Have Angels Abandoned the Two-Hour Drive Rule?

early stage investors

One of the rules of thumb about early stage investors is that they invest in companies no more than a two-hour drive from their location. Investing locally, the story goes, provides better information about entrepreneurs and facilitates the monitoring of portfolio companies.

That rule of thumb may be changing. The Angel Capital Association (ACA) reports that accredited angel investors are more willing to invest in geographically distant startups than they once were. The March 2015 ACA Member Group Survey of 106 angel groups revealed that less than 13 percent of groups preferred to invest in start-ups located within a two-hour drive of their homes. In 2008, that fraction was nearly 28 percent.

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Why the change?

One factor is the rise in accredited investor angel platforms like AngelList, FundersClub, CircleUp, and SeedInvest. Investors are joining these platforms to diversify their portfolios, gain access to types of startups that are rare in their parts of the country, fill out investment rounds, or follow successful investors. The national scope of these platforms breaks down geographic limits on investing.

A second factor is the growth in affinity groups.

Marianne Hudson, Executive Director of the ACA, explains that geographically-dispersed angels with common interests — alumni of the same universities, female angels with a preference for backing female entrepreneurs, investors focused on particular industries or themes, like green technology or doing well by doing good — have increasingly banded together to co-invest.

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Some of these groups have even set up structures that facilitate coordination of people in different parts of the country. Because these groups are linked less by geography than other factors, their rise has led to a decrease in the geographic focus of angels.

A third factor is generational change. Younger angels — people in their 20s and 30s and even some in their 40s — are less geographically focused in their investments than older angels — people in their 60s and 70s.

These younger angels have moved around more in their lives and have built networks of contacts in geographically disparate locations from school and previous jobs. They are more adept with technology, and are as comfortable getting to know someone through a video chat as in person. Their motivations for angel investment are also different from many in the older generation of investment, financing others to support the development of technologies or to promote common interests more than to spur local economic development.

As younger generations that are less geographically tied move into angel investing, the reliance on local investments has tended to fade.

A fourth factor, highlighted by Marianne Hudson in a recent article is an increase in deal syndication. The size of seed rounds has risen, reducing the number of early stage deals each angel group can do alone, and has pushed them towards co-investment. In addition, as angel groups become more sophisticated, they seek greater diversification, leading them to do more deals with other groups.

Furthermore, angel groups have started to do more investment rounds, co-investing to make follow on investments in companies when venture capitalists have not followed on deals that the angels have made. The desire for more syndication has been supported by the development of processes that facilitate co-investment by angel groups: common deal terms, similar due diligence practices, investment treaties and the like.

From 2008 to 2015, reliance on a common rule of thumb in angel investing — financing companies within a two hour drive of home — has weakened. Because the factors that have driven this shift are still at play, the tendency of angels to invest only locally will likely continue to shrink in years to come.

Man Driving Car Photo via Shutterstock


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

4 Reactions
  1. With more of the supervision being digital (email, conference calls, phone, etc.) it makes less sense to be married to a physical limitation like a 2 hour drive. My question would be “How many angels have physically been on site at their portfolio companies in the last 3 months?”

  2. Hello Scott,
    In my opinion, your article is very interesting and I found here new information. Maybe Two-Hour Drive Rule is a part of the idea for building commercial areas and business centers where the companies are near each other lol…

  3. I have definitely heard of the distance limitation in my local angel group in order for the group (or one of its funds) to act as a lead investor. And I believe it is a good practice for the lead investor to have some sort of geographic proximity to the startup (though I’m personally more comfortable with 3-4 hour driving distance or a direct flight away).

    However, I completely agree from the co-investment perspective, that there is no need to have a geographic limitation. I’m a startup investor in my 30s and relate to all of the reasons in the article to forego the 2-hour driving rule. I still rely a lot on the deals coming via my local channels, however, I’ve been expanding my portfolio to companies coming out of my university in a different state, as well as looking at startups from states where I used to live or visit often, and finally making an investment via a purpose-driven national angel group.

    I hope that startup founders capitalize on this trend as well and start expanding their search for funding far and wide.

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