As heavenly as the name sounds, angel investors are usually affluent people who give a start-up business the capital they need to begin operations.
In exchange for this funding, an angel investor will get either ownership equity or convertible debt. Often, a group or network of angel investors pools in their funding after organizing themselves a cohesive unit.
How Do Angel Investors Operate?
Unlike venture capitalists, angel investors use their own funds for investing usually through a trust, business, investment fund or limited liability company. A report had stated that companies funded by angel investors are not as likely to fail, compared with other companies who use other sources of financing.
Between seed funding and venture capital funding, angel investors provide the capital needed between these two forms of investing. And because most venture capitalists will only invest in companies that need more than one or two million dollars, angel investments fill the void between these two means of funding they received to start the business. There is also no minimum or maximum amount that angel investors rely on before deciding on making their investment.
Origin of Angel Investors
A while back, wealthy individuals would offer money to productions that were planned for Broadway. Then in 1978, William Wetzel, a professor at the University of New Hampshire and the founder of the Center for Venture Research conducted a study regarding how entrepreneurs were able to raise seed capital in the United States.
During his research, he started using the term “angel” referring to the investors that supported these entrepreneurs.
Who are Angel Investors?
For the most part, angel investors are executives or retired entrepreneurs. Their reasons for investing are varied, including wanting to stay on top of developments in a specific industry, mentoring other entrepreneurs or using their network and experience on a part-time basis. Not only do angel investors provide monetary help, but also management advice and even contact information if needed.
Angel investing is considered a high-risk strategy for investing which is why most angel investors require an extremely high return on their investment. Most angel investors will only invest in companies that may have the possibility of a return that is ten or more times higher than their investment amount. They also would like to see this return within a five-year period and with a definitive exit strategy, which usually involves either an initial public offering or an acquisition.
Angel Investors and Statistics
In 2007, the average amount raised by angel investors and put into U.S. companies was $450,000. Just a few years later, the healthcare/medical filed received the highest share of angel investor funding (30%). After that, software had 16%, biotech had 15%, industrial/energy had 8% and retail and information technology services received 5%.
While angel investors may demand a high return on their investment, the fact is, many companies in the early stages of operations will not qualify for traditional loans, making it difficult to get their businesses up and running in order to begin turning a profit. The fact is, if the founders of a company have enough faith and expertise in the product they are developing, they will have no problem using funds from angel investors, including the conditions that go along with it, as they will no doubt produce something that proves to be highly successful.