Angel Investors – Supporting Entrepreneurs
Taking its name from a term historically used to describe the wealthy patrons of Broadway Theater, angel investors was first used in 1978 to describe private investors providing start-up capital for entrepreneurs. In his pioneering study focusing on methods used by US entrepreneurs to raise seed capital, Professor William Wetzel at the University of New Hampshire’s Center for Venture Research, began to refer to these investors as angels, and the term stuck.
With the high risk attached to investing in start-up companies, along with an extended period before returns may be realized, it’s clear that angel investors are not only in this for the money. Research reveals that a large percentage of angel investors come from the ranks of retired executives and entrepreneurs who want to pass on their knowledge and experience, while keeping abreast of business trends in a constantly changing world. Today, associations have been formed to support this vital form investing and to provide a platform for entrepreneurs and potential investors to network. These organizations include the World Business Angels Association, Angel Capital Association, Angel Capital Education Foundation and TechStars.
Although angel investors are not only in this for the money, they do expect a return on their investment. Because of the high risk, along with the strong likelihood of dilution from future investments, angel investors favor investments with the potential of producing returns of at least ten times (some suggest twenty to thirty times) of the original investment within five years. This could include plans for an acquisition, initial public offering, or a structured and defined exit strategy.
It would be impossible to put a monetary value on mentoring programs for entrepreneurs, but an analysis by Josh Lerner, Antionette Schoar and William Kerr, known as the Harvard report, indicates that start-up companies funded by angel investors have a far greater chance of succeeding that similar companies relying on other forms of initial financing. Many entrepreneurs get their start from what is jokingly referred to as FFF financing – family, friends and fools – but this type of funding may fall short of what is necessary to make a success of a new business venture. As a general rule, venture capital funds do not invest in anything under US$1 million, thereby ruling them out as a source of additional funding. This is where angel investors step in to fill the gap, providing additional financing for start-ups that show potential for growth.