Angel Investor: the informal venture-capital market

Angel investors and individual participants are the two categories of Individual investors in the private capital market.  The two categories are differentiated by the degree the investor participates in the company’s affairs, the size of the minimum investment, and the number of investors involved in the company.

Angle investor vs Individual participant:

An angel investor generally makes a substantial investment in an individual company, the company is closely held by a few owners, and the angel plays an active role in the management of the company. Individual participants in the informal private-equity market (as opposed to angels) tend to make smaller investments in several companies. They co-invest with other individuals and institutions to create more shareholders than is typical for an angel-funded company. They usually play no role in the management of the company. Individual participants are typically brought into the company by a licensed broker, who shops the company’s securities on a best-efforts basis. The angel investor is the key type of individual investor for the entrepreneur and small business owner.

KEY POINT: Angel financing is the most significant form of financing for startup and early-stage companies — other than funds provided by the founders, friends, and families of the founders

Angel Investor – Definition:

There is no standard definition of an angel investor. The most widely accepted one is that angels are financially sophisticated, wealthy individuals, with net worth exceeding $1 million, who invest their funds on a part-time basis in startup or early-stage ventures. Surveys of angels have shown that they are middle-aged (average age of 47), experienced entrepreneurs with advanced education, whose wealth is partly derived from one or more successful entrepreneurial ventures.

Where do angels invest?

The primary screening criterion for angel investments is whether the angel or an associate of the angel knows and trusts the entrepreneur. Angels typically invest in companies in an industry with which the angel is familiar and are located near the angel’s home (one hour’s driving time is the standard radius). The businesses appear to have high growth potential, proven management, and sufficient available information for the angel to assess the company’s value. Because angel investment is private and not publicly reported, the total size of the angel market is not easy to find out. The Small Business Administration recently estimated that 250,000 individual private investors annually put $20 billion in early-stage companies.

Role of angel investors:

Besides money, angel investors often provide active assistance to the companies in which they invest. This can include technical and marketing help, advice on strategy, financing,and recruiting, and assistance with equity offerings and acquisitions. An angel also brings an extensive external contact network, including potential customers, vendors, and financing institutions. Because venture capitalists usually fund businesses a bit later in their development than angels, generally after one or more angels have invested in the business, angels play a critical role in screening the one million annual startups in the economy. Their participation is critical in determining which businesses will evolve to the more exclusive realm of formal venture capital.