Angel investor

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 or businesses 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), once or in a consecutive manner,
and when most investors are not prepared to back them.[1] In a survey of 150 founders conducted by
Wilbur Labs, about 70% of entrepreneurs will face potential business failure, and nearly 66% will face this
potential failure within 25 months of launching their company.[2] 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.[3] Over the
last 50 years, the number of angel investors has greatly increased.[1]

Contents
Etymology and origin
Source and extent of funding
Investment profile
Geographical differences
Canada
China
Russia
United Kingdom
United States
India
Saudi Arabia
See also
References
External links

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.[4] 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.[5] 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.[6]

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.[7][8] 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[9] 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" [10] 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.[11] 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).[12][13]

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%).[12][14] While more readily available than venture financing, angel investment is still
extremely difficult to raise.[15] However, some new models are developing that are trying to make this
easier.[16]

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.[17]

Investment profile
Angel investments bear extremely high risks[18] and are usually subject to dilution from future investment
rounds. As such, they require a very high return on investment. Additionally, angel investors often mitigate
the risk of an angel investment by allocating less than 10% of their portfolio to these types of
investments.[19] Because a large percentage of angel investments are lost completely when early stage
companies fail, professional angel investors seek investments that have the potential to return at least ten or
more times their original investment within 5 years, through a defined exit strategy, such as plans for an
initial public offering or an acquisition. Current 'best practices' suggest that angels might do better setting
their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x
return over a five- to seven-year holding period. After taking into account the need to cover failed
investments and the multi-year holding time for even the successful ones, however, the actual effective
internal rate of return for a typical successful portfolio of angel investments is typically as 'low' as 20–30%.
While the investor's need for high rates of return on any given investment can thus make angel financing an
expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for
most early-stage ventures.

The last years showed the emergence of founding angels as angel investors involved even before the
foundation of a start-up.[20] Founding angels co-found start-ups together with scientists who bring in the
technology on which the start-up is based. After foundation, they are actively engaged in the management
of the start-ups, typically in a non-executive position. This type was firstly described by Gunter Festel and
Sven De Cleyn who found that founding angels are individuals playing a key role in providing day-to-day
operational support to the start-up together with early-stage financing.[21]

Geographical differences

Canada

Canada is reportedly home to the most sophisticated and advanced network of angel investors in the
world.[22] Incorporated in 2002, the National Angel Capital Organization pioneered the angel investing
movement and supported the formation of regional angel networks in Canada. According to both the
National Angel Capital Organization and Business Development Bank of Canada, there are 20,000–50,000
active angel investors in Canada.[23] Over 4,000 are members of 45 angel groups that are members of the
National Angel Capital Organization (NACO).[24]

China

Prior to 2000, it was difficult for startups in China to find local angel investors. Entrepreneurs such as Jack
Ma of Alibaba Group needed to raise funds from Softbank, Goldman Sachs, Fidelity and other
institutions.[25] However, by 2015, several Chinese Angel groups had been in operation.[26]

Russia

In 2012, the International Business Angels Assembly[27] took place in the Russian Federation. This was an
exclusive event devoted to private investing into innovative projects in Eastern Europe.[28]

United Kingdom

A study by NESTA[29] in 2009 estimated that there were between 4,000 and 6,000 angel investors in the
UK with an average investment size of £42,000 per investment. Furthermore, each angel investor on
average acquired 8 percent of the venture in the deal with 10 percent of investments accounting for more
than 20 percent of the venture.
In terms of returns, 35 percent of investments produced returns of between one and five times of the initial
investment, whilst 9 percent produced returns of multiples of ten times or more. The mean return, however,
was 2.2 times investment in 3.6 years and an approximate internal rate of return of 22 percent gross.

The UK Business Angel market grew in 2009/2010 and, despite recessionary concerns, continues to show
signs of growth.[30][31] In 2013, this dynamic kept going on in the UK as angel investors were named by
two-thirds of technology entrepreneurs as a means of funding.[32] By 2015, angel investments had
increased throughout the UK, with the average number of investments made by angels at 5, compared to
2.5 in 2009. The same report also found an increase in angel investors making impact investments, with
25% of angels saying they had made an impact investment in 2014.[33]

United States

Geographically, Silicon Valley dominates United States angel investing, receiving 39% of the $7.5B
invested in US-based companies throughout Q2 2011, 3–4 times as much as the total amount invested
within New England.[13] Total investments in 2011 were $22.5 billion, an increase of 12.1 percent over
2010 when investments totalled $20.1 billion.[34] In the United States, angels are generally accredited
investors in order to comply with current SEC regulations, although the JOBS Act of 2012 loosened those
requirements starting in January 2013. Reaching nearly $23 billion in 2012 in the US, angel investors are
not only responsible for funding over 67,000 startup ventures annually, but their capital also contributed to
job growth by helping to finance 274,800 new jobs in 2012.[35] In 2013, 41% of tech sector executives
name angel investors as a means of funding.[32] In 2020 total US angel investment reached $25.3 billion,
indicating recent slowdown in growth compared to several years prior.[36]

India

In the early [37]2000s there were fewer than 50 Angel investors in the Indian Startup Ecosystem. This has
grown to a massive number in today's context. Investors have invested about $7.8 billion in the first four
months of 2021, which is almost 70% of the overall corpus of $12.1 billion invested in entire 2020 and
more than 50% of $14.2 billion invested in 2019.[38]

Saudi Arabia

Saudi Vision 2030 has been launched in 2016, and since that, entrepreneurship ecosystem is being built
from scratch. Angel investor group reached 8 in 2022.[39]

See also
Comparison of business angel networks
Crowdfunding
Deep tech
Entrepreneurship
Pre-money valuation
Private equity
Revenue-based financing
Seed money
Super angel
 Venture capital financing
Venture funding
Vulture fund

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