What Are Angel Investors
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Angel investors in the United States and Europe
An angel investor is NOT an investor with golden wings and a halo but rather an individual who provides startup capital to a new business and expects a percentage of ownership equity in return. Angel investing is a common business practice in the United States and Europe but will often take on different names depending on the country.

In the United States, the term ‘angel' derives from the early twentieth century when wealthy businessmen eagerly invested in lavish Broadway productions. Throughout Europe, an “angel investor” is known as a “business angel,” a financier who provides equity capital for startup companies and growing firms. Regardless of location, most angel investors invest their own capital, although there are some angel groups (or angel networks) where several investors combine their capital so they can invest in more opportunities.

How angel investors differ from venture capitalists
Venture capitalists, on the other hand, are quite different from angel investors. Rather than using their own funds, VC's invest pooled money from other people. In addition to the percentage of equity interest in a company, venture capitalists usually desire an active say in the invested company's business decisions. Venture capitalists also have the tendency to invest in expanding companies, although many VC firms have begun to invest in early stage businesses as well.

The benefit of obtaining angel capital
Many lending institutions are very hesitant about early stage ventures; therefore, it can be very difficult to obtain the necessary startup capital for a new business. If a prospective entrepreneur is unsuccessful in borrowing money from a bank, s/he may often resort to an angel investor to raise capital. The average angel investor can invest anywhere between $150,000 and $1.5 million in a given venture.

Many angel investors are retired executives or business owners who have the money, knowledge, and experience to mentor new entrepreneurs so they can stay abreast of developments in a particular area of industry. An experienced angel investor can provide valuable knowledge and skills to an entrepreneur on how to run their business during its early stages of development. They may also be a good source of useful contacts, allowing the entrepreneur the opportunity to network with others in their industry. Often, the angel investor has their invested company's best interests at heart; therefore, entrepreneurs should find an angel investor's insight and resources beneficial to the company's success.

The angel investors' return on investment
Due to the risks associated with investing in a new company, an angel investor will often expect a very high return on investment (ROI). Since it is a proven fact that many new companies will fail, an angel investor will expect a return up to ten times his/her investment within several years. Angel investors believe that this amount will balance the large risk of losing their invested money.

There is often a defined exit strategy (perhaps through an acquisition or initial public offering) in case a company does not perform as well as expected. The Angel Capital Education Foundation recommends that in order to compensate for the high risks associated with investing in new companies, angel investors should aim for twenty to thirty times the return on their initial investment. In actuality, this return, after covering failed investments and holding time over a number of years, may be about twenty or thirty percent. While most angel investors will fail in about 1/3 of all of their investments, they usually expect an average of twenty six percent or more annual return to make an investment a worthwhile venture.

Angel networks in the United States
Since the late 1980s, angel groups have emerged. These angel networks comprise of anywhere between ten to two hundred members, each with a common interest of using their own personal funds for joint investments. In 2005, there were approximately 225,000 active angel investors in the United States. Today, there are thousands more as well as the formation of several hundred angel groups.

The year 2004 marked the formation of the Angel Capital Association (a non-profit organization) and Angel Capital Education Foundation. Each year, members of these organizations meet in different cities to exchange angel practice ideas and develop resources for improved angel investing.

2004 also marked the same year that approximately 45,000 companies in the United States received funding from angel investors. Most of the investments were in high tech companies, especially those specializing in software.

The entrepreneur and angel investor relationship
It is vital for a company and their angel investor(s) to form a sound relationship with one another before any investment takes place in order to make sure they share the same goals and ideals. A company and their angel investor(s) must feel comfortable with one another in order to maintain good lines of communication and to ensure a successful business.

Angel investors often use their own capital when investing in startup companies. They bring much needed experience and skills to a business, especially during the crucial early stages of development. Due to the risks of investing in early-stage enterprises with no proven history of success, angel investors will often request a high return on investment to compensate for any losses. In the past few years, there has been a growing number of angel investors in the United States, as well as the increasing trend of angel group formation. In these angel groupings, each member contributes a specific amount towards a given investment. The benefit of angel groups is that personal capital can be pooled from each member. This affords the opportunity to participate in multiple investments rather than one large one. This also allows the prospect of diversifying one's portfolio.

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