An angel investor (also known as a business angel, informal investor, angel financier, business angel, private investor, or seed investor) is a person who provides capital for the start-up of a business, usually in exchange for convertible debt (bonds) or equity. social (shares). Angel investors generally support start-ups or startups in the initial moments (where the risks of startups failing are relatively high) and when most investors are not prepared to back them. A small but growing number of angel investors invest online through equity crowdfunding or organize into angel groups or angel networks to share investment capital., as well as to provide advice to its portfolio companies. Over the past 50 years, the number of angel investors has increased considerably. The support of an angel investor can be key for a startup to reach the degree of unicorn company or that these companies can eventually reach the public market.
Etymology and origin
The application of the term “angel” in reference to the angel investor originally comes from the Broadway theater, where it was used to describe wealthy individuals providing money for theater productions that would otherwise have had to close. In 1978, William Wetzel, then a professor at the University of New Hampshire and founder of its Center for Venture Research, completed a pioneering study on how entrepreneurs raised seed capital in the US He began using the term “angel” to describe to the investors who supported them. A similar term, “patron” or “patron,” is commonly used in the arts.
Retired entrepreneurs or executives often fall into the angel investor category, who may be interested in angel investing for reasons that go beyond pure monetary returns. These include wanting to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs, and making use of their expertise and networks part-time. Because innovations tend to be produced by outsiders and founders in startups, rather than existing organizations, angel investors provide (in addition to funding) feedback, advice, and contacts. Because there are no public exchanges that list their securities, private companies meet with angel investors in various ways, including references from trusted sources of investors and other business contacts; at investor conferences and symposia; and in meetings organized by groups of angels in which companies directly address investors in face-to-face meetings.
According to the Center for Venture Research, there were 258,000 active angel investors in the US in 2007. According to literature reviewed by the US Small Business Administration, the number of people in the US who conducted an Angel investment between 2001 and 2003 is between 300,000 and 600,000. In the late 1980s, angel investors began merging into informal groups with the goal of sharing deal flow and due diligence work, and pooling their funds to make larger investments. Angel groups are generally local organizations comprised of 10 to 150 accredited investors interested in early stage investments. In 1996 there were about 10 groups of angels in the United States. By 2006 the number of angel investor groups was at least 200.
Source and scope of funding
Angel investors often invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally managed fund. Although it typically reflects an individual’s investment judgment, the actual entity providing the financing may be a trust, company, limited liability company, mutual fund, or other vehicles. A Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar provides evidence that startups funded by angel investors are more likely to be successful than companies that rely on other forms of seed funding. The article by Kerr et al. Found that “angel funding is positively correlated with increased survival,
Angel capital fills the gap in seed funding made between “friends and family” and stronger seed funding through formal venture capital. Although it is generally difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds generally cannot make or evaluate small investments below $ 1 or 2 million. Annually, the combined value of all US angel investments nearly reaches the combined value of all US venture capital funds, while angel investors invest in 60 times more companies than companies venture capital ($ 20.1 billion vs. $ 23.26 billion in the US in 2010, at 61.
There is no “set amount” for angel investors; investments can range from a few thousand to a few million dollars. In a big change from 2009, in 2010 healthcare accounted for the largest share of angel investments, with 30% of total angel investments (up from 17% invested in 2009), followed by software (16% vs. 19% in 2007), biotechnology (15% versus 8% in 2009), industrial and energy (8% versus 17% in 2009), retail (5% versus 8% in 2009) and IT services ( 5%).
Although more available than venture financing, angel investing is still extremely difficult to raise. However, some new models are being developed that try to facilitate this.
Like other forms of private equity, angel investment decision making has been shown to suffer from cognitive biases such as the illusion of control and overconfidence.
Angel investments carry extremely high risks and are generally subject to dilution in future investment rounds. As such, they require a very high return on investment. Because a large percentage of angel investments are completely lost when early-stage businesses fail, professional angel investors look for investments that have the potential to return at least ten or more times their original investment in 5 years, through a defined exit strategy, such as plans for an initial public offering or acquisition. Current ‘best practices’ suggest that angel investors would be better off setting their sights even higher, looking for companies that have at least the potential to provide a 20 to 30 times return over a five to seven year holding period. However, after taking into account the need to cover failed investments and the holding time of several years even for successful ones, the real effective internal rate of return for a typical successful portfolio of angel investments is usually as low as 20 30% returns.
The angel investor’s need for high rates of return on any given investment can make angel financing an expensive source of funds. On the other hand, cheaper sources of capital, such as bank financing, are generally not available to most early-stage businesses. The real effective internal rate of return for a typical successful portfolio of angel investments is typically as low as 20-30% of returns. The angel investor’s need for high rates of return on any given investment can make angel financing an expensive source of funds. On the other hand, cheaper sources of capital, such as bank financing, are generally not available to most early-stage businesses. The real effective internal rate of return for a typical successful portfolio of angel investments is typically as low as 20-30% of returns. The angel investor’s need for high rates of return on any given investment can make angel financing an expensive source of funds. On the other hand, cheaper sources of capital, such as bank financing, are generally not available to most early-stage businesses.
Geographical differences regarding angel investment at the international level
According to the Business Development Bank of Canada, there are between 20,000 and 50,000 angel investors in Canada. More than 3000 are members of 35 angel groups that belong to the National Angel Capital Organization (NACO).
Before 2000, it was difficult for startups in China to find local angel investors. Entrepreneurs like Alibaba Group’s Jack Ma needed to raise funds from Softbank, Goldman Sachs, Fidelity, and other institutions. However, in 2015, several groups of Chinese angels were already in operation.
In 2012, the International Assembly of Business Angels took place in the Russian Federation. This was an exclusive event dedicated to private investment in innovative projects in Eastern Europe.
A NESTA study in 2009 estimated that there were between 4,000 and 6,000 angel investors in the UK with an average investment size of £ 42,000 per investment. Additionally, each angel investor acquired an average of 8 percent of the company in each deal, with 10 percent of the investments representing more than 20 percent of the company.
In terms of returns, 35 percent of the investments produced returns of between one and five times the initial investment, while 9 percent produced returns of multiples of ten times or more. The average return, however, was 2.2 times the investment in 3.6 years and an internal rate of return of about 22 percent gross.
The UK Business Angel market grew in 2009 and 2010 and, despite recession concerns, continues to show signs of growth. In 2013, this dynamic continued in the UK, as two-thirds of tech entrepreneurs named angel investors as the preferred means of funding. By 2015, angel investments had risen across the UK, with the average number of investments made by angels at 5, compared to 2.5 in 2009. The same report also found an increase in angel investors making investments of impact, with 25% of angels saying they had made an impact investing in 2014.
Geographically, Silicon Valley dominates angel investment in the United States, receiving 39% of the USD 7.5 billion invested in American companies during the second quarter of 2011, 3 to 4 times more than the total amount invested in New England . Total investments in 2011 were USD 22.5 billion, an increase of 12.1 percent over 2010, when investments totaled USD 20.1 billion. In the United States, angels are generally investors accredited to comply with current SEC regulations, although the JOBS Act of 2012 eased those requirements as of January 2013. By reaching almost $ 23 billion in 2012 in the US. In the US, angel investors are not only responsible for financing more than 67,000 startups a year,
Angel investment in Latin America
For Latin America, a region with more than 540 million people, angel investment is still very incipient, with just $ 17 million invested by angels in local startups during 2017. In countries like Colombia, an angel investor can deposit figures that range between $ 30,000 and $ 250,000, with small exceptions of companies that exceed this last record. As in developed economies, angel investment in Latin America is aimed at startup-stage companies, which generally cannot access the financing provided by large banks or investment groups. The interest of angel investment in Latin America has focused mainly on the area of health and technology companies that develop mobile applications with great potential.
Although in the region, individuals with the possibility of being an angel investor prefer to dedicate themselves to Real Estate, investment funds and investments in traditional businesses, angel investment has been growing through the creation of forums and symposiums that bring together investors with entrepreneurs. Angel investing, however, is still seen as risky, but can offer good dividends in a short time, generally average returns of 30% per annum. The profile of the Latin American angel investor is usually that of a retired, knowledgeable and well-connected executive or businessman who wants to stay active in the business world and earn returns in exciting companies.
Aspiring companies to obtain angel investments must have a very well structured business project in which the benefits for all interested parties can be highlighted, be willing to compromise and show confidence in their project.