What is an angel investor?
.It is a high net-worth individual who invests his or her own money directly into promising startup businesses in return for mostly equity share of the company. Angels are often former or current entrepreneurs themselves, as well as business professionals and corporate leaders. There are a few reasons why angels make investments, and those are to gain a return on their money, to participate in the entrepreneurial process, and to give back to their communities by catalyzing economic growth. Angels typically invest in companies local to them. Sometimes they will co-invest in a company if the other so-investor is someone they know and trust. What is important is that they are wealthy and willing to invest a great deal of money in your business for a piece of the action in return.
Angels need to meet the Securities Exchange Commission’s definition of an accredited investor, which in their case is they need to have a net worth of at least $1 million and make $200,000 a year—or $300,000 a year jointly with a spouse. About 225,000 people have made an angel investment in the last two years. Investments commonly run around $600,000. The Center for Venture Research estimates that U.S. angel investors invested $19 billion in 55,000 deals in 2008, with most of the investments being made in start-up or very early-stage companies. Angels make a return on their investment when the entrepreneur successfully grows the business and exits it, generally through a sale or merger.
What is an angel group?
An angel group is individuals that join together with other angels to evaluate and invest in entrepreneurial firms together. These group members can pool their wealth together to make larger investments. The Angel Capital Education Foundation has three hundred American angel groups in its database, and they all come in many forms. They do all share some of the same characteristics. Group members meet regularly to review business proposals and watch presentations of the selected businesses. They decide together whether or not to invest in the presenting entrepreneur. And members work together to implement due diligence to validate plans, statements, and history of entrepreneurial team.
Groups invest in firms in a wide range of industries, but are typically all innovative and high growth. The most common industries include software, medical devices, telecommunications, and manufacturing. The Angel Capital Association found that the median investment per round per angel group was about $277,000. This number varies widely depending on the industry and on the angel group making the investment. Many angel groups will co-invest with other angel groups and individual angels to make larger investments. These investments generally range from $500,000 to $2 million per round. Since angels are typically entrepreneurs, business professionals and corporate leaders they will have areas of expertise. Some groups will select the markets of the group member’s expertise to invest in, whereas other groups will have a market focus on a specific industry. Angel groups are commonly easier for entrepreneurs to find and since they comprise of some of the most sophisticated and active angel investors in the country, groups have become the leading indicator of angel investor activity in many communities.
Want To Learn More?
Download our free Raising Capital from Angel Investors eBook.
This guide will walk you through the process of obtaining seed capital for your startup. This book includes:
- An overview of the angel investor process and who they are
- The milestones angel investors look for when evaluating your business
- Strategies for finding the angels best fit for your startup
- How to nurture the relationship, prepare for the meeting and deliver the pitch
- Rounding out the details and preparing for the future