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Angel investorAn angel investor is an affluent individual who provides capital for a business startup, 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. Angel capital fills the gap in startup financing between the "three F"s (friends, family and fools) and venture capital. While it is usually difficult to raise more than $100,000 - $200,000 from friends and family, most venture capital funds will not consider investments under $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 ($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. Angel investors typically 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. 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.; now there are over 200. In January, 2004 the not-for-profit Angel Capital Association was formed under the auspices of the Ewing Marion Kauffman Foundation, bringing together over 100 of the most active angel groups in the United States. 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. On average, each firm that received angel money in 2004 got $469,000. The lion's share went to high-tech companies, and the single biggest category within high tech was software.
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This page was created on Dec 20, 2005 |
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