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Angel Investing: A Broadway Reprisal, not a Silicon Valley Innovation

How the theater world gave today's angel investors their wings

Welcome to Spots, where I share what I’m learning about startups, tech, and how our industry operates.

Why exactly are angel investors in tech startups called angel investors? As a generally curious person, I’m ashamed to admit that is not a question I’d ever asked until writing my first angel check back in 2022.

Answering it led me to a surface-level fun fact: the term “angel investor” is borrowed from the world of Broadway, where wealthy individuals who financed plays and musicals were known as “angels.” Tech blogs share this brief anecdote, and then move on to discussing angel investing in startups. But it left me wondering - who first borrowed the term, and why? Is there something we can learn from Broadway?

Pulling on that thread revealed that the connection to the Broadway term was more than just a neat story about a loanword from an unrelated industry. Historical angel investing in theater production has some surprising parallels with investing in startups.

For example - is this a description of investing in tech startups, or plays?

We think of it as a combination of (1) exercising thoughtful investment judgment (2) betting on a horse rase and (3) being elected to and maintaining your standing in an exclusive club.

Howard and Marguerite Cullman, legendary Broadway angels

A penchant for jargon and re-invention

It’s natural to assume that “angel” is a tech industry invention, since talking about startups can feel like learning another language for those who didn’t grow up with the lingo of Silicon Valley as a native tongue.

People casually throw around terms like “pre-seed” or “SAFE”, leaving newcomers to Google1 their meanings like moms trying to keep up with the middle-school slang they overhear from the back seat. Sometimes, it can even feel like this language is serving as a shibboleth2 of sorts, to separate out those “in the know” from those on the outside. The truth is that often the insider saying the word doesn’t even really know what it means, or where it comes from.

Some concepts truly were created by the tech industry (such as Y Combinator inventing the SAFE, a financing vehicle). But many of the tech industry’s ideas are borrowed from much older industries, and the majority of the industry isn’t even aware of that fact.

This is the story of one of those quintessentially Bay Area concepts (angel investing) that is, in fact, borrowed from a legacy industry (19th century Broadway).

1950s play producers or 2023 startup founders?

Wait, what is an angel investor?

In startup land, angel investors are individuals who will invest their own money in early-stage companies. This is often contrasted with “institutional” investors, which means venture capital firms who have raised money from others to invest on their behalf. These aren’t hard and fast rules, but angels tend to invest earlier than those institutional investors, and they usually write smaller checks. There are some angel investors who will write $250,000 checks, but many (myself included) are writing checks as small as $1,000.

But why are they called angels? Do they truly view themselves as messengers from God, bringing a message to startup founders everywhere? Despite the popular media conception of the “tech savior complex,” that’s not what is going on here.

Borrowed from New York City, coined by a New Englander

William Wetzel, a professor at the University of New Hampshire, was completing a study on how early-stage businesses in the Northeast were funded when he first borrowed this term and applied it to investors supporting new companies in 1978. Today, it seems to almost always be used in reference to investing in tech startups, and the Broadway meaning has faded into the background.

But the term originated at least a century before it was lifted by Wetzel. The New York Times referred to investors in plays and musical as “angels” early as 1884, implying it was common parlance in American theater circles by then. While there is not a clear origin for the term, playwrights are described as being supported in their endeavors by these financiers. Others cheekily referred to Broadway angels as the greater fools of a sort, whose money grew wings and flew away.

It is customary for gentlemen like Mr. Weed and Mr. Williams to be alluded to by the theatrical people as “angels”

Nov 30, 1884, New York Times (earliest mention of “angels” that I could find)

That’s a neat origin story, and it is initially where I thought my research would stop.

Parallels from another industry driven by power laws

As I thumbed through the Times’ archival mentions of angels, I was reminded of the saying3 , “history doesn't repeat itself, but it often rhymes.”

These rhymes between two seemingly different investment classes reveal that they are in fact quite similar because they are governed by the very same power law: a handful of investments typically drive the bulk of returns.

High risk, high reward

Investing in Broadway productions was about more than just being a patron of the arts. It was a real opportunity for financial gain. Life with Father raised $25,000 and returned over $9 million at the box-office. Arsenic with Lace raised $35,000 and grossed $8 million. Sounds an awful lot like the initial angel investments in tech giants like Google or Uber.

However, with the potential for high returns comes high risk. It is oft-quoted that 4 out of 5 startups will fail. Turns out this is true of theater as well. In a 1946 New York Times piece by longtime Broadway angels Howard and Marguerite Cullman, they cite two different sobering statistics in their advice for hopeful angels: four out of five productions are doomed to failure, and barely one in twenty amateur angels ends up making anything from their investments.

It’s not just about the returns

Broadway angels were often seen to be in it not just for the financial returns, but for the chance to rub shoulders with the creative elite, meet important people in the New York scene, and be a part of bringing art to the stage. There are some angels in tech who are motivated by similar reasons, wanting to re-invest in the industry that made them wealthy, help out promising young entrepreneurs, or build their networks.

However, both classes of angels suffer from a similar misconception that they are in it because it is “fun”, rather than as a way to make financial returns. The ancillary benefits are nice, but they are not the reason most investors are putting money into companies or musicals.

Using investor updates to lure in new checks

Startup founders will send out updates to their investors on a periodic basis. Over the past year or two, I’ve noticed founders sending these updates not just to those who have already invested, but to investors they are courting for future rounds of funding or who may have rejected their initial pitch.

This sounds like a novel idea4 , but read this strategy by a Broadway producer, Hurry Fredrik, as she was trying to finish raising the funds for her play Tribades:

She also issued a newsletter to previous backers, business associates and friends outlining some of the details about “Tribades,” as well as “An Almost Perfect Person” and “The Dream Watcher,” her two other productions scheduled for this season. When a nibble was received, she immediately contacted that person by telephone in an effort to close the sale.

Leonard Sloane, “What Makes the Broadway Angels Take the Plunge?”, New York Times, Sept 18, 1977

Swap out the play references for previous business ventures, and “telephone” for “e-mail” and it could be a story about Hurry Fredrik, startup founder raising a pre-seed round in 2023.

Trend towards greater access and syndication over time

While mentions of angels in the early 1900s all seem to be about high net worth individuals, articles from the 60s and 70s start to reference “subscriptions” or syndicates of angels. The very first brokerage registered with the SEC in the 1960s - the First Theater Investing Service5 , and its members ranged from the Play Investors Club, a group of local women who invested as little as $100 (around $1000 in today’s dollars), to individuals who put in as much as $25,000.

Other syndicates started as a group of friends led by someone with industry experience, such as the Ruth Green Peanut Syndicate. Ruth started the group when she was a secretary for the League of New York Theaters, and had 40 backers kick in $200 each. It ran for three years, and led to returns of 150%. These “peanut syndicates” were a way for smaller investors to pool their funds to write impactful checks, just like syndicates or roll-up vehicles today. From syndicates on AngelList to angel groups like Hustle Fund, investing small checks into early stage startups has never been more accessible.

Silent night vs. a chorus of angels

One key difference between angels in tech and theater is how involved investors are expected to be after writing the check. This 1946 Times piece by two Broadway angels talks at length about how you shouldn’t go around offering your amateur advice to producers as an angel, and how it will result in your being “blackballed” from future investment if you do. On the contrary, many times tech founders are specifically raising from angels to tap on their expertise as they build their businesses, and welcome - even expect - tangible feedback and support from their investors.

Broadway today: consolidated to insiders, heavy hitters and sure bets

Based on the trends at the time, someone who time-traveled from the 1960s to the 2020s might expect to see an even larger investor pool dumping money into productions - for it to maybe even be approachable to retail investors.

Alas, angel investing activity on Broadway seems to have reverted to mostly being a game played by well-connected insiders, with just a handful of angels and angel syndicates active today. There are some narrative violations here - Godspell famously raised $5 million from 700 investors through a crowdfunding campaign. But the very fact that this was newsworthy shows that the idea of small checks and syndicates is no longer the way the industry works. Those raising from and investing as Broadway angels don’t even seem to be aware of the fact it was the OG form of angel investing: this Times article from 2017 draws parallels to startup investing to justify the risk of theater investing.

While I’m no expert in the theater, my armchair diagnosis is that the pressures to produce profitable shows as productions costs have mounted led to consolidation (aka the Big Mouse, Disney), a preference for revivals (less IP upside), and a desire to back repeat producers and playwrights (who will raise money from insiders). To boot, Broadway has a supply problem: there are only 41 Broadway theaters in Manhattan. It’s hard to bet on a sports team if you aren’t even sure they are going to have a field to play on.

Is tech angel investing heading the same way?

I hope not. Angel investing is an important source of funding for tech startups, as angels are often willing to fund ventures at day zero. Contrast this with institutional capital, who typically waits until they see the magic word: traction. Without angel funding, founders who aren’t independently wealthy or who don’t have networks with deep pockets would struggle even more than they already do to get their businesses off the ground.

The tech industry differs from Broadway in a few key ways, most of all in size. Broadway grossed $1.8 billion6 in 2018, while the US tech market is estimated to have surpassed $1.5 trillion that same year. There is no cap on the number of startups that can exist. Production costs to build software businesses are decreasing, not increasing, especially with the advent of artificial intelligence. Legislative and regulatory changes on the horizon offer a boost as well, by making changes like expanding the pool of accredited investors via a certification exam and increasing the maximum number of angels who can participate in an investment.

Despite their structural similarities, these key differences mean that angel investing in tech will have a very different next act than Broadway’s angels.

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1: At what point will this fade into obsolescence and we “GPT” the meaning of something?

2: I’ll take any excuse I can to reference The West Wing

3: Often, but not substantively, attributed to Mark Twain

4: Like many clever ideas, the impact of this is diluted if everyone starts doing it

5: Nobody ever said financiers of the arts had any creative flair themselves

6: Notably, this is a TAM that VCs would probably not invest in

I’m not an academic and my high school history teacher isn’t here to whine about my citations. Here’s a list of things I consulted while writing this:

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