Joshua Schachter, for example, doesn’t invest in companies that are out of his networks (Bay Area and New York). “I don’t like doing deals sight unseen,” Schachter avows.
Similarly, Canadian angel investor Boris Wertz, former COO of AbeBooks.com, which was sold to Amazon.com, told The Globe and Mail:
You need to be selective about it. Stick to an industry you really understand, and pick companies close to home – coaching over the phone is a tough one. You want to see them in person as often as possible.
In 2008, a team of academics from the University of Maryland drew a sample of 136 firms and examined proximity measures [PDF] based on the zip code of investors relative to the zip codes of the startups’ headquarters. They found that investors generally lived close to the companies they backed.
Sixty percent of angels lived within three hours of driving time from the firms in which they invested, and 18 percent were within the same zip code. The researchers also pointed out that pure angel-backed companies (i.e., those that haven’t raised money from venture capitalists) were most likely to be in the same zip code as the angels.
Yes, the sample size is small, but it does provide insights into investors’ preference in regards to proximity.
Angels invest for different reasons.
Some invest locally because they want to support local entrepreneurs as they’d been there themselves and want to “pay it forward” within their local community.
Others like Dharmesh Shah, an entrepreneurial angel and the founder of HubSpot, enjoys the welcoming advantages of helping out local entrepreneurs: “One of the side benefits of being an angel investor is that it builds credibility and good will within the local community,” Shan avouches.
For yet others, it’s due to the risky nature of angel investing. These investors invest close to home because it’s easier to monitor local investments and help resolve issues quickly at the first sign of trouble. They believe this helps improve company performance and reduce the risk of their investment.
Jamie Rhodes, chairman of Central Texas Angel Network (CTAN) in Austin, Texas, says: “We invest in Texas-based companies because investors like to drop in on their investments.”
Most investors don’t actually monitor their investment like a hawk or visit their portfolio companies every day, but the ability to do so without having to travel a long distance does offer them a sense of security.
Because they feel more secured, investors who invest close to home are more likely to “rely on trust in lieu of more formal control mechanisms,” according to Venture Capital: Investment Strategies, Structures, and Policies. Those who invest aboard tend to use more formal (and costly) control mechanisms to protect their investments.
Having said that, investors are willing to commute to find good deals. As mentioned in the beginning, experienced investors are more willing to invest aboard if they have a trusted syndication partner across the border.
They’re also more willing to back companies located in a distant area that they’re very familiar with or frequently travel to.
Even so, convenience still plays a big role.
As Forbes’ Maureen Farrell writes, “most angels and VC can only go so many places so often so proximity to investors or at least proximity to an easily traveled route helps.”
Of course, don’t invest in a company operating in an industry you’re unfamiliar with just because it’s close to home. Without knowledge of the industry, you can’t properly evaluate the real risks and potential of investing in that company. And you won’t be able to leverage your expertise if the company needs help.
But if you must invest in a sector that’s new to you, either due to a strong urge or whatever reasons that captivate you, then check out “Angel Investing: Effective Ways to Invest in the Unknown” to learn how to go about it.
* For series, references are published in the last installment of the series.