Angel Investing is loosely defined as the investment from an individual, or group of, high-net-worth or sophisticated investors into an early-stage pre-venture company. The term “Angel” stems from the term “Broadway Angel” which was used to describe a wealthy individual who would front the money required to get a new broadway show off the ground in exchange for a share of the potential profits. In the late 70’s the term was first applied to investors in early-stage businesses by William Wetzel, who was conducting research for the University of North Hampshire on how entrepreneurs raised capital.
Who are angel investors? Historically, business angels were successful entrepreneurs who had exited their business and wanted to support the next group of entrepreneurs through investment and mentorship. Now, however, the number of investors who have made their way from having significant industry experience into angel investing has exploded, and with the advent of online investment platforms, the background of the typical angel investor is increasing exponentially.
Famous Angel Investors
Chris began his career at Fenwick & West in Silicon Valley, where he handled venture capital, mergers and acquisitions, and licensing transactions, but was laid off after 13 months - big mistake. He spent the next few years living in Silicon Valley by drafting contracts for $50 on Craigslist and other odd jobs. Fast forward a few years and Chris became an early employee at Google, rose to Head of Special Initiatives and then left to pursue other interests and start investing. His first investments were into Photobucket and Twitter. He later founded Lowercase Capital, known to be one of the most successful VCs in the market, and has appeared on Shark Tank.
Currently a Partner at the incredible Founders Fund, Cyan got her start as a Systems Admin/Support Manager at Extreme Internet, before working her way up the chain at various tech companies including IronPort, which was acquired by Cisco. Taking all she’d learned from working for some of the tech giants, Cyan turned her hand to being an entrepreneur and angel investor, and has successfully had exits from her investments into Hot Potato, EQAL, and OtherInBox, and is a current investor in Pokemon Go creator Niantic.
The model-turned-actor then turned to angel investing a few years back, and has shown no signs of slowing down. Ashton includes the legends Ron Conway and Marc Andreessen as his angel investing mentors, and in 2010 set up his own venture firm called A-Grade Investments. Ashton has invested in seed and Series-A rounds for companies including Uber, Airbnb, Spotify, and Casper.
Founder & CEO at Pantegrion, Alicia has made over 40 investments as an angel investor, occassionally as part of the New York Angels where she is a board member. Alicia has obtained exits from investments in Texture Media, Willa Skincare, and a few others. Alicia has been featured in the Huffington Post, Forbes, CNBC, Mashable, Inc. and many others.
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At what stage do the angels get involved?
Angels are generally the first investors to get involved in a company’s funding after bootstrap, and the three Fs (Friends, Family, Fools). Sometimes angels will invest based on little more than a chance meeting and a business plan scrawled on the back of a napkin (or so the legends go), but often they take time to get to know the person, the market, and the opportunity before making a decision.
Elizabeth Kraus asks these 7 specific questions before investing. Typically, angels get involved in what is known as the “seed” stage – when the company may be little more than an idea, have a prototype, or be in the very early stages of trading – and will continue to invest in follow on stages (growth, scale, venture) to keep a good share holding in later rounds if the company is doing well.
Angel network investment over the last 15 years
What’s in it for the angels?
There are many reasons to get involved in angel investing, and with the advent of online investing platforms it has become even easier to do. Below, we cover the main reasons investors get started:
Returns Angel Investors take massive risks investing in companies that are little more than ideas, so to compensate for the risk, they look for big returns. For very early-stage investments, angels want to invest in companies that could return at least 10 times their investment. The reason for this is that very few of their investments will actually provide a return, so they need to be certain that the ones that do can cover all of their losses and still give them a healthy return (20 per cent per annum over the investment period is the regularly quoted statistic).
Tax Relief In some countries, including the UK, tax relief are offered to those who take on board the risk of investing in early-stage ventures. While this is not the driving force, many angels have stated that they would invest less, but not stop, if the tax reliefs were taken away. The reliefs on offer in the UK are EIS and SEIS.
More than finance Many angels get started investing as a way to be involved in the entrepreneurial process. Angels provide much more than capital, they provide insights, experience, access to their business and personal networks, and may end up joining the board of the company, depending how involved they, and the company want them to be.
There are some heavy potential downsides to angel investing that all investors must come to terms with before they decide to invest. Here are the two main ones to be aware of:
Loss of investment Investing in startups is incredibly risky, over 50% of businesses ultimately fail and an even higher percentage return nothing to investors even though they may not go out of business. Investing in startups is not like investing in a public market, there is no way to sell your shares in the company on a market whenever you want. For all intensive purposes, you are in it until the company either lists on a market, or is bought by another company.
Dilution and time to exit The typical time to exit for a startup is close to 10 years. It’s not 3-5, which many companies may tell you is their exit timeline in early rounds. It’s not 5-7, which you may hope it is after being in an investment for 4 or 5 years. 10 years. That’s a long time to have money tied up in an investment that’s probably not paying dividends and may never feel stable until it’s finally sold.
What’s in it for the companies?
Angels are generally the first investors in the company. They invest early, and most continue to invest throughout the company’s lifespan. They take the risks that VCs are unwilling to take, and they continue to back the company so long as things are going well. They often invest in groups, so if you can get one on board you are likely to get at least a few more.
As alluded to above, angels provide a lot more than just money. Many angels are either successful entrepreneurs, or had very successful careers in their industry who are a great source of experience, insights, and more than anything, provide access to their network of potential suppliers, distributors, buyers, and other angel investors.
How to get started
There are a few ways you can get going with angel investing, the easiest being by signing up to one of the many online platforms that offer angel-styled investments, or you can join one of your local angel networks where you can meet and discuss your investments in person with another experienced angel investors. Regardless of where you decide to invest, be sure you are comfortable with the risks associated with investing, and do your homework on the company and those you are investing alongside. For more insights from the experts, download our guide to investing in startups here.