No, an angel investor is NOT an investor that has golden wings and a halo. An angel
investor is someone who provides capital to start up a business and normally expects
ownership equity in return for this. An angel investor is known as an angel or a
business angel in Europe. The term ‘angel’ comes from the early twentieth century
when wealthy businessmen would invest in Broadway productions. Most angel investors
invest their own capital, although there are angel groups (or angel networks) where
several investors form a team so they can invest more.
A venture capitalist is different in that he would be investing pooled money from
other people rather than using his own funds. Many new companies require an angel
investor if they cannot borrow the money from a bank. Banks are wary about early
stage ventures and it can be very difficult to get a business loan for a brand new
business. The average angel invests between $150,000 and $1.5 million.
A lot of angel investors are retired executive or business owners who have spare
money to invest and who would like to make use of their years of experience as a
mentor to others or keep abreast of developments in a particular area which interests
them. An angel investor who is knowledgeable about your company is a godsend and
can prove very useful in giving valuable advice about how to run things. They might
also know some useful contacts. The better your company does, the better your angel
investor does, so he will have the company’s best interests at heart.
An angel investor will expect a very high return on investment because of the risk
of investing in a new company. Many new companies fail so an angel investor will
expect a return of around ten times his investment within ten years. This balances
the large risk of losing everything. There is often a defined exit strategy (perhaps
an acquisition or initial public offering) in case things do go wrong. The Angel
Capital Education Foundation recommends that angels should aim for a twenty to thirty
times return on their initial investment. The actual returns, after covering failed
investments and holding time over a number of years, might be only twenty or thirty
percent. An expert angel expects a third of his investments to fail but expects
an average of twenty six percent annual return to make his investment and participation
a worthwhile venture.
There were 225,000 angel investors active in the US in 2005. Angel groups and networks
began to appear in the late 1980s and an angel group can comprise anything between
ten and two hundred members, each with a common interest and some cash to invest.
There were ten or so groups in the US in 1996 and there are several hundred today.
The year 2004 saw the launch of the Angel Capital Association (a non-profit organization)
and the Angel Capital Education Foundation came shortly afterwards. Each year there
are summit meetings in a different city, bringing the group leaders to exchange
best practice ideas and meet. The European Business Angel Network (EBAN) appeared
in 1999 and was set up by the European Association of Development Agencies (EURADA),
with the help of the European Commission.
About 45,000 companies in the US received funding from angels in 2004. Most investments
were in high tech companies, especially those specializing in software.
It is vital for a company and angel to form a sound relationship with one another
before any investment takes place, to make sure they are compatible and have the
same goals and ideas. A company and angel must feel comfortable with one another
to ensure a successful business and maintain good lines of communication.