Wednesday May 22, 2013 2 comments
You may have heard the term "angel investor" and wondered what, in heaven's name, would celestial beings at the pearly white gates have to do with investing. Well, not much actually, but angel investors are considered "angels" because they help new companies by providing financing when banks and venture capitalists will not.
Angel investors are individuals who supply funding to private businesses that are not listed on public stock exchanges. Generally, they invest in startup companies that may lack the historical financial record and assets to secure a bank loan, and/or are too early-stage or require too little investment for venture capitalists. According to the Center for Venture Research at the University of New Hampshire, 268,160 individuals invested $22.9 billion in 67,030 entrepreneurial ventures in 2012.
Technically, anyone can be an angel investor, but because of SEC regulations, most companies prefer to sell their private securities to accredited investors. Under the Securities Act of 1933, a company selling securities must register with the SEC (a fairly onerous process) unless it meets the requirements of certain exemptions. In order to qualify for many of these exemptions, companies must limit the number of non-accredited investors and provide additional information to them (also an onerous process). Hence, many companies prefer to sell securities to accredited investors.
Angel investment opportunities come in many shapes and sizes, and the recent JOBS Act may or may not change this (many of the regulations are still not finalized). Angel investing can be very lucrative, but it is also very risky. A recent Harvard Business Study found that 30 to 40 percent of startup investors lose their money, while 70 to 80 percent of startup investments fail to reach their projected returns. Despite this, there are many reasons to angel invest and, from my experience as an angel investor who looked at 522 angel investments last year, I would say that most angel investors tend to be motivated by some or all of the following:
- The potential to make a significant financial return. According to a recent study, angels earn an average 2.5X multiple on their investment.
- The ability to leverage their experience as seasoned professionals or entrepreneurs in order to both choose and support their portfolio investments.
- An interest in supporting economic and community development by investing in companies to create jobs and/or make the world a better place.
Again, while technically anyone can become an angel investor, from my experience as well as information I've gathered from over 200 seasoned angel investors, I would say that angel investing is a great fit for accredited investors who are able and willing to:
- Comfortably invest (and potentially risk losing) at least $50k per year,
- Either dedicate at least 10 hours per month to analyzing and supporting their investments or afford to pay someone to do that for them.
These criteria are a great benchmark, but if you're still wary of the risks or your time or money is limited, there are several other ways to invest in startups.
If you are interested in exploring angel investing, consider joining an angel group like the Impact Angel Group (in full disclosure, I am the managing director) or any of the hundreds of angel groups around the country. Additionally, if you are a Colorado resident, the Impact Angel Group will be starting its next Angel-in-Training Program on June 4. Happy Investing!
Elizabeth Kraus is a Boulder entrepreneur and angel investor and co-founder of the Impact Angel Group, a group of investors equally dedicated to making a difference and realizing a return. Prior to founding the Impact Angel Group, Kraus ran her own startups, myUsearch.com and Take it OUT! Fitness, and now spends most of her time convincing smart people that investing for social and environmental impact isn't just "feel good" investing, but is "real" investing. She is a startup mentor and advisor, and has been very active in the state and national effort to improve the entrepreneurial ecosystem and mobilize angel investors.