Angel investors are private investors who provide finance and support to early-stage businesses.
The term derives from the “Theatre Angels” who were wealthy patrons of Broadway who provided the initial capital needed to get a new theatre production off the ground and onto the stage. In exchange, these patrons received a share of the production’s earnings.
Over time, the term evolved and in the late 1970s began to be applied to early stage investment into companies of all different sectors.
Angels, unlike funds, are generally investing their own money into the companies in addition to offering additional support by either taking up a board position or by providing informal advice and mentoring.
Angels often invest together in syndicates that are formed within a formally organised angel network or through an informal group who invest together often or just for one particular opportunity. The formal networks are sometimes run by an individual or group of individuals who may act to source deal flow, organise the investment documents or any number of other tasks.
Angel investing is a very risky activity as 50% of small businesses go bust within the first few years. Given this high failure rate it is not uncommon for an angel investor to want a sizeable equity stake on their investment or high interest rate if they provide a loan.
Angel investing today
Angel investing has made a resurgence in recent years as the sources of traditional capital dried up post the recessionary period that began in 2008. More recently a new and wider audience has been introduced to the concept of angel investing through the rise of online equity and debt crowdfunding platforms. These platforms have reduced the barriers of entry to angel investing by not only giving visibility to a large audience but by making the investment process much more efficient and therefore reducing the minimum investment amount of any individual into an opportunity.
Like the angel networks, these platforms source investment opportunities, consolidate the investment documents, and facilitate the act of investment.
The risks of angel investing
High Company failure rates: As mentioned earlier, angel investing is a very risky activity and has traditionally been reserved for sophisticated investors and high net worth individuals. It is unfortunate but the truth is that the most common outcome for an angel investment is that the company invested in fails. For this reason many angel investors choose to develop a portfolio of early stage investments with the hope that one or two do well and more than cover the losses made elsewhere.
Time to return: While many companies will state in their business plan that they are expecting to exit in X amount of years, the truth of the matter is much different. Angels tend to look for an exit 3-8 years down the line though some businesses, particularly those in research and development heavy fields and heavily regulated industries (think pharmaceutical) can take many times longer than that.
Lack of due diligence: Whether it’s not going through the business plan with a fine tooth comb or overlooking a minor clause in the legal documents, not spending an adequate amount of time performing due diligence can lead to problems down the line. Regardless of how well the company does or does not do, investors should always pay close attention to exactly what they are investing in and the terms at which they are investing to make sure that should the company profit, they get their fair share.
Notable angel investors
Jeff Bezos Jeff Bezos is the Founder, President, Chief Executive Officer, and Chairman of the Board of Amazon.com. Jeff is also a very active angel investor whose recent investments include Domo and Everfi.
Max Levchin MaxLevchin arose to prominence as Co-founder and CTO of PayPal. Later he founded Slide and HVF. He is an active angel investor with an extensive list of investments which includes Yelp, BackOps, AdRoll, WePay, Pinterest, Yammer, THRED, and Nuzzel.
Marissa Mayer Marissa Mayer is the current CEO of Yahoo prior to which she played a key role in product Development at google and had a major hand in the development of gmail, igoogle, google maps, and many other cherished products. She has invested in Square, Minted, Airtime, Wealthfront, Periscope, Lever, uBeam, and others.
Kevin Rose Kevin is a serial entrepreneur having founded Digg and Milk, and co-founded Revision 3. He is also a partner as Google Ventures and board member at the Tony Hawk Foundation. His investments include facebook, treehouse, fab, path, zynga and twitter, amongst others.
Jonathan Milner Founder and former CEO of Abcam, Jonathan is making his name now as an angel investor. His recent investments include Faction, Cambridge Temperature Concepts, Horizon Discovery, SyndicateRoom, and more.
Saul Klein Serial entrepreneur (LoveFilm, Seedcamp, others) and partner at index ventures. Saul is also a serial angel investor having invested in a plethora of companies including Slideshare, Tweetdeck, TransferWise, Last.fm, Wonga, and Moo.
Brent Hoberman Co-founder of lastminute.com and PROFounders capital, Brent is a serial entrepreneur and angel investor.