An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
Angel investors usually give support to start-ups at the initial
moments (where risks of the start-ups failing are relatively high) and
when most investors are not prepared to back them. 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, as well as to provide advice to their portfolio companies. Over the last 50 years, the number of angel investors has greatly increased.
Etymology and origin
The application of the term "angel" originally comes from Broadway theater,
where it was used to describe wealthy individuals who provided money
for theatrical productions that would otherwise have had to shut down.
In 1978, 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. 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. 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. 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. 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. 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 of 2006.
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. 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 startups
are more likely to succeed than companies that rely on other forms of
initial financing. The paper by Kerr et al., found "that angel funding
is positively correlated with higher survival, additional fundraising
outside the angel group, and faster growth measured through growth in
web site traffic".
Angel capital fills the gap in seed funding between "friends and family"
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.
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).
There is no "set amount" for angel investors; investments can
range 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.
Much like other forms of private equity, the angel investment decision-making has been shown to suffer from cognitive biases such as illusion of control and overconfidence.
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