Table of Contents:
Angel Investors:
- An angel investor (business angel in Europe, or simply angel) is an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity. Unlike venture capitalists, angels typically do not manage the pooled money of others in a professionally-managed fund. However, angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital.
What are Angel investors?
Such people invest in promising startups too young and raw to attract the attention and money of professional venture capitalists.
Risk vs Return
As we know, there is a trade-off risk vs. return. Angels that back such ventures can earn impressive long-term returns—one study cites an annual rate of return of about 27%, on average, or 2.6 times the investment in 3.5 years. The risks, of course, are steep
What sort of return can an angel expect? There's that rate of return of about 27%, on average, a result reached by professor Robert Wiltbank of Willamette University and Warren Boeker of the University of Washington in a study of 539 angels from 86 groups in North America from 1990 to 2007. The return figure comes from 1,137 "exits" during this time period through mergers and acquisitions, initial public offerings, bankruptcies, and shut doors.
Of course, averages can be a bit misleading. Remember, on average Lake Erie never freezes, and the stock market returns, on average, some 11% a year. With the return number for angel investing, keep in mind that 7% of the venture exits that the professors studied had returns of 10 times investment while 39% had a multiple of less than one times investment. The Center for Venture Research estimates that angels enjoyed a rate of return in 2007 between 20% and 40%.
Chances of success:
approximately 30%:
Rule of thumb for VC investments: of 10 deals.... 4 will die....3 will do ok..... and only 3 will be a success
Stories of extreme-Success:
But it's fun to remember the outcome of a $100,000 investment that Sun Microsystems ("SUNW") co-founder Andrew Bechtolsheim made to two Stanford University graduate students. The check allowed the students to move out of dorm rooms and start marketing their revolutionary idea. The result: Google ("GOOG").
How many Angel investors are there?
In 2006" 258,200 angels pumped $26 billion into 57,120 ventures, according to the University of New Hampshire's Center for Venture Research.. In 2006 , VC firms only invested in 700 "seed and early stage" deals, while angels invested in about 50,000 of these.
Deal Size:
In comparison to VC deals...which jumped from 5.9M$ to 6.2M$ in 2006....Angel deals may be as low as $100,000
How to be an Angel: Keys to Successful Angel Investing
- Understand the risks.
- Follow an intellectual framework.
- Have a well-thought-out methodology for buying and selling.
- Due diligence: questions like: What is the market opportunity, barriers to entry, and business model? What's the company's competitive edge? Is there an exit strategy? What is the entrepreneur's background?...the character of the entrepreneur is more important than the technology!
- Diversify. Angel groups funded, on average, about seven companies in 2007. Only a small percentage of an angel's capital should be at risk—no more than 10% of investable wealth, counsels Susan Preston, currently general partner of the California Clean Energy Fund's Angel Fund, a public investment fund that takes equity stakes in alternative energy ventures.
- keep emotions in check. "You make money in angel investing by killing off your losses early, as quickly as possible," he says. "The entrepreneur really believes that success is just around the corner, and you'll quickly go broke investing for 'just-around-the-corner.'"
- focus efforts on an industry you know.
- Join angel groups: to get a wider range of perspectives and deals, and to pool resources,...makes it easier to develop a deal flow, pool money, and share expertise...."We get prospects in front of the network to find the members who will say: 'I used to be in that business' and to tell us whether it's a real deal,"
Angel Investor Groups
Why: spread risk around & help scale (share the work of due dillignence, screening, etc)
Any angel will tell you there's a significant learning curve. But a big transformation in angel investing is making it easier to move up that curve: the rise of more formal angel investing groups. It wasn't all that long ago that angels largely hooked up with entrepreneurs through ad-hoc social networks, friendships created over the years, perhaps at the country club or local philanthropic events. Since the latter part of the 1990s there has been a proliferation of more professionally organized groups—usually with a Web site—that screen investments and pool money on a local and regional level. Estimates of the number of angel groups in the U.S. and Canada go as high as 275. The groups even have their own trade-and-education association in Washington, the Angel Capital Assn.
Angel Investor method of Valuation
What Angels do:
An angel investor (business angel in Europe, or simply angel) is an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity. Unlike venture capitalists, angels typically do not manage the pooled money of others in a professionally-managed fund. However, angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital.
see: seed funding
Angel capital fills the gap in start-up financing between the "three F"s (friends, family and fools) and venture capital. While it is usually difficult to raise more than US$100,000 - US$200,000 from friends and family, most venture capital funds will not consider investments under US$1 - 2 million. Thus, angel investment is a common second round of financing for high-growth start-ups, and accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs. $22 billion in the US in 2004, according the University of New Hampshire's Center for Venture Research).
Angel investments bear extremely high risk, and thus require a very high return on investment. Some angel investors seek a return of at least 10-20 times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Angel financing can thus be an expensive source of funds. However, cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures.
Angel investors are often retired business owners or executives, who may be interested in angel investing for other reasons in addition to 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-fulltime basis. Thus, in addition to funds, angel investors can often provide valuable management advice and important contacts.
Angel investors who invest in start-ups, and then follow up those investments with more cash, end up losing money on their investment more than 70 percent of the time. That's just one of the facts contained in an extensive survey of the angel investors (you can download it here), and how they are performing. Angel investors are so named because their supposed "angelic" role: They are wealthy individuals who invest seed capital in companies for them to get off the ground. They then roll up their sleeves to help the companies by doing things like
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Finding Angel Invetors
Gathering of Angels website
How has the Credit Crunch effected Angel investing?
How has the Credit Crunch effected Angel investing? Studies show that the best time to start a business is when the economy is down. That's because entrepreneurs with good ideas will find cheaper land, labor, supplier contracts, and other ingredients that go into starting a business.
Competition from Early-stage Venture Capitalists
In recenty years, there has been a trend in Venture Capital, as they have moved to smaller funding of more companies, directly challenging the Angel investment funds.....see examples: Charles River Venture Quickstart program, or YCombinator.
More about Angels
According to the Center for Venture Research, there were 225,000 active angel investors in the U.S. last year. 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 2005 there are over 200. In January, 2004 the not-for-profit Angel Capital Association, and later the Angel Capital Educational Foundation, were formed under the auspices of the Ewing Marion Kauffman Foundation, bringing together over 100 of the most active angel groups in the United States. The ACA and ACEF have an annual summit meeting each year in a different city, bringing together the leaders of the different groups to exchange best practices.
In 2004, according to the Center for Venture Research, 18.5% of deals that got through the early screens of angel groups and were presented to investors attracted funding, up significantly from 10% in 2003, which is about the historical average. But since this figure discounts the substantial initial screening, the percentage of all companies seeking angel financing that actually receive funding is closer to 0.5%-1% (but still higher than the 0.2%-0.25% of applicants who receive funding from venture capitalists). Approximately 45,000 US companies received angel funding in 2004, and on average, each raised about US$469,000. The lion's share went to high-tech companies, and the single biggest category within high tech was software.
- The super-angel, who has enough money to be a one-man show VC playing with his own money (and maybe money from a few friends). Either he is known by the VC community, and he is treated well by them because he can source good deals for the later-stage rounds, or he has enough money within his ecosystem that he can help entrepreneurs all the way through.
- The social type, who has money and like toying with the idea that he could invest and may do so one day. He likes attending meetings and talking about it, but the reality is that he never really invests in anything.
- And then you have everybody else in between these 2 types.
read more from: http://www.entrepreneurcommons.org/
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Venture Capital
Private Equity
Angel Investors
Books for fund raising
Book Reviews
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