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What Is An Angel Investor?
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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.

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