An angel investor or angel (also known as a
business angel or informal investor) is an affluent individual who
provides capital for a business start-up, 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, as well as to provide advice to their portfolio companies.
Angel investors are often retired entrepreneurs or
executives, who may be interested in angel investing for reasons that go
beyond pure monetary return. These 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. Thus, in addition to funds,
angel investors can often provide valuable management advice and
important contacts. 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 meetings
organized by groups of angels where companies pitch directly to
investor in face-to-face meetings.
According to the Center for Venture Research, there were 258,000 active
angel investors in the U.S. in 2007. According to literature reviewed by
the US Small Business Administration, the number of individuals in the
US who made an angel investment between 2001 and 2003 is between 300,000
and 600,000. Beginning 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 United States. There were over 200 as
typically invest their own funds, unlike venture capitalists who manage
the pooled money of others in a professionally-managed fund.
Although typically reflecting the
investment judgment of an individual, the actual entity that provides
the funding may be a trust, business, limited liability company,
investment fund, or other vehicle. A Harvard report by William R. Kerr,
Josh Lerner, and Antoinette Schoar provides evidence that angel-funded
startup companies have historically been less likely to fail than
companies that rely on other forms of initial financing.
Angel capital fills the gap in start-up financing
between "friends and family" who provide seed funding—and 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. Thus, angel investment is a common
second round of financing for high-growth start-ups, and accounts in
total for almost as much money invested annually as all venture capital
funds combined, but into more than 60 times as many companies (US$20.1
billion vs. $23.26 billion in the US in 2010, into 61,900 companies vs.
There is no “set
amount” for angel investors, and the range can go anywhere from a few
thousand, to a few million dollars. In a large shift from 2009, in 2010
healthcare/medical accounted for the largest share of angel investments,
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%). While more readily available than venture financing,
angel investment is still extremely difficult to raise. However some new
models are developing that are trying to make this easier.
Angel investments bear extremely high risk and are
usually subject to dilution from future investment rounds. As such, they
require a very high return on investment. 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 10 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. Current 'best practices' suggest that
angels might do better setting their sights even higher, looking for
companies that will have at least the potential to provide a 20x-30x
return over a five- to seven-year holding period.
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, in reality, typically as 'low' as
20–30%.While the investor's need for high rates of return on any given
investment can thus 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.