What are angel investors?

Discussions About Angel Investors

Venture capitalists invest in more established ventures, but informal angel investors are the primary source of early stage risk capital for entrepreneurial ventures in the United States. Angels are private individuals that invest their own wealth in entrepreneurs who are not directly related to them through family or prior friendship, with the mindset that they will get higher returns as the ventures get “discovered” down the road by an attractive buyer.

Active angels will make one to two deals per year, with investments ranging from $10,000 to $500,000, and the average being $175,000. They particularly focus on firms in the start-up stage. For example, the first angel investor in Starbucks Coffee was a doctor who was introduced to its founder, Howard Schultz, through their wives. The doctor’s $100,000 investment grew to be worth more than $10 million.

Though not formally classified with the venture capital industry, angel investors are the largest pool of risk capital available to finance entrepreneurial activity in the United States, consisting of about $60 to $80 billion. Each year, as many as 250,000 active angel investors finance between 30,000 and 50,000 very early stage ventures with a total dollar investment between $7 billion and $20 billion.

And according to one serial angel investor, as angel investors increasingly pool their funds and resources by connecting in networks, they are becoming more accessible to entrepreneurs. Jeffrey Sohl at the University of New Hampshire’s Center for Venture Research estimates that there may be as many as 170 formal and informal networks in the United States and Canada with accredited investors. There are many different types of angels and this subject is well documented.

Typology of Angel Investors

Serial Angels
These are the super, high-flying formal angels that are most commonly associated with Silicon Valley. They may or may not work alone. Some have sold out of their ventures and work in established investment banking or venture capital firms.

Free-Lancing Angels
Sometimes angels can be found inside other businesses. Examples are Meg Whitman at eBay and Larry Ellison at Oracle. In addition to cash, they bring great credibility and connections.

Operational/Value-Adding Angels
These manager-investors are nearing the end of their careers and have earned their stripes working through the corporate ranks. They invest to keep themselves busy. They often start out as an advisor, board member, and/or consultant, and will even consider employment opportunities. Sometimes the are officers or board members inside established companies, looking to nurture and support emerging ventures.

Flock of Angels
A group of all types. But a formal angel investor participating in a legally structured angel group must be an “accredited investor.” The Securities and Exchange Commission (SEC) states that is someone whose net worth is greater than $1 million or who has an annual income of at least $200,000, or $300,000 for couples.

Enthusiast/Financial Angels
Also known as Tourist or Checkbook Angels, they are accredited by having great luck in the stock market, home values, or long and many years working within a large company. Typically investing purely for the financial return, they almost never invest on their own. Most like to hide in the background of formal angel groups. With no formal investing practice, nor entrepreneurial experience, they quite often spread money among many small investments in the range of $10,000-$25,000.

Socially Responsible Angels
This group includes great names like John Anderson of UCLA, The Price Institute, and The Kauffman Institute. They look for entrepreneurs with high moral values and ventures addressing major social issues, or they invest in educational and non-profit organizations.

Neighborhood Angels
The largest group in US, these unaccredited private investors are less experienced investors who like to tinker with entrepreneurial activities. Working solo, they are the doctors, lawyers, successful real estate developers, and other entrepreneurs. Virgin Angels are included in this group. They are individuals with funds available and are looking to make their first investment but have yet to discover a suitable deal.

Celebrity Angels
These were entrepreneurs, or “bubble-babies,” who were at the right place, at the right time, with the right idea, and made upwards to hundreds of millions of dollars. Fortunately, they are almost completely worked out of the investment community. They could have started a private equity firm, most likely disguised as an incubator. These angels do not add much strategic value and they dilute the capital structure.

Tire-Kicking Angels
Also known as Hobbyists Angels, they are the opposite of serial and formal angels. Sometimes they are accredited, but they almost never invest. They like hanging around the exciting world of entrepreneurship. It is something to tell their friends, or keep themselves busy often having fun in a “men’s-night-out” at gatherings of formal angel groups.

SOURCE: Roadmap To Entrepreneurial Success