As defined in the Securities Act of 1933, an angel investor is an accredited investor
who has an individual or joint net worth that exceeds $1 million at the time in
which an investment is made. They are also individuals who have a personal income
of at least $200K in each of the two most recent years of investment or have a joint
account in excess of $300K in each of those years, and will have the same expected
income level in the current year. Angels invest their own personal wealth in early-stage
(seed and start-up) companies.
Several decades ago, the word âangelsâ referred to people who helped
fund Broadway entertainment. However, in todayâs business world, the term
âangel investorsâ takes on a whole new meaning. First used by William
Wetzel, former director of the Center for Venture Research at the University of
New Hampshire, many entrepreneurs view angel investor funding as âmoney from
heavenâ because of the opportunity to finance their early stage enterprises.
The reasons why many wealthy individuals want to become angel investors vary considerably.
Some people seek a means to employ themselves, while others want to create jobs
for their families and their future generations. Some really enjoy helping other
start-ups succeed, while others simply have a hedonistic approach to investment,
taking pleasure in risk-taking in a companyâs success. In addition, there
are those who are only interested on the economic gain and rate of return on an
investment. Regardless of the reason, many angels share a few things in common:
To become an angel investor takes more than just personal wealth for a desired investment.
According to Howard H. Stevenson, Sarofirm-Rock Professor of Business Administration
at Harvard Business School, âreading business plans, studying in business
school at angel seminars, and learning an industry by working in itâ are ways
that âone can develop expertise that will promote success in investing.â
For both the entrepreneur and angel investor, Stevenson claims that âthere
is nothing like doing it,â referring to working and having experience in a
given field.
In addition to having experience, angel investors should also define their personal
and financial goals, and invest with those who have a solid track record when assessing
any potential business opportunities.
William Sahlman and Howard Stevenson, from Harvard Business School, have
proposed a basic framework for each investment opportunity/entrepreneurial evaluation
as a three-sided model in which four vital components are organized and well-interconnected:
Not only is each individual component crucial for a successful investment, but the
way they interact is also just as significant. A high-potential business opportunity
occurs when there is the right arrangement or combination of each element, whereas
poorly arranged/combined elements or lack of one or more of these essential components
will lead to failure. The Harvard Framework is as follows:
PEOPLE- refer to any significant stakeholders of the company, including
the entrepreneur, team members, investors, advisors, etc.
THE POTENTIAL BUSINESS OPPORTUNITY- refers to the business proposal/plan,
the consumer, the size of the business, etc.
CONTEXT- refers to the external factors that can influence the
success of a business, including industry trends, the state of the economy, consumer
supply and demand, technology development, etc.
DEAL- refers to the contract between an entrepreneur and an angel
investor, including the terms, agreement and pricing.
There are five requirements that Micah Baldwin, an angel investor who sold his SEO
consulting company, looks for in every business opportunity: