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EspañolANGEL INVESTOR
An 'angel investor' or "angel" (known as a "business angel" 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 are organizing themselves into 'angel networks' or 'angel groups' to share research and pool their investment capital.
Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund. Although typically thought of as individuals, the actual entity that provides the funding may be a trust, business, 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. 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$25.6 billion vs. $26.1 billion in the US in 2006, into 51,000 companies vs. 3,522 companies[1], [2]). Of the 51,000 US companies that received angel funding in 2006, the average raise was about US$500,000. Healthcare services, and medical devices and equipment accounted for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software (18 percent) and biotech (18 percent). The remaining investments were approximately equally weighted across high-tech sectors.
Angel investments bear extremely high risk, and thus 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 might, in reality, be 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 term "angel" originally comes from England where it was used to describe wealthy individuals who provided money for theatrical productions. In 1978, William Wetzel, 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.
According to the Center for Venture Research, there were 234,000 active angel investors in the U.S. in 2006. 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 2007 there are over 250, with a roughly equal number in all other countries combined. 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.
★ Private equity
★ Venture funding
★ Entrepreneurship
★ Pre-money valuation
★ Angel Capital Association (US/CA)
★ European Business Angel Network
★ UNH Center for Venture Research
1. UNH Center for Venture Research http://wsbe.unh.edu/Centers_CVR/2006pressrelease.cfm
2. PWC MoneyTree http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical
| Contents |
| Description |
| Source and extent of funding |
| Investment profile |
| Profile of investor community |
| See also |
| External links |
| References |
Description
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. Although typically thought of as individuals, the actual entity that provides the funding may be a trust, business, 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. 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$25.6 billion vs. $26.1 billion in the US in 2006, into 51,000 companies vs. 3,522 companies[1], [2]). Of the 51,000 US companies that received angel funding in 2006, the average raise was about US$500,000. Healthcare services, and medical devices and equipment accounted for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software (18 percent) and biotech (18 percent). The remaining investments were approximately equally weighted across high-tech sectors.
Investment profile
Angel investments bear extremely high risk, and thus 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 might, in reality, be 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.
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, 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.
According to the Center for Venture Research, there were 234,000 active angel investors in the U.S. in 2006. 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 2007 there are over 250, with a roughly equal number in all other countries combined. 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.
See also
★ Private equity
★ Venture funding
★ Entrepreneurship
★ Pre-money valuation
External links
★ Angel Capital Association (US/CA)
★ European Business Angel Network
★ UNH Center for Venture Research
References
1. UNH Center for Venture Research http://wsbe.unh.edu/Centers_CVR/2006pressrelease.cfm
2. PWC MoneyTree http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical
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