Angel Investors: everything you need to know

Who are those business angels and where do you find them? This, among others, is what we’re going to learn today

angel investor

Angel Investors: everything you need to know. Source: pexels.com

They say angels are everywhere ready to help people when they least expect it. That religious theory has an alternative meaning in the business world, where angel investors are pouring billions of dollars into the ideas no one expected to succeed.

Why angels?

Money has never been associated with sacredness, so why are some capitalists called Angel Investors? The name comes from early Broadway shows where wealthy patrons were referred to as “angels”. Initially, it meant a private investor ready to gamble their money on a show or a producer they liked. Later, the entertainment industry started to rely more on institutions, whereas private “angel” investments got mainly redirected to other businesses.

Today, the term Angel Investor describes an individual who’s investing their money in a startup, normally in exchange for equity shares or convertible debt (a type of bonds). Angels make a return on their investment when the entrepreneur successfully grows the business and exits it, generally through a sale or merger.

Angels often form investing groups and networks. These groups are usually local so that the members can regularly meet and discuss investing opportunities. As a rule, they also support domestic startups (from the same city, region, or state). Sometimes, angel groups focus on a particular industry sector in addition to or rather than a specific location.

Who they are

Many angels are former or active entrepreneurs themselves. They provide valuable insights alongside financing to the freshmen startuppers. Moreover, angel investors with entrepreneurial experience invest more, with an average check of $39,000 vs. $28,000 for angels without such an experience. Other categories of angel investors include high net-worth professionals such as lawyers, doctors, executives and managers, bankers, insurers, athletes, media celebrities, etc. In addition, some employees may become angel investors for their own companies at further expansion stages.

Most business angels are accredited investors able to participate in ICOs. As defined by SEC, those are natural persons who have earned income exceeding $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expect the same for the current year, or have a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

According to the latest amendments, natural persons holding in good standing one or more professional certifications or other credentials from an educational institution accredited by the Commission, and “knowledgeable employees” of the private-fund securities issuer can also qualify as accredited angel investors.

In the US, you can invest in companies where you have a personal relationship with the founder(s) without being an accredited investor. Less wealthy individuals can also become angel investors via crowdfunding platforms.

Impact

According to the Angel Capital Association, there are approximately 300,000 angel investors in the US, whereas the potential number of angel investors is 4 million. The majority of them are middle-aged men, with women angels representing about 30% of the angel market in 2018. It is important since the research indicates clear gender differences in investment patterns.

Namely, 51% of women investors find the gender of business founders to be important while making investment decisions (vs 6% of male respondents). Moreover, women seem to be more socially responsible taking into account the social impact of a startup before making an investment. Around 33% of female angels strongly consider this business factor, while only 16% of male investors take social impact into serious consideration while making an investment decision.

The US angels invest about $25 billion in 70,000 companies every year. Individual angel groups invest about $2.5M each year in 10-20 new ventures in North America, according to the ACA Angel Funders Report. The average check of individual angels is about $36,000 and the median investment is $25,000.

The total number of business angels in Europe was about 345,000 in 2019. In many countries, they constitute the second-largest source of external funding in newly established ventures, after family and friends. According to the latest EBAN statistics, the average investment for an angel investor in a single business in 2017 was EUR 25,000, and EUR 1,536,000 for an angel network. In 2018, the total funding received from reported angel networks ranged from 5 to 109 million euros per year in different European countries.

The UK is still leading the European angel market. However, with Brexit coming into full effect, there may be changes to expect. For instance, British entrepreneurs, especially those in science and technology, may be turning towards the US for access to a wider pool of investors. On the other hand, Jenny Tooth OBE, CEO of the UK Business Angels Association (UKBAA), believes that business angels can play a vital role for SMEs in this time of Brexit- and pandemic-induced economic uncertainty. Those angels that belong to the seasoned entrepreneurs have survived through a number of economic cycles and challenges. This will help business angels guide the younger, less experienced startup founders.

Amid the coronavirus outbreak, angels did not stop their investing activities. More than half (57%) of the angel investors surveyed in the UK had made an investment between April and July 2020, whereas 46% of respondents expected to make new investments to add to their portfolio during the remainder of the financial year.

Average investment checks have become slightly smaller in the first half of the last year as some angel investors were cautiously waiting for the crisis to abate. Today, business angels are increasingly trying to diversify their portfolios across various industries and sectors. Startups working on technologies for remote work and education as well as telehealth are among the areas that angel investors are chasing in an economy altered by the pandemic.

What do angel investors gain?

Some people may wonder whether angel investing is really worth it. Their doubts are fair. One academic study of American angel investments found that business angels lose some or all of their money in 52% of their investment deals since the startup companies go out of business. Hence, the most sophisticated angels make at least ten investments in order to make a solid return. According to the Angel Capital Association, angels most aggressively seek investment opportunities with innovative companies that have the potential to grow to hundreds of employees and $50 million in sales within three to seven years of startup.

There is little data on average returns regarding angel investments. The latest research by Robert Wiltbank, PhD is almost a decade-old (2012). However, at that time the author estimated overall angel investor returns to be 2.5 times their investment in about 4 years. Although in any one particular investment the odds of a positive return are less than 50 percent, the gains are pretty competitive with venture capital involvement. Moreover, investors who spread their risk out to at least 50 startups produce the highest returns (over 27% annually).

Where do you find angels?

In times of limited personal contacts, online resources might be the best option to find a business angel for your startup. AngelList, LinkedIn, Seedrs, SeedInvest, Life Science Angels, Tech Coast Angels, Angel Investment Network Blog – those are only a few of popular websites to look for angel capital. Most angel networks also have their webpages and social network profiles. Finally, crowdfunding platforms are another great way of raising some seed capital from individual angel investors.

Nevertheless, establishing closer ties with business angels requires personal acquaintance. You may meet potential angel investors at industry-specific events or events dedicated to investments. Talking to your business partners, contractors, or any well-to-do professionals you know might also bring you some angel funding. Hence, it would be nice to learn to present your business ideas effectively. Communication skills are vital at the stage of attracting the investors you’ve met.

The key rule is to not give up after a few refusals. Angel Investors don’t always rely on logic and market trends to make an investment decision. Sometimes, your charming personality or the potential social impact of your business activities may do the trick.

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