Angel investor

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An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital to a business or businesses, including startups, usually in exchange for convertible debt or ownership equity. Angel investors often provide support to startups at a very early stage (when the risk of their failure is relatively high), once or in a consecutive manner, and when most investors are not prepared to back them. [1] In a survey of 150 founders conducted by Wilbur Labs, about 70% of entrepreneurs will face potential business failure, and nearly 66% will face this potential failure within 25 months of launching their company. [2] A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share investment capital and provide advice to their portfolio companies. [3] The number of angel investors has greatly increased since the mid-20th century. [1]

Contents

Etymology and origin

The application of the term "angel" originates in Broadway theater, where it was used to describe wealthy individuals who provided money for theatrical productions that would otherwise have had to shut down. [4] This term, however, was not used in the context of investing in companies until 1978, when William Wetzel, a then-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 US. [5] He began using the term "angel" to describe the investors who supported them. A similar term, "patron", is commonly used in arts.

Angel investors are often retired entrepreneurs or executives who may be interested in angel investing for reasons that go beyond pure monetary return.[ citation needed ] These reasons 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. Because innovations tend to be produced by outsiders and founders in startups, rather than existing organizations, angel investors provide (in addition to funds) feedback, advice, and contacts. [6] Because there are no public exchanges listing their securities, private companies meet angel investors in several ways, including referrals from the investors' trusted sources and other business contacts, at investor conferences and symposia, and at face-to-face meetings organized by groups of angels where companies pitch directly to investors.

According to the Center for Venture Research, there were 363,460 active angel investors in the US in 2021. [7] 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 US; by 2006, there were over 200. [8]

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). [9] [10] Although typically reflecting the investment judgment of an individual, the entity providing the funding may be a trust, business, limited liability company, investment fund, or other vehicle. A Harvard report [11] by William R. Kerr, Josh Lerner, and Antoinette Schoar provides evidence that angel-funded startups are more likely to succeed than companies reliant on other forms of initial financing. The paper found "that angel funding is positively correlated with higher survival, additional fundraising outside the angel group, and faster growth measured through growth in website traffic".

Angel capital fills the gap in seed funding between "friends and family" [12] funding rounds and more robust start-up financing through formal 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 make or evaluate small investments under US$1–2 million. [13] On an annual basis, the combined value of all angel investments in the US almost reaches the combined value of all US venture capital funds, while angel investors invest in more than 60 times as many companies as venture capital firms (US$20.1 billion vs. $23.26 billion in the US in 2010, into 61,900 companies vs. 1,012 companies). [14] [15]

There is no set amount for angel investors. Investments can range from a few thousand to a few million dollars. The healthcare/medical industry accounted for the largest share of angel investments in 2010, with 30% of total angel investments (vs. 17% in 2009), followed by software (16% vs. 19% in 2007), biotech (15% vs. 8% in 2009), industrial/energy (8% vs. 17% in 2009), retail (5% vs. 8% in 2009) and IT services (5%). [14] [16] While more readily available than venture financing, angel investment is still extremely difficult to raise. [17] However, some new models are developing that are trying to make this easier. [18]

Much like other forms of private equity, angel investment decision-making has been shown to suffer from cognitive biases such as the illusion of control and overconfidence. [19]

Investment profile

Angel investments bear extremely high risks [20] and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment. Additionally, angel investors often mitigate the risk of an angel investment by allocating less than 10% of their portfolio to these types of investments. 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 ten 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. 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 is typically as 'low' as 20–30%. While the investor's need for high rates of return on any given investment can 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.

Founding angels

In recent years, a new trend has emerged in the business world known as "founding angels". These are angel investors who get involved with a startup even before it is officially established. [21] Unlike a traditional business angel, because founding angels invest so early, they are typically seen as "founders" and typically have much greater involvement in the early stages of the business. [22]

Founding angels most often co-found startups with scientists, developers, or engineers in the technology space who bring in the technology upon which the start-up is based. After they are founded, they are actively engaged in the management of startups, typically in a non-executive position, supporting the day-to-day running of the business. They less often have a predefined exit strategy, and more often hold onto equity long into the company's development. [23]

Geographical differences

Canada

Canada is reportedly home to the most sophisticated and advanced network of angel investors in the world. [24] Incorporated in 2002, the National Angel Capital Organization (NACO) pioneered the angel investing movement and supported the formation of regional angel networks in Canada. According to both NACO and the Business Development Bank of Canada, there are 20,000–50,000 active angel investors in Canada. [25] Over 4,000 are members of 45 angel groups that are NACO members. [26]

China

Before 2000, it was difficult for startups in China to find local angel investors. Entrepreneurs, such as Jack Ma of Alibaba Group and many others, needed to raise funds from Softbank, Goldman Sachs, Fidelity, and other institutions. [27] However, by 2015, several Chinese Angel groups had been in operation. [28]

Russia

In 2012, the International Business Angels Assembly took place in the Russian Federation. This was an exclusive event devoted to private investing into innovative projects in Eastern Europe. [29]

In 2022, after Russia's invasion of Ukraine, all investors reduced their activity, this was noticeable in private funds, which reduced the volume of investments by 4 times compared to 2021. [30]

United Kingdom

A study by NESTA [31] in 2009 estimated there were between 4,000 and 6,000 angel investors in the UK with an average investment size of £42,000 per investment. Furthermore, each angel investor on average acquired 8 percent of the venture in the deal, with 10 percent of investments accounting for more than 20 percent of the venture.

In terms of returns, 35 percent of investments produced returns of between one and five times the initial investment, while 9 percent produced returns of multiples of ten times or more. The mean return, however, was 2.2 times the investment in 3.6 years and an approximate internal rate of return of 22 percent gross.

The UK Business Angel market grew in 2009 through 2010 and, despite recessionary concerns, continues to show signs of growth. [32] [33] In 2013, this dynamic kept going on in the UK as angel investors were named by two-thirds of technology entrepreneurs as a means of funding. [34] By 2015, angel investments had increased throughout the UK, with angels making an average number of five investments, compared to 2.5 in 2009. The same report also found an increase in angel investors making impact investments, with 25% of angels saying they had made an impact investment in 2014. [35]

United States

Geographically, Silicon Valley dominates United States angel investing, receiving 39% of the $7.5 billion invested in US-based companies throughout Q2 2011, 3–4 times as much as the total amount invested within New England. [15] Total angel investments in the United States in 2021 were $29.1 billion, an increase of 15.2 percent over 2020, with 69,060 companies receiving funding. [7] In the United States, angels are generally accredited investors in order to comply with current SEC regulations, although the JOBS Act of 2012 loosened those requirements starting in January 2013. Reaching nearly $23 billion in 2012 in the US, angel investors are not only responsible for funding over 67,000 start-up ventures annually, but their capital also contributed to job growth by helping to finance 274,800 new jobs in 2012. [36] In 2013, 41% of tech sector executives named angel investors as a means of funding. [34]

Saudi Arabia

Saudi Vision 2030 was launched in 2016; since then, the entrepreneurship ecosystem is being built from scratch. The number of angel investor groups reached eight in 2022. [37]

India

The Indian Government introduced Atal Incubation centers and Technology Incubation and Development of Entrepreneurs, a program to solely support ICT startups in building emerging technologies including AI, IoT, and blockchain. [38]

See also

Related Research Articles

A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship includes all new businesses including self-employment and businesses that do not intend to go public, startups are new businesses that intend to grow large beyond the solo-founder. During the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to become successful and influential, such as unicorns.

Private equity (PE) is stock in a private company that does not offer stock to the general public. In the field of finance, private equity is offered instead to specialized investment funds and limited partnerships that take an active role in the management and structuring of the companies. In casual usage, "private equity" can refer to these investment firms, rather than the companies in which that they invest.

<span class="mw-page-title-main">Venture capital</span> Form of private-equity financing

Venture capital (VC) is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number of employees, annual revenue, scale of operations, etc. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake. Venture capitalists take on the risk of financing start-ups in the hopes that some of the companies they support will become successful. Because startups face high uncertainty, VC investments have high rates of failure. Start-ups are usually based on an innovative technology or business model and they are often from high technology industries, such as information technology (IT), clean technology or biotechnology.

Seed money, also known as seed funding or seed capital, is a form of securities offering in which an investor puts capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include friends and family funding, seed venture capital funds, angel funding, and crowdfunding.

Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources.

Deal flow is a term used by finance professionals such as venture capitalists, angel investors, private equity investors and investment bankers to refer to the rate at which they receive business proposals/investment offers. The term is also used not as a measure of rate, but simply to refer to the stream of offers or opportunities as a collective whole. An organization's deal flow is considered "good" if it results in enough revenue- or equity-generating opportunities to keep the organization functioning at peak capacity. For private consultants to high and ultra high net worth individuals, deal flow is called deal generation, which is the process of making deals with a business as the result of lead generation.

Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve an outsized gain in financial return while delivering social impact to the world. There are various organizations, such as Venture Philanthropy (VP) companies and nonprofit organizations, that deploy a simple venture capital strategy model to fund nonprofit events, social enterprises, or activities that deliver a high social impact or a strong social causes for their existence. There are also regionally focused organizations that target a specific region of the world, to help build and support the local community in a social cause.

A venture round is a type of funding round used for venture capital financing, by which startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of venture funding is among the primary stimuli for the development of new companies and technologies.

A series A is the name typically given to a company's first significant round of venture capital financing. It can be followed by the word round, investment or financing. The name refers to the class of preferred stock sold to investors in exchange for their investment. It is usually the first series of stock after the common stock and common stock options issued to company founders, employees, friends and family and angel investors.

Venture debt or venture lending is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Venture debt can complement venture capital and provide value to fast growing companies and their investors. Unlike traditional bank lending, venture debt is available to startups and growth companies that do not have positive cash flows or significant assets to give as collateral. Venture debt providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default, although this is not always the case.

Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies. CVC is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage." Examples of CVCs include GV and Intel Capital.

<span class="mw-page-title-main">William Klippgen</span>

William Klippgen is a Singapore-based Norwegian entrepreneur and technology venture capitalist who co-founded the price comparison portal Zoomit.com. He served as one of the judges on the television series Angel's Gate, which was broadcast on Channel NewsAsia in 2012. Klippgen is a co-founder and serves as the Managing Partner at Cocoon Capital. He holds an MBA from INSEAD where he is an Entrepreneur in Residence.

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an alignment of an investor's beliefs and values with the allocation of capital to address social and/or environmental issues.

<span class="mw-page-title-main">David S. Rose</span>

David Semel Rose is an American serial entrepreneur and angel investor. He is an investor in startup technology companies and founder of New York Angels, an early-stage technology investment group. He is Managing Partner of Rose Tech Ventures, a venture fund focused on Internet-based business, and CEO of Gust, which operates a collaboration platform for early stage angel investing.

Entrepreneurial finance is the study of value and resource allocation, applied to new ventures. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the startup; and how should funding contracts and exit decisions be structured.

Crowdfunding is a process in which individuals or groups pool money and other resources to fund projects initiated by other people or organizations "without standard financial intermediaries." Crowdfunded projects may include creative works, products, nonprofit organizations, supporting entrepreneurship, businesses, or donations for a specific purpose. Crowdfunding usually takes place via an online portal that handles the financial transactions involved and may also provide services such as media hosting, social networking, and facilitating contact with contributors. It has increased since the passage of the Jumpstart Our Business Startups (JOBS) Act.

<span class="mw-page-title-main">AngelList</span> Website connecting startups, angel investors, and job-seekers

AngelList is an American software company for fundraising and connecting startups, angel investors, and limited partners. Founded in 2010, it started as an online introduction board for tech startups that needed seed funding. Since 2015, the site allows startups to raise money from angel investors free of charge. Created by serial entrepreneur Naval Ravikant and Babak Nivi in 2010, Avlok Kohli has been leading AngelList as its CEO since 2019.

Sandbox Industries is a venture capital firm located in Chicago. The firm focuses on connecting established corporations with disruptive startups via strategic corporate investment funds.

<span class="mw-page-title-main">Unicorn bubble</span>

A unicorn bubble is a theoretical economic bubble that would occur when unicorn startup companies are overvalued by venture capitalists or investors. This can either occur during the private phase of these unicorn companies, or in an initial public offering. A unicorn company is a startup company valued at, or above, $1 billion US dollars.

<span class="mw-page-title-main">Venture capital in Poland</span> Overview of venture capital in Poland

Venture capital in Poland is a segment of the private equity market that finances early-stage high-risk companies based in Poland, with the potential for fast growth. As of March 2019, there is a total of 130 active VC firms in Poland, including local offices of international VC firms, and VC firms with mainly Polish management teams. Between 2009–2019, these entities have invested locally in over 750 companies, which gives an average of around 9 companies per portfolio. The Polish venture market accounts for 3% of the entire European ecosystem of VC investments, mainly in the digital space.

References

  1. 1 2 McKaskill, Tom (2009). "An Introduction to Angel Investing: A guide to investing in early stage entrepreneurial ventures" (PDF). pp. 2–3.
  2. ↑ Kronenberger, Craig (2021-08-20). "The Top 10 Entrepreneurial Mistakes that Startup Studios Help Address". Startup Studio Insider. Retrieved 2022-03-09.
  3. ↑ "A Guide to Angel Investors". Entrepreneur. 2010-08-17.
  4. ↑ Bansal, Raman (2021). Your First Startup- Sparking Entrepreneurship. BFC Publications. p. 155. ISBN   978-93-91455-26-2.
  5. ↑ Mustafa, Mohammad (2021). Angel Investing: The Untold Story of India. Singapore: Macmillan. p. 12. ISBN   978-981-16-0921-3.
  6. ↑ Hammons, Rebecca Lee; Kovac, Ronald J. (2019). Fundamentals of Internet of Things for Non-Engineers. Boca Raton, FL: CRC Press. p. 390. ISBN   978-1-000-00034-4.
  7. 1 2 Sohl, Jeffrey (May 20, 2022). "The Angel Market in 2021: Metrics Indicate Strong Market" (PDF). Center for Venture Research. Retrieved February 10, 2023.
  8. ↑ Lee, Jeanne (May 31, 2006). "How to fund other startups (and get rich)". CNN Money. Retrieved 2012-12-01.
  9. ↑ Joe Hadzima. "All Financing Sources Are Not Equal". Boston Business Journal.
  10. ↑ "National Venture Capital Association". Nvca.org. 2012-11-20. Archived from the original on 2012-07-29. Retrieved 2012-12-01.
  11. ↑ William R. Kerr; Josh Lerner; Antoinette Scholar (2010-04-15). "The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis – HBS Working Knowledge". Hbswk.hbs.edu. Retrieved 2012-12-01.
  12. ↑ Loewen, Jacoline (2008). Money Magnet: Attract Investors to Your Business: John Wiley & Sons. ISBN   978-0-470-15575-2.
  13. ↑ Ács, Zoltán J.; Audretsch, David B. (2003). Handbook of Entrepreneurship Research: An Interdisciplinary Survey and ... – Zoltán J. Ács, David B. Audretsch – Google Books. ISBN   9781402073588 . Retrieved 2012-12-01.
  14. 1 2 Sohl, Jeffrey (2011-04-12). "Full Year 2010 Angel Market Trends" (PDF). Wsbe.unh.edu. Archived from the original (PDF) on 2011-12-16. Retrieved 2011-09-27.
  15. 1 2 "Historical Trend Data, Select Financing Sequence – 1". The Money Tree Report. Pwcmoneytree.com. 2011. Archived from the original on 2011-10-24. Retrieved 2011-09-27.
  16. ↑ Sohl, Jeffrey (2010-03-31). "Full Year 2009 Angel Market Trends" (PDF). Wsbe.unh.edu. Archived from the original (PDF) on 2013-01-20. Retrieved 2011-09-27.
  17. ↑ "Entrepreneur FAQ". California Investment Network. Retrieved 2011-09-27. Angels are also extremely discerning in the projects that they will invest in (rejecting, on average, approximately 97% of the proposals submitted to them).
  18. ↑ Prentice, Claire (2010-05-12). "Cash-strapped entrepreneurs get creative". BBC News. Retrieved 2012-12-01.
  19. ↑ Zhang, Stephen X.; Cueto, Javier (2015-11-09). "The Study of Bias in Entrepreneurship". Entrepreneurship Theory and Practice. 41 (3): 419–454. doi:10.1111/etap.12212. ISSN   1042-2587. S2CID   146617323.
  20. ↑ Rachleff, Andy (30 September 2012). "Why Angel Investors Don't Make Money … And Advice For People Who Are Going To Become Angels Anyway". Techcrunch. Retrieved 30 September 2012.
  21. ↑ Sørheim, Roger; Botelho, Tiago (2016). "Categorisations of business angels: An overview". Handbook of Research on Business Angels: 76–91. doi:10.4337/9781783471720.00009. ISBN   9781783471720.
  22. ↑ Tenca, Francesca; Croce, Annalisa; Ughetto, Elisa (2019-03-01), Claus, Iris; Krippner, Leo (eds.), "Business Angels Research in Entrepreneurial Finance: A Literature Review and a Research Agenda", Contemporary Topics in Finance, Wiley, pp. 183–214, doi:10.1002/9781119565178.ch7, hdl: 11311/1031294 , ISBN   978-1-119-56517-8 , retrieved 2023-06-23
  23. ↑ Festel, Gunter; De Cleyn, Sven (2013). "Founding angels as an emerging subtype of the angel investment model in high-tech businesses". Venture Capital. 15 (3): 261–282. doi:10.1080/13691066.2013.807059. S2CID   154613196.
  24. ↑ "Claudio Rojas, NACO's new CEO, wants to "see some magic happen" for Canadian entrepreneurs | BetaKit". 2019-04-26. Retrieved 2022-03-13.
  25. ↑ "Angel investors: How to find them". www.bdc.ca. BDC/NACO. 12 September 2020.
  26. ↑ "Angel Activity Report 2016". www.nacocanada.com. Retrieved 25 March 2018.
  27. ↑ "Company Overview" . Retrieved 24 January 2014.
  28. ↑ "With stocks' stellar growth over, startups gain favor". cnbc. 2015-11-09. Retrieved 2016-08-29.
  29. ↑ "Marchmont Innovantional News" . Retrieved 2012-12-01.
  30. ↑ "Российскому бизнесу нужны ангелы". realnoevremya.ru. Retrieved 2024-11-03.
  31. ↑ R.E. Wiltbank. "Siding with the angels: Business angel investing – promising outcomes and effective strategies". Archived from the original on 2013-01-13. Retrieved 2013-04-02.
  32. ↑ "The UK Business Angel market for 2009/10". Venture Giant. Retrieved 2012-12-01.
  33. ↑ "Annual Report on the Business Angel Market in the United Kingdom: 2009/10". Bis.gov.uk. Retrieved 2012-12-01.
  34. 1 2 Alex Hern (2014-07-23). "Angel investors and government grants dominate British tech investment". the Guardian.
  35. ↑ "UKBAA Report 2015 Main Findings". UK Business Angels. Retrieved 2015-07-07.
  36. ↑ "What Angel Investors Know About Startup Investing That You Don't" (PDF). RockThePost. Archived from the original (PDF) on 2013-10-05. Retrieved 2013-09-01.
  37. ↑ Magnitt, Magnitt. "Angel Group in Saudi Arabia (KSA)". Magnitt. Magnitt. Retrieved 18 July 2022.
  38. ↑ David, Dharish; Gopalan, Sasidaran; Ramachandran, Suma (2020-12-30). "The Startup Environment and Funding Activity in India". Investment in Startups and Small Business Financing. World Scientific. pp. 193–232. doi:10.1142/9789811235825_0007. ISBN   978-981-12-3581-8.
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