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Angel investor

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An angel investor or angel (also known as a business angel or informal investor) 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, as well as to provide advice to their portfolio companies.[1]Sophisticated angel investors are known as super angels.

Etymology and origin

The term "angel" originally comes from Broadway where it was used to describe wealthy individuals who provided money for theatrical productions. In 1978, William Wetzel,[2] 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.[3] 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.[4] 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 United States and are over 200 as of 2006.[5]

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.[6]

Source 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.[7][8] 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, or other vehicle. A Harvard report[9] by William R. Kerr, Josh Lerner, and Antoinette Schoar provides evidence that angel-funded startup companies have historically been less likely to fail than companies that rely on other forms of initial financing.

Angel capital fills the gap in start-up financing between "friends and family"—(sometimes humorously given the acronym FFF, which stands for "friends, family and fools")[10] who provide seed funding—and formal 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 make or evaluate small investments under US$1–2 million.[11] 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 60 times as many companies (US$20.1 billion vs. $23.26 billion in the US in 2010, into 61,900 companies vs. 1,012 companies).[12][13]

There is no “set amount” for angel investors, and the range can go anywhere from a few thousand, to a few million dollars. In a large shift from 2009, in 2010 healthcare/medical accounted for the largest share of angel investments, with 30% of total angel investments (vs. 17% in 2009), followed by software (16% vs. 19% in 2007), biotech (15% vs. 8% in 2009), industrial/energy (8% vs. 17% in 2009), retail (5% vs. 8% in 2009) and IT services (5%).[12][14] "A 2010 survey conducted by Angels Den, a UK based Angel Network found that 73% of Angel investors mainly relied on their gut filling when investing in a start-up company. [15] This challenges the view that Angel Investors follow a investment pattern of industries. While more readily available than venture financing, is still extremely difficult to raise.[16] However some new models are developing that are trying to make this easier.[17]

Investment profile

Angel investments bear extremely high risk[18] and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment. 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. 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%.[19] 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.

In the US

Geographically, Silicon Valley dominates the destination of angel funds, receiving 39% of the $7.5B invested in US-based companies throughout Q2 2011, 3-4 times as much as the total amount invested within New England.[13] Total investments in 2011 were $22.5 billion, an increase of 12.1 percent over 2010 when investments totaled $20.1 billion.[20] In the United States, angels are generally accredited investors in order to comply with current SEC regulations, although the JOBS Act of 2012 will loosen those requirements starting in January 2013.

In the UK

A study by NESTA[21] in 2009 estimated that there were between 4,000 and 6,000 angel investors in the UK with an average investment size of £42,000 per investment. Furthermore, each angel investor on average acquired 8 per cent of the venture in the deal with 10 per cent of investments accounting for more than 20 per cent of the venture.

In terms of returns, 35 percent of investments produced returns of between one and five times of the initial investment, whilst 9 per cent produced returns of multiples of ten times or more. The mean return, however, was 2.2 times investment in 3.6 years and an approximate internal rate of return of 22 per cent gross.

The UK Business Angel market grew in 2009/2010 and, despite recessionary concerns, continues to show signs of growth.[22][23]

In Russia

In 2012 in the Russian Federation the 'International Business Angels Assembly' [24] took place. This was an exclusive event devoted to private investing into innovative projects in Eastern Europe.[25]

See also

References

  1. ^ "A Guide to Angel Investors". Entrepreneur.
  2. ^ [1][dead link]
  3. ^ "Center for Ventura Research: The Angel Investor Market in 2007: Mixed Signs of Growth" (PDF). Unh.edu. Retrieved 2012-12-01.
  4. ^ "The Importance of Angel Investing in Financing the Growth of Entrepreneurial Ventures" (PDF). Sba.gov. Retrieved 2012-12-01.
  5. ^ Lee, Jeanne (May 31, 2006). "How to fund other startups (and get rich)". CNN Money. Retrieved 2012-12-01.
  6. ^ [2][dead link]
  7. ^ Joe Hadzima. "All Financing Sources Are Not Equal". Boston Business Journal.
  8. ^ "National Venture Capital Association". Nvca.org. 2012-11-20. Retrieved 2012-12-01.
  9. ^ William R. Kerr, Josh Lerner, and Antoinette Schoar (2010-04-15). "The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis — HBS Working Knowledge". Hbswk.hbs.edu. Retrieved 2012-12-01.{{cite web}}: CS1 maint: multiple names: authors list (link)
  10. ^ Loewen, Jacoline (2008). Money Magnet: Attract Investors to Your Business: John Wiley & Sons. ISBN 978-0-470-15575-2.
  11. ^ Handbook of Entrepreneurship Research: An Interdisciplinary Survey and ... - Zoltán J. Ács, David B. Audretsch - Google Books. Books.google.com. Retrieved 2012-12-01.
  12. ^ a b Sohl, Jeffrey (2011-04-12). "Full Year 2010 Angel Market Trends" (PDF). Wsbe.unh.edu. Retrieved 2011-09-27.
  13. ^ a b "Historical Trend Data, Select Financing Sequence - 1". The Money Tree Report. Pwcmoneytree.com. Q2 2011. Retrieved 2011-09-27. {{cite web}}: Check date values in: |date= (help)
  14. ^ Sohl, Jeffrey (2010-03-31). "Full Year 2009 Angel Market Trends" (PDF). Wsbe.unh.edu. Retrieved 2011-09-27.
  15. ^ Growing Business. "Investments Made on Gut Instinct, Say Angels." Growing Business. 22 July 2010.
  16. ^ "Entrepreneur FAQ". California Investment Network. Retrieved 2011-09-27. Angels are also extremely discerning in the projects that they will invest in (rejecting, on average, approximately 97% of the proposals submitted to them).
  17. ^ Prentice, Claire (2010-05-12). "Cash-strapped entrepreneurs get creative". BBC News. Retrieved 2012-12-01.
  18. ^ Rachleff, Andy. "Why Angel Investors Don't Make Money … And Advice For People Who Are Going To Become Angels Anyway". Techcrunch. Retrieved 30 September 2012.
  19. ^ [3][dead link]
  20. ^ "UNH Center for Venture Research: Angel Investor Market on Solid Path of Recovery in 2011" (PDF). Wsbe.unh.edu. Retrieved 2012-12-01.
  21. ^ R.E. Wiltbank. "Siding with the angels: Business angel investing – promising outcomes and effective strategies".
  22. ^ "The UK Business Angel market for 2009/10". Venture Giant. Retrieved 2012-12-01.
  23. ^ "Annual Report on the Business Angel Market in the United Kingdom: 2009/10". Bis.gov.uk. Retrieved 2012-12-01.
  24. ^ "International Business Angels Assembly". Retrieved 2012-12-01.
  25. ^ "MARCHMONT Innovantional News". Retrieved 2012-12-01.
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