Angel investor

An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

Description

ource and extent of funding

Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund [ [http://nvca.org/def.html National Venture Capital Association] ] . Although typically reflecting the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc.

Angel capital fills the gap in start-up financing between "friends and family" (sometimes humorously called "friends, family, and fools") who provide seed funding, and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under US$1–2 million [ [http://books.google.com/books?id=4KRnkLZfXtMC&pg=PA291&lpg=PA291&dq=typical+venture+investment+size&source=web&ots=TZCdKW2ajK&sig=RrS6RPo1Mh3CU8JxVDb3gaqbjFU&hl=en&sa=X&oi=book_result&resnum=9&ct=result Handbook of Entrepreneurship Research] ] . Thus, angel investment is a common second round of financing for high-growth start-ups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but into more than ten times as many companies (US$26 billion vs. $30.69 billion in the US in 2007, into 57,000 companies vs. 3,918 companies). [ [http://wsbe.unh.edu/files/2007%20Media%20Release%20-%20Lori%20Wright.pdf UNH Center for Venture Research] ] [ [https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/MoneyTree%20-%20Q2%202008%20final.pdf PWC Money Tree Survey] ]

Of the US companies that received angel funding in 2007, the average capital raised was about US$450,000. Software accounted for the largest share of angel investments, with 27 percent of total angel investments in 2007, followed by healthcare services, and medical devices and equipment (19 percent) and biotech (12 percent). The remaining investments were approximately equally weighted across high-tech sectors. [ [http://wsbe.unh.edu/files/2007%20Media%20Release%20-%20Lori%20Wright.pdf UNH Center for Venture Research] ] Angel financing, while more readily available than venture financing [ [https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/MoneyTree%20-%20Q2%202008%20final.pdf PWC Money Tree Survey] ] , is still extremely difficult to raise. [ [http://www.angelsoft.net/industry Angelsoft] ]

Investment profile

Angel investments bear extremely high risk and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment [ [http://www.entrepreneurship.org/Resources/Detail/Default.aspx?id=11258 Kauffman Foundation] ] . Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period [ [http://www.entrepreneurship.org/Resources/Detail/Default.aspx?id=11038 Kauffman Foundation] ] . After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments is, in reality, typically as 'low' as 20-30% [ [http://www.angelcapitaleducation.org/dir_resources/news_detail.aspx?id=144 Angel Capital Educational Foundation] ] . While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures, which may be too small or young to qualify for traditional loans.

Profile of investor community

The term "angel" originally comes from England where it was used to describe wealthy individuals who provided money for theatrical productions. In 1978, William Wetzel [ [http://www.unh.edu/cvr/bio_wwetzel.htm University of New Hampshire] ] , then a professor at the University of New Hampshire and founder of its Center for Venture Research, completed a pioneering study on how entrepreneurs raised seed capital in the USA, and he began using the term "angel" to describe the investors that supported them.

Angel investors are often retired entrepreneurs or executives, who may be interested in angel investing for reasons that go beyond pure monetary return. These include wanting to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs, and making use of their experience and networks on a less-than-full-time basis. Thus, in addition to funds, angel investors can often provide valuable management advice and important contacts. Because there are no public exchanges listing their securities, private companies meet angel investors in several ways, including referrals from the investors' trusted sources and other business contacts; at investor conferences and symposia; and at meetings organized by groups of angels where companies pitch directly to investor in face-to-face meetings.

According to the Center for Venture Research, there were 258,000 active angel investors in the U.S. in 2007 [ [http://www.unh.edu/news/docs/2007AngelMarketAnalysis.pdf Center for Venture Research] ] . According to literature reviewed by the US Small Business Administration, the number of individuals in the US who made an angel investment between 2001 and 2003 is between 300,000 and 600,000 [ [http://www.sba.gov/advo/research/rs331tot.pdf US Small Business Administration] ] Beginning in the late 1980s, angels started to coalesce into informal groups with the goal of sharing deal flow and due diligence work, and pooling their funds to make larger investments. Angel groups are generally local organizations made up of 10 to 150 accredited investors interested in early-stage investing. In 1996 there were about 10 angel groups in the U.S.; as of 2008 there are over 300 [ [http://angelsoft.net/entrepreneurs/find-groups.seam Angelsoft] ] , with a roughly equal number in all other countries combined; these groups accounted for approximately 12,000 individual angel investors in 2008. The more advanced of these groups have full time, professional staffs; associated investment funds; sophisticated web-based platforms for processing funding applications; and annual operating budgets of well over US$250,000.

The past few years, particularly in North America, have seen the emergence of networks of angel groups, through which companies that apply for funding to one group are then brought before other groups to raise additional capital [ [http://www.angelcapitaleducation.org/dir_resources/news_detail.aspx?id=166 Angel Capital Educational Foundation] ] . The development of the Angelsoft network, connecting a majority of existing angel groups, has led to an increase in the syndication of investments among more than one group [ [http://www.techcrunch.com/2008/09/02/angelsoft-30-launches-with-400-angel-investment-groups-in-tow/ Techcrunch] ] .

See also

* Entrepreneurship
* Pre-money valuation
* Private equity
* Venture funding

References

External links

* [http://www.wsbe.unh.edu/Centers_CVR/news.cfm UNH Center for Venture Research]
* [http://www.angelcapitaleducation.org/ Angel Capital Education Foundation]
* [http://www.angelcapitalassociation.org/ Angel Capital Association (US/CA)]
* [http://www.eban.org/ European Business Angel Network (Europe)]
* [http://www.angelinvestor.ca/ National Angel Organization (CA)]
* [http://www.bbaa.org.uk/ British Business Angels Association (UK)]