Who Are These Angel Investors

November 20 2010 No Commented

The following article appeared in the March 2010 issue of the Flathead Business Journal, but is no longer available online.

For several months, we have been discussing sources of startup capital for businesses.  Entrepreneurs first use their own cash and resources as they germinate the idea of the business.  As the venture idea germinates and personal resources are depleted, entrepreneurs turn to Friends and Family to continue work towards defining a product or service.  Federal and local grants can also become important capital sources at this stage.

Once the entrepreneur begins to engage customers in the testing and validation of the product, the timing is right to engage with angel investors. OK, so angel investors provide funding and advice for startup companies at the time these ventures begin interactions with customers…but who are these angels?

Business angels are wealthy businessmen and entrepreneurs who have the time and inclination to invest in and mentor startup entrepreneurs.  Most angels are part-time investors, dividing time between other business interests, family and personal interests such as golf, tennis and traveling.  Angels commit only a small fraction (3-10%) of their wealthy to angel deals because investing in startups is very risky business.  Angels who engage with entrepreneurs also tend to commit a significant fraction of their available time to portfolio companies.

The average angel is in his or her late fifties but active angels can be found in all age groups.  Angel investors tend to invest close to home, say within an hour or two drive of their residence, for several reasons:  Most angels have had their fill of business travel and would prefer investing close to home.  Furthermore, investing in their region can boost the local economy – a motivation for some investing close to home.  Angels tend to enjoy working with entrepreneurs, feeling that give-back to the community is a personal responsibility.  Most want to stay engaged in business as they retire from their full-time positions.  Angel investors have varied motivations for investing in startup companies, but all pursue a substantial return on investment, considering the risk of this asset class. Angels invest both time and money in startup ventures.  While several angels may invest in a single company, one or two will step forward to serve as mentors for the company and/or directors of the company.  In these roles, angels normally spend a few hours a week with the entrepreneur and the management team, on the tactics and strategy of managing and growing the company.  If several angels invest at the same time, those with the most experience in the business sector likely step to the plate to assist the company.

As a group, angels generally invest $250,000 to $1,000,000 per round of investment per company.  Each angel may commit $25,000 to $100,000, with six to twelve angels contributing to fill the round of investment.  Mentors and directors are then selected from among those investors.  If needed by the company, investors may commit to multiple, sequential rounds of investment of this size, spread over 2-4 years.

As was mentioned above, angel investing is highly risky.  About 50% of angel investments do not return the capital invested to angels.  About 10% of angel-funded startups are highly successful, returning perhaps 20X invested capital to early angel investors in 6-8 years.  The remaining 40% of ventures provide more modest returns to investors.  Considering this profile of returns, angels must invest in a rather large portfolio of companies to provide some assurance of reasonable performance.  Ten to fifteen angel investments over a lifetime of angel investing is considered the minimum necessary for success.   The skewed returns of angel investments suggest that angel investors must surely have high risk tolerance and the patience necessary for successful investments to mature.

If you are an entrepreneur, stay tuned next month for more information on soliciting capital from angel investors.

If you are interested on becoming an angel investor, look around for an angel group near you.  Kalispell/Whitefish, Montana is home for the Frontier Angel Group (to be featured in a future column).  The Big Sky Angels are forming just now in Missoula.  The Montana Angel Network, in collaboration with the Governor’s Office of Economic Development, is organizing educational opportunities and support angel investors during the year ahead. Please contact Liz Marchi, liz@frontierangels.com for more information.