Angel investor

An angel investor (also known as a business angel, informal investor, angel funder, private investor, or
seed investor) is an individual who provides capital for a business start-up, usually in exchange for convertible
debt or ownership equity. Angel investors usually give support to start-ups at the initial moments (where risks
of the start-ups failing are relatively high) and when most investors are not prepared to back them.[1] A small
but increasing number of angel investors invest online through equity crowdfunding or organize themselves
into angel groups or angel networks to share investment capital, as well as to provide advice to their portfolio
companies.[2] Over the last 50 years, the number of angel investors has greatly increased.[1]

Contents
Etymology and origin
Source and extent of funding
Investment profile
Geographical differences
Canada
China
Russia
United Kingdom
United States
See also
References
External links

Etymology and origin

The application of the term "angel" originally comes from Broadway theater, where it was used to describe
wealthy individuals who provided money for theatrical productions that would otherwise have had to shut
down. In 1978, William Wetzel, a then-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
US. He began using the term "angel" to describe the investors who supported them. A similar term, "patron",
is commonly used in arts.

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. Because innovations tend to be produced by outsiders
and founders in startups, rather than existing organizations, angel investors provide (in addition to funds)
feedback, advice and 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] 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. There were over 200 as of 2006.[5]

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.[6][7] 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[8] by William R. Kerr, Josh Lerner, and Antoinette Schoar provides
evidence that angel-funded startups are more likely to succeed than companies that rely on other forms of
initial financing. The paper by Kerr et al., found "that angel funding is positively correlated with higher
survival, additional fundraising outside the angel group, and faster growth measured through growth in web
site traffic".

Angel capital fills the gap in seed funding between "friends and family"[9] and more robust start-up financing
through 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.[10] On an annual basis, the combined value of all angel investments
in the US almost reaches the combined value of all US venture capital funds, while angel investors invest in
more than 60 times as many companies as venture capital firms (US$20.1 billion vs. $23.26 billion in the US
in 2010, into 61,900 companies vs. 1,012 companies).[11][12]

There is no "set amount" for angel investors; investments can range 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%).[11][13] While more readily available than venture financing, angel investment is still
extremely difficult to raise.[14] However some new models are developing that are trying to make this
easier.[15]

Much like other forms of private equity, the angel investment decision-making has been shown to suffer from
cognitive biases such as illusion of control and overconfidence.[16]

Investment profile
Angel investments bear extremely high risks[17] 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 ten 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 typically as 'low'
as 20–30%. 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.

The last years showed the emergence of founding angels as angel investors involved even before the
foundation of a start-up.[18] Founding angels co-found start-ups together with scientists who bring in the
technology on which the start-up is based. After foundation, they are actively engaged in the management of
the start-ups, typically in a non-executive position. This type was firstly described by Festel and De Cleyn who
found that founding angels are individuals playing a key role in providing day-to-day operational support to
the start-up together with early-stage financing.[19]

Geographical differences

Canada

According to the Business Development Bank of Canada, there are 20,000-50,000 angels in Canada.[20] Over
3000 are members of 35 angel groups that belong to the National Angel Capital Organization (NACO).[21]

China

Prior to 2000, it was difficult for startups in China to find local angel investors. Entrepreneurs such as Jack Ma
of Alibaba Group needed to raise funds from Softbank, Goldman Sachs, Fidelity and other institutions.[22]
However, by 2015, several Chinese Angel groups had been in operation.[23]

Russia

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

United Kingdom

A study by NESTA[26] 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 percent of the venture in the deal with 10 percent of investments accounting for more than 20
percent 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 percent 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 percent gross.

The UK Business Angel market grew in 2009/2010 and, despite recessionary concerns, continues to show
signs of growth.[27][28] In 2013, this dynamic kept going on in the UK as angel investors were named by two-
thirds of technology entrepreneurs as a means of funding.[29] By 2015, angel investments had increased
throughout the UK, with the average number of investments made by angels at 5, compared to 2.5 in 2009.
The same report also found an increase in angel investors making impact investments, with 25% of angels
saying they had made an impact investment in 2014.[30]
United States

Geographically, Silicon Valley dominates United States angel investing, 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.[12] Total investments in 2011 were $22.5 billion, an increase of 12.1 percent over 2010 when
investments totalled $20.1 billion.[31] In the United States, angels are generally accredited investors in order to
comply with current SEC regulations, although the JOBS Act of 2012 loosened those requirements starting in
January 2013. Reaching nearly $23 billion in 2012 in the US, angel investors are not only responsible for
funding over 67,000 startup ventures annually, but their capital also contributed to job growth by helping to
finance 274,800 new jobs in 2012.[32] In 2013, 41% of tech sector executives name angel investors as a means
of funding.[29]

See also
Comparison of Business Angel Networks
Crowdfunding
Deep tech
Entrepreneurship
Pre-money valuation
Private equity
Revenue-based financing
Seed funding
Super angel
Venture capital
Venture funding
Vulture investor

References
1. "Dr.Tom McKaskill, p.2 p.3 "An Introduction to Angel Investing: A guide to investing in early
stage entrepreneurial ventures" " (https://www.angelcapitalassociation.org/data/Documents/Re
sources/McKaskill-_Intro_to_Angel_Investing.pdf) (PDF).
2. "A Guide to Angel Investors" (http://www.entrepreneur.com/article/52742). Entrepreneur. 2010-
08-17.
3. "Center for Ventura Research: The Angel Investor Market in 2007: Mixed Signs of Growth" (htt
p://www.unh.edu/news/docs/2007AngelMarketAnalysis.pdf) (PDF). Unh.edu. Retrieved
2012-12-01.
4. "The Importance of Angel Investing in Financing the Growth of Entrepreneurial Ventures" (htt
p://www.sba.gov/advo/research/rs331tot.pdf) (PDF). Sba.gov. Retrieved 2012-12-01.
5. Lee, Jeanne (May 31, 2006). "How to fund other startups (and get rich)" (https://money.cnn.com/
2006/05/30/smbusiness/angels_wealthbuilders_fsb/). CNN Money. Retrieved 2012-12-01.
6. Joe Hadzima. "All Financing Sources Are Not Equal" (http://enterpriseforum.mit.edu/mindshar
e/startingup/financing-sources.html). Boston Business Journal.
7. "National Venture Capital Association" (https://web.archive.org/web/20120729015249/http://nv
ca.org/def.html). Nvca.org. 2012-11-20. Archived from the original (http://nvca.org/def.html) on
2012-07-29. Retrieved 2012-12-01.
8. William R. Kerr; Josh Lerner; Antoinette Scholar (2010-04-15). "The Consequences of
Entrepreneurial Finance: A Regression Discontinuity Analysis – HBS Working Knowledge" (htt
p://hbswk.hbs.edu/item/6347.html?wknews=041910). Hbswk.hbs.edu. Retrieved 2012-12-01.
 9. Loewen, Jacoline (2008). Money Magnet: Attract Investors to Your Business: John Wiley &
Sons. ISBN 978-0-470-15575-2.
10. Ács, Zoltán J.; Audretsch, David B. (2003). Handbook of Entrepreneurship Research: An
Interdisciplinary Survey and ... – Zoltán J. Ács, David B. Audretsch – Google Books (https://boo
ks.google.com/books?id=4KRnkLZfXtMC&pg=PA291). ISBN 9781402073588. Retrieved
2012-12-01.
11. Sohl, Jeffrey (2011-04-12). "Full Year 2010 Angel Market Trends" (https://web.archive.org/web/
20111216015055/http://wsbe.unh.edu/sites/default/files/2010_angel_market_press_release.pd
f) (PDF). Wsbe.unh.edu. Archived from the original (http://wsbe.unh.edu/sites/default/files/2010
_angel_market_press_release.pdf) (PDF) on 2011-12-16. Retrieved 2011-09-27.
12. "Historical Trend Data, Select Financing Sequence – 1" (https://web.archive.org/web/20111024
212456/https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=historical). The Money
Tree Report. Pwcmoneytree.com. 2011. Archived from the original (https://www.pwcmoneytree.
com/MTPublic/ns/nav.jsp?page=historical) on 2011-10-24. Retrieved 2011-09-27.
13. Sohl, Jeffrey (2010-03-31). "Full Year 2009 Angel Market Trends" (https://web.archive.org/web/
20130120034841/http://wsbe.unh.edu/files/2009_Angel_Market_Press_Release.pdf) (PDF).
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_Release.pdf) (PDF) on 2013-01-20. Retrieved 2011-09-27.
14. "Entrepreneur FAQ" (http://www.californiainvestmentnetwork.com/entrepreneur/44). 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)."
15. Prentice, Claire (2010-05-12). "Cash-strapped entrepreneurs get creative" (http://news.bbc.co.u
k/2/hi/10100885.stm). BBC News. Retrieved 2012-12-01.
16. Zhang, Stephen X.; Cueto, Javier (2015-11-09). "The Study of Bias in Entrepreneurship".
Entrepreneurship Theory and Practice. 41 (3): 419–454. doi:10.1111/etap.12212 (https://doi.or
g/10.1111%2Fetap.12212). ISSN 1042-2587 (https://www.worldcat.org/issn/1042-2587).
17. Rachleff, Andy. "Why Angel Investors Don't Make Money … And Advice For People Who Are
Going To Become Angels Anyway" (https://techcrunch.com/2012/09/30/why-angel-investors-do
nt-make-money-and-advice-for-people-who-are-going-to-become-angels-anyway/).
Techcrunch. Retrieved 30 September 2012.
18. Sørheim, Roger; Botelho, Tiago (2016). "Categorisations of business angels: An overview".
Handbook of Research on Business Angels: 76–91.
19. Festel, Gunter; De Cleyn, Sven (2013). "Founding angels as an emerging subtype of the angel
investment model in high-tech businesses". Venture Capital. 15 (3): 261–282.
doi:10.1080/13691066.2013.807059 (https://doi.org/10.1080%2F13691066.2013.807059).
20. "Angel investors: How to find them" (https://www.bdc.ca/en/articles-tools/start-buy-business/star
t-business/pages/angel-investors-how-find-them.aspx). www.bdc.ca. BDC/NACO.
21. "Angel Activity Report 2016" (https://www.nacocanada.com/cpages/angel-activity-report).
www.nacocanada.com. Retrieved 25 March 2018.
22. "Company Overview" (http://news.alibaba.com/specials/aboutalibaba/aligroup/index.html).
Retrieved 24 January 2014.
23. "With stocks' stellar growth over, startups gain favor" (https://www.cnbc.com/2015/11/08/chinas-
new-wave-of-angel-investors.html). cnbc. 2015-11-09. Retrieved 2016-08-29.
24. "International Business Angels Assembly" (http://www.mabaspb.ru/). Retrieved 2012-12-01.
25. "MARCHMONT Innovantional News" (http://www.marchmontnews.com/Finance-Business/Inno
vation/18522-International-Business-Angels-Assembly-try-yourself-as-a-business-angel.html).
Retrieved 2012-12-01.
26. R.E. Wiltbank. "Siding with the angels: Business angel investing – promising outcomes and
effective strategies" (https://web.archive.org/web/20130113012946/http://www.nesta.org.uk/pub
lications/reports/assets/features/siding_with_the_angels/). Archived from the original (http://ww
w.nesta.org.uk/publications/reports/assets/features/siding_with_the_angels) on 2013-01-13.
Retrieved 2013-04-02.
27. "The UK Business Angel market for 2009/10" (http://www.venturegiant.com/news-channel-401-
the-uk-business-angel-market.aspx). Venture Giant. Retrieved 2012-12-01.
28. "Annual Report on the Business Angel Market in the United Kingdom: 2009/10" (http://www.bis.
gov.uk/assets/biscore/enterprise/docs/a/11-p116-annual-report-business-angel-market-uk-2009
-10). Bis.gov.uk. Retrieved 2012-12-01.
29. Alex Hern (2014-07-23). "Angel investors and government grants dominate British tech
investment" (https://www.theguardian.com/technology/2014/jul/23/angel-investors-government-
grants-dominate-british-tech-investment-venture-capital). the Guardian.
30. "UKBAA Report 2015 Main Findings" (http://www.ukbusinessangelsassociation.org.uk/news/n
ation-angels-2015-main-findings). UK Business Angels. Retrieved 2015-07-07.
31. "UNH Center for Venture Research: Angel Investor Market on Solid Path of Recovery in 2011"
(https://web.archive.org/web/20121224173109/http://wsbe.unh.edu/sites/default/files/2011_ang
el_market_press_release.pdf) (PDF). Wsbe.unh.edu. Archived from the original (http://wsbe.un
h.edu/sites/default/files/2011_angel_market_press_release.pdf) (PDF) on 2012-12-24.
Retrieved 2012-12-01.
32. "What Angel Investors Know About Startup Investing That You Don't" (https://rtp-equity-static-or
igin.s3.amazonaws.com/email/investopedia201309/RockThePost_Report_What_Angel_Invest
ors_Know_About_Startup_Investing_Sept2013.pdf) (PDF). RockThePost. Retrieved
2013-09-01.

External links

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