Angel investor


An angel 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 and when most investors are not prepared to back them. 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. Over the last 50 years, the number of angel investors has greatly increased.

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 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. 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. 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.
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. Keiretsu Forum, for example, was founded in 2000.

Investment profile

Angel investments bear extremely high risks 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.

Geographical differences

Canada

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

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. However, by 2015, several Chinese Angel groups had been in operation.

Russia

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

United Kingdom

A study by NESTA 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.
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. 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.

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. Total investments in 2011 were $22.5 billion, an increase of 12.1 percent over 2010 when investments totalled $20.1 billion. 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.
In 2013, 41% of tech sector executives name angel investors as a means of funding.