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What Are Angel Investors

Angel investors in the United States and Europe
An
angel investor
is NOT an investor with golden wings and a halo but rather an
individual who provides startup capital to a new business and expects a percentage
of ownership equity in return. Angel
investing
is a common business practice in the United States and Europe
but will often take on different names depending on the country.

In the United States, the term ‘angel’ derives from the early twentieth century
when wealthy businessmen eagerly invested in lavish Broadway productions. Throughout
Europe, an “angel investor” is known as a “business angel,” a financier who provides
equity capital for startup companies and growing firms. Regardless of location,
most angel investors invest
their own capital, although there are some angel groups (or angel networks) where
several investors combine their capital so they can invest in more opportunities.

How angel investors differ from venture capitalists

Venture capitalists
, on the other hand, are quite different from angel investors.
Rather than using their own funds, VC’s invest pooled money from other people. In
addition to the percentage of equity interest in a company, venture capitalists
usually desire an active say in the invested company’s business decisions.
Venture
capitalists
also have the tendency to invest in expanding companies, although many
VC firms have begun to invest in early stage businesses as well.

The benefit of obtaining angel capital
Many lending institutions are very hesitant about early stage ventures; therefore,
it can be very difficult to obtain the necessary
startup capital for a new business
. If a prospective entrepreneur is unsuccessful
in borrowing money from a bank, s/he may often resort to an angel investor to raise
capital. The average angel investor can invest anywhere between $150,000 and $1.5
million in a given venture.

Many
angel investors
are retired executives or business owners who have the money,
knowledge, and experience to mentor new entrepreneurs so they can stay abreast of
developments in a particular area of industry. An experienced angel investor can
provide valuable knowledge and skills to an entrepreneur on how to run their business
during its early stages of development. They may also be a good source of useful
contacts, allowing the entrepreneur the opportunity to network with others in their
industry. Often, the angel investor has their invested company’s best interests
at heart; therefore, entrepreneurs should find an angel investor’s insight and resources
beneficial to the company’s success.

The angel investors’ return on investment
Due to the risks associated with investing in a new company, an angel investor will
often expect a very high return on investment (ROI). Since it is a proven fact that
many new companies will fail, an angel investor will expect a return up to ten times
his/her investment within several years. Angel investors believe that this amount
will balance the large risk of losing their invested money.

There is often a defined exit strategy (perhaps through an acquisition or initial
public offering) in case a company does not perform as well as expected. The Angel
Capital Education Foundation
recommends that in order to compensate for the high
risks associated with investing in new companies, angel investors should aim for
twenty to thirty times the return on their initial investment. In actuality, this
return, after covering failed investments and holding time over a number of years,
may be about twenty or thirty percent. While most angel investors will fail in about
1/3 of all of their investments, they usually expect an average of twenty six percent
or more annual return to make an investment a worthwhile venture.

Angel networks in the United States
Since the late 1980s, angel groups have emerged. These
angel networks
comprise of
anywhere between ten to two hundred members, each with a common interest of using
their own personal funds for joint investments. In 2005, there were approximately
225,000 active angel investors in the United States. Today, there are thousands
more as well as the formation of several hundred angel groups.

The year 2004 marked the formation of the Angel Capital Association (a non-profit
organization) and Angel Capital Education Foundation. Each year, members of these
organizations meet in different cities to exchange angel practice ideas and develop
resources for improved angel investing.

2004 also marked the same year that approximately 45,000 companies in the United
States received funding from angel investors. Most of the investments were in high
tech companies, especially those specializing in software.

The entrepreneur and angel investor relationship
It is vital for a company and their angel investor(s) to form a sound relationship
with one another before any investment takes place in order to make sure they share
the same goals and ideals. A company and their angel investor(s) must feel comfortable
with one another in order to maintain good lines of communication and to ensure
a successful business.

Conclusion
Angel investors often use their own capital when
investing in startup companies
. They bring much needed experience and skills
to a business, especially during the crucial early stages of development. Due to
the risks of investing in early-stage enterprises with no proven history of success,
angel investors will often request a high return on investment to compensate for
any losses. In the past few years, there has been a growing number of angel investors
in the United States, as well as the increasing trend of angel group formation.
In these angel groupings, each member contributes a specific amount towards a given
investment. The benefit of angel groups is that personal capital can be pooled from
each member. This affords the opportunity to participate in multiple investments
rather than one large one. This also allows the prospect of diversifying one’s portfolio.

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