An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business startups, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.
Angels investor capital typically invest their own capitals or money into new business, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund.
Angel Investor Capital
Most of the time, angel investor capital fills the gap in start-up financing between “friends and family” who provide seed funding, and venture capital.
Seed funding -> angel investor capital -> venture capital
One of the reason for above mentioned situation is because 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 consider investments under US$1–2 million.
Angel Investor Capital Profile
A research on angel investments done by The Center for Venture Research at the University of New Hampshire shows that:
The “average” private investor is 47 years old with an annual income of $90,000, a net worth of $750,000, is college educated, has been self employed and invests $37,000 per venture.
Most angels invest close to home and rarely put in more than a few hundred thousand dollars.
Informal investment appears to be the largest source of external equity capital for small businesses.
Nine out of 10 investments are devoted to small, mostly start-up firms with fewer than 20 employees.
Nine out of 10 investors provide personal loans or loan guarantees to the firms they invest in. On average, this increase the available capital by 57%.
Informal investors are older, have higher incomes, and are better educated than the average citizen, yet they are not often millionaires. They are a diverse group, displaying a wide range of personal characteristics and investment behavior.
Seven out of 10 investments are made within 50 miles of the investor’s home or office.
Investors expect an average 26% annual return at the time they invest, and they believe that about one-third of their investments are likely to result in a substantial capital loss.
Investors accept an average of 3 deals for every 10 considered. The most common reasons given for rejecting a deal are insufficient growth potential, overpriced equity, lack of sufficient talent of the management, or lack of information about the entrepreneur or key personnel.
There appears to be no shortage of informal capital funds. Investors included in the study would have invested almost 35% more than they did if acceptable opportunities had been available.
The above few points are just some of the profile of angel investors. The right angel investor can be the perfect first step in formal funding, because it is usually takes less time to meet with an angel and to receive funds, due diligence is less involved and angels usually expect a lower rate of return than a venture capitalist.
The downside is finding the right balance of expert help without the angel totally taking charge of the business. Therefore, structuring the relationship carefully is an important step in the process.