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Angel investor

An angel investor or angel (also known as a business angel or informal investor) is an


affluent individual who provides capital for a business start-up, usually in exchange for
convertible debt or ownership equity. A small but increasing number of angel investors
organize themselves into angel groups or angel networks to share research and pool their
investment capital.Contents [hide]

Angels typically invest their own funds, unlike venture capitalists, who manage the
pooled money of others in a professionally-managed fund.[1][2] Although typically
reflecting the investment judgment of an individual, the actual entity that provides the
funding may be a trust, business, limited liability company, investment fund, etc. The
Harvard report[3] by William R. Kerr, Josh Lerner, and Antoinette Schoar tables
evidence that angel-funded startup companies are less likely to fail than companies that
rely on other forms of initial financing.

Angel capital fills the gap in start-up financing between "friends and family" (sometimes
humorously given the acronym FFF, which stands for "friends, family and fools") who
provide seed funding, and venture capital. Although it is usually difficult to raise more
than a few hundred thousand dollars from friends and family, most traditional venture
capital funds are usually not able to consider investments under US$1–2 million.[4] Thus,
angel investment is a common second round of financing for high-growth start-ups, and
accounts in total for almost as much money invested annually as all venture capital funds
combined, but into more than ten times as many companies (US$26 billion vs. $30.69
billion in the US in 2007, into 57,000 companies vs. 3,918 companies).[5][6]

Of the US companies that received angel funding in 2007, the average capital raised was
about US$450,000. However, there is no “set amount” for angel investors, and the range
can go anywhere from a few thousand, to a few million dollars. Software accounted for
the largest share of angel investments, with 27 percent of total angel investments in 2007,
followed by healthcare services, and medical devices and equipment (19 percent) and
biotech (12 percent). The remaining investments were approximately equally weighted
across high-tech sectors.[5] Angel financing, while more readily available than venture
financing,[6] is still extremely difficult to raise.[7] However some new models are
developing that are trying to make this easier.[8] Many companies who receive angel
funding are required to file a Form D with the Securities and Exchange Commission.
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Investment profile

Angel investments bear extremely high risk and are usually subject to dilution from
future investment rounds. As such, they require a very high return on investment.[9]
Because a large percentage of angel investments are lost completely when early stage
companies fail, professional angel investors seek investments that have the potential to
return at least 10 or more times their original investment within 5 years, through a
defined exit strategy, such as plans for an initial public offering or an acquisition. Current
'best practices' suggest that angels might do better setting their sights even higher,
looking for companies that will have at least the potential to provide a 20x-30x return
over a five- to seven-year holding period.[10] After taking into account the need to cover
failed investments and the multi-year holding time for even the successful ones, however,
the actual effective internal rate of return for a typical successful portfolio of angel
investments is, in reality, typically as 'low' as 20-30%.[11] While the investor's need for
high rates of return on any given investment can thus make angel financing an expensive
source of funds, cheaper sources of capital, such as bank financing, are usually not
available for most early-stage ventures, which may be too small or young to qualify for
traditional loans.
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Profile of investor community

The term "angel" originally comes from Broadway where it was used to describe wealthy
individuals who provided money for theatrical productions. In 1978, William Wetzel,[12]
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 USA, and he began using the term "angel" to describe the investors that supported
them.

Angel investors are often retired entrepreneurs or executives, who may be interested in
angel investing for reasons that go beyond pure monetary return. These include wanting
to keep abreast of current developments in a particular business arena, mentoring another
generation of entrepreneurs, and making use of their experience and networks on a less-
than-full-time basis. Thus, in addition to funds, angel investors can often provide
valuable management advice and important contacts. Because there are no public
exchanges listing their securities, private companies meet angel investors in several ways,
including referrals from the investors' trusted sources and other business contacts; at
investor conferences and symposia; and at meetings organized by groups of angels where
companies pitch directly to investor in face-to-face meetings.

According to the Center for Venture Research, there were 258,000 active angel investors
in the U.S. in 2007.[13] According to literature reviewed by the US Small Business
Administration, the number of individuals in the US who made an angel investment
between 2001 and 2003 is between 300,000 and 600,000.[14] Beginning in the late
1980s, angels started to coalesce 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 made up of 10 to 150 accredited investors
interested in early-stage investing. In 1996 there were about 10 angel groups in the U.S.;
as of 2008, while there are no official statistics, data from the company that provides deal
management services for the majority of organized Angel investors indicates there are
over 300,[15] with a roughly equal number in all other countries combined; these groups
accounted for approximately 12,000 individual angel investors in 2008. The more
advanced of these groups have full time, professional staffs; associated investment funds;
sophisticated web-based platforms for processing funding applications; and annual
operating budgets of well over US$250,000.
The past few years, particularly in North America, have seen the emergence of networks
of angel groups, through which companies that apply for funding to one group are then
brought before other groups to raise additional capital.[16] The development of the
Angelsoft network, connecting a majority of existing angel groups, has led to an increase
in the syndication of investments among more than one group.[17]
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Angel investing in the UK

A study by NESTA[18] 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.
Furthermore, each angel investor on average acquired 8% of the venture in the deal with
10 per cent of investments accounting for more than 20 per cent of the venture.

In terms of returns, 35 percent of investments produced returns of between one and five
times of the initial investment, whilst 9 per cent produced returns of multiples of ten
times or more. The mean return, however, was 2.2 times investment in 3.6 years and an
approximate internal rate of return of 22 per cent gross.
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See also
Seed funding
Venture funding
Crowd funding
Private equity
Entrepreneurship
Pre-money valuation

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