Yes, every business needs an angel investor, and most businesses get started with angel capital infusion. Angel investor is a general term for a private investor who provides capital in exchange for ownership (equity) in a business. Typically, the angel investor is the first real money in a business after a founder’s own money and his or her friends’ and family’s money.
The changing face of angels
For years, angel investors were anonymous wealthy individuals who funded local and regional companies to start a business, and often to also help fund the scaling of a business.
Since the Internet has opened the market for many ideas and connections, angel investors have become a well-known visible funding phenomenon.
Some investors have websites, some have press followings and some are organized into professional funding groups.
Tracking the dollars
The Center for Venture Research at the University of New Hampshire has estimated that 298,000 angel investors invested in over 71,000 companies to the tune of $24.8 billion in 2013.
How does this compare to venture capital in 2013? VC invested $29.6 billion in 4,056 companies, according to The MoneyTree™ Report, a collaboration between PricewaterhouseCoopers LLP and the National Venture Capital Association.
The major difference is that angel investors invest in the earlier stages of a company’s life cycle with smaller dollar amounts, and VC invests in the later stage of a company’s life cycle with larger dollar amounts.
Many early-stage companies will never need VC; however, those companies that are high growth will require VC in order to scale. These high-growth companies likely received a few million dollars from angel investors to prove their concept in the marketplace, and thus were enabled by angels to attract VC investment.
Examining the types
Angel investors are not all the same, there are three major categories: individual angel investors, super angels and angel groups.
Individual angels can be sophisticated or unsophisticated. As lone investors unable to fully assess the risk, the mass of individual angel investors tends to be unsophisticated.
Super angels are typically family offices, or individuals that have a small group of investment professionals working for them. They invest large amounts of capital per company and tend to be sophisticated investors. They are not specialists, and after a few failed attempts, some end up investing in venture funds to hedge their bets.
Angel groups have grown exponentially in the U.S. over the past 10 years. In 2003 there were about 90. Today, there are more than 400.
Angel groups are individual angel investors acting together to aggregate their money and knowledge to build a portfolio of early-stage companies. These groups are typically managed professionally, have a website and engage in industry best practices to manage their risks, and thus tend to be sophisticated investors.
On the other hand, some groups organize to just invest in one deal. These “ad hoc groups” are typically unsophisticated and don’t have a portfolio strategy.
Ad hoc groups shouldn’t be confused with the professionally managed angel investor groups. For a partial list of professionally managed U.S. angel groups, visit www.angelcapitalassociation.org.