Do Business with an Angel

Angel Investors: For Startups

by Terry Stidham

There are currently between 5-7.2 million people in the United States who are accepted as accredited investors. This group of people, which represents as little as 1% of the U.S. population, is made up of wealthy individuals that make $200,000 or more in base salary every year, or maintain a net worth of over $1,000,000.

A common investing trend where the wealthy commit part of their portfolio in startups is called angel investing. According to the recent Reynolds survey, there are currently 756,000 angel investors in the U.S. who have made an angel investment or participated in a friends and family round of financing.

 

Angel Investors

The term angel investor originally comes from Broadway, where it was used when describing the people that provided financing for theatrical productions.

Angel investors invest their own money, where the typical amount raised ranges from $150,000 to $2,000,000. Since angel investors are very often individuals that have held executive positions at large corporations, they can often provide fantastic advice and introductions to the entrepreneur, in addition to the funds. A Harvard report provided information on how angel funded startups had a higher chance of survival.

Angel investments are high-risk, which is why this strategy normally doesn’t represent over 10% of the investment portfolio of any given individual. What angel investors look for is a great team with a good market that could potentially return 10 times their initial investment in a period of 5 years. The exits, or liquidity events, are for the most part via an initial public offering or an acquisition.

According to the Halo Report, angel investors particularly like startups operating in the following industries: internet (37.4%), healthcare (23.5%), mobile & telecom (10.4%), energy & utilities (4.3%), electronics (4.3%), consumer products & Svcs (3.5%), and other industries (16.5%).

In today’s competitive business world, there are times when a business runs out of capital funds. The easiest and most convenient source of funding during such times, are the angel investors. This however doesn’t mean that they should accept cash from any angel investor. Choosing the right kind of angel investor is an important consideration.

While there are several kinds of angel investors, they can widely be categorized as –

7 Types of Angel Investors

1. Return on Investment (ROI) Angels - One thing about ROI angels is that, they invest only when the market is doing well. This is because; such investors are mainly concerned with the financial rewards they will be able to reap given the high-risk investments they make. For the ROI angels each investment is like another significant addition to their already diversified portfolio.
2. Corporate Angels - These angels are most often former business executives who have either been replaced from large corporations downsized or taken voluntary retirement. While these investors seem to be making investments only for the sake of profitability, they are actually looking for a paid & secured position in the company they are investing in.
3. High -Tech Angels - Though these investors are less in experience, the investments made by them in modern technology is quite significant. These investors value profitability as much as they value the exhilaration of introducing a novel technology in the market.
4. Entrepreneurial Angels - These are successful investors who have their own brilliant businesses, which provide them with a steady flow of income for making high-risk investments in start-up companies. While they make all efforts to help entrepreneurs launch their start-ups, they do not actively get involved in the operations of the company.
5. Core Angels - These are investors with extensive business experience, who have accumulated enormous amount of wealth over extended period of time. One important fact about these investors is that, they usually tend to make high-risk investments in spite of their losses, which adds-up to their diversified portfolio. Core Angels not just make capital investments but also useful knowledge investments.
6. Professional Angels - Being professionally employed as lawyers, physicians, etc, these angels make investments into companies of their fields. At times, they may invest in several companies simultaneously. Professional angels are extremely valuable for initial capital investments.
7. Micromanagement Angels - These are considered to be the most serious types of investors. While some of them are born with a silver spoon, others acquire their wealth through sheer hard work. These investors usually seek a board position & tend to implicate the business strategies they have incorporated in their own companies into the companies they are investing in.

Angel Investment Returns

Data collected by the Kauffman Foundation shows that the best estimate for angel investor returns is 2.5 times their investment even though the odds of a positive return are less than 50%, which is absolutely competitive with the venture capital returns.

The secret recipe for getting a good ROI is to diversify your investments into multiple startups and hedge your bet. Angel investors should look to position themselves as investors in at least 10 startups in order to play the startup game right. However, carefully selecting your picks and knowing who you are getting into bed with, so to speak, is very important. The due diligence process should be taken very seriously before making any type of decisions.

 

Angel Groups

During the last 15 years, angel investors have joined different angel groups in order to get access to quality deals. According to the Angel Capital Association, there are over 330 groups in the United States and Canada that are active within the startup community.

One disadvantage of joining an angel group is the time commitment of having to go to their events and networking with the group. In addition, most of the angel groups require member attendance to the screening process, which takes hours out of your schedule. Another requirement is that members need to invest a certain amount every year. For example, the New York Angels require every member to invest at least $50,000 during a 12-month period.

Investment Crowdfunding

Times are changing, and the new way to access deals is via investment crowdfunding. With investment crowdfunding, angel investors are able to navigate quality deals from home without any limitations and requirements, being able to invest lower minimums, allowing angels to hedge their bets with more startups.

Angel groups on average review around 80 deals per month. Another positive ingredient that investment crowdfunding platforms provide is the fact that they’ve done most of the due diligence process for you. Typically the venture follows this process:

• The entrepreneur submits all the business information (business plan, executive summary, financial information, investor presentation, etc.)
• The application is reviewed and the business analyst team decides whether or not it makes sense to move forward. This step is all about the compelling story, the uniqueness, and the traction that the business has been able to accomplish.
• The deals that pass the above filters are forwarded to the investment committee comprised of individuals with vast experience in acquisitions. All of them are active angel investors. The main focus during this process is to review the financials, legal structure, and deal terms.
• If the company passes the investment committee’s due diligence process, then the investment committee would schedule a conference call with the entrepreneur for additional questions and a full walk through of the pitch.
• If the call and additional background checks are passed the deal is posted on the platform and the interaction with the registered accredited investors begins.

Conclusion

One of the positive factors about investing in startups is not only the potential of getting a return, but also being able to be a part of something great. As opposed to investing in the public markets, investing in startup companies gives the investor the chance to be in communication with the team and opens the opportunity to be part of the growth.

Angel investing is positive all around. Not only because it could provide gains, but also because every single investment contributes to the US economy thanks to the jobs that these ventures create. It is important to note that during the past 17 years, startups were accountable for creating 65% of the net new jobs. Providing them with access to capital is without a doubt something that is needed in this country.

Angel investing is becoming the new venture capital. 50,000 companies were started by seed capital last year while venture capital firms financed only 600.

About the author Terry Stidham

Terry Stidham is the founder and principal of Target Search Group. He is a B2B Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.