Angel Investing: The Largest Private Source of Capital for
Early Stage Entrepreneurs
By: Cammie Edwards, PhD, DNA Gateway International
In
2005, angels and venture capitalists (VC) invested the same amount
(approximately $20 billion) in emerging companies. Yet it is commonly perceived
that VCs are the key players doing the start-up funding. However, only about 2%
of all VC investments fund companies at the seed or start-up stage. Angels, on
the other hand, provide about 90% of the seed and early stage outside equity
capital for start up entrepreneurs.
Who are these angels? They are usually multimillionaires, often self- made
entrepreneurs who want to use their capital and business expertise not only to
get a good return on investment (ROI), but to also help and stay involved with
the entrepreneurial community. This means that most angels invest locally so
they can play an active role in building the company. Many start-ups have
benefited from the angels' expertise and contacts as well as from their capital.
A typical angel investment is between $25K-$250K per deal and an average angel
round will have 6-8 investors. Given the hands-on approach that most angel
investors take, it is best to ensure that the founding investors will work
together well. Finding such a cluster of such angels is often best achieved
through angel organizations. It is estimated that approximately 140 of these
exist in the U.S. and the webpage at
http://www.angelcapitalassociation.org will provide links to most of them.
Different angel groups invest in different market sectors. Be sure to identify
up-front the angel groups that invest in life science companies.
Angels are individuals who invest early and can wait 5-7 years for the return on
their investment. However, they expect higher returns for their higher risk.
They look for companies with strong growth potential and typically expect a 10X
ROI after 5 years. Therefore, when pitching to angels it is important
demonstrate how this ROI will be achieved. An excellent on-line presentation (CLICK
HERE) of how to effectively pitch to angels has been assembled by the Tech
Coast Angels. When pitching, in addition to demonstrating how you will bring
them their ROI, ensure that you completely convey the passion that you bring to
your start-up company. Coming from entrepreneurial backgrounds, angels are
intimately aware of the challenges facing emerging companies and they want to
back entrepreneurs that have the drive and commitment to see the venture
through. Most importantly, though, you want to find and foster good working
relationships with angels you are comfortable with. You will be spending a lot
of time with these individuals through both good and bad times of your company's
growth.
In
2005, angels and venture capitalists (VC) invested the same amount
(approximately $20 billion) in emerging companies. Yet it is commonly perceived
that VCs are the key players doing the start-up funding. However, only about 2%
of all VC investments fund companies at the seed or start-up stage. Angels, on
the other hand, provide about 90% of the seed and early stage outside equity
capital for start up entrepreneurs.