When someone has an entrepreneurial idea, they can seek out funding to help them put together a business through variety of ways. Funds could come from a venture capital firm, a bank via a loan, or through crowdfunding. But these days, it is becoming increasingly popular for startups to seek capital from people known as angel investors.
Angel investors are individuals/groups of people seeking out new opportunities to invest their funds, or invest their own borrowing capacity. They are often wealthy, having been successful in their own business ventures – offering an abundance of business knowledge and experience to share. Rather than rest on their laurels, they are very keen to immerse themselves in new projects, and make use of their skills and wisdom for valuable purposes. Generally, angel investors have more of a relationship with the individual who is seeking capital, providing guidance along the way.
How much do they invest?
The capital angel investors provide can be either a one off allocation of seed money or ongoing support. Obviously, the amount of capital they provide varies, but the 2006 Study of Business Angel Market in Australia by the Department of Industry, Tourism and Resources (DITR) found that they typically invest less than $500,000. The study came up with a rough average of $350,000, based on the angels they interviewed. However, when the angels invest with other angels as part of a network, they can invest as much as $5 million or more – an amount to rival that of a venture capital firm.
According to the study, angels generally invest no more than 20% of their on-hand capital into startup opportunities. Most of them invest less than 10% which is understandable, considering the risks involved and the likelihood of failure. But the study reported that the majority of angels interviewed had experienced a blockbuster of an investment which had returned more than ten times their original capital. By investing in a number of different startups, angels hope that at least one of these will provide significant enough returns so as to offset any losses they may have made from failed ones. With that, the study found that most angels reported a remarkably high positive return from their exited investments.
How did they come to be known as ′angels′?
The origin of the ′angels′ title is believed to have come from the old show business days (think New York′s Broadway scene) in which wealthy individuals would provide funding for potential new musicals or stage performances. These ′angels′ would descend from up-town to meet with the producers requiring funding for their ′next big hits′. These shows were very risky investments though. Many of them failed to make any returns, but wealthy individuals would invest anyway for the perks of being involved and getting to mingle with the cast.
The term might also refer to their elusiveness, as most angel investors are quite private and hidden.
Types of angel investors
According to the DITR study, there are three different types of angel investors:
- Early winners: These investors are the youngest of the lot, having made most of their wealth in their 30s and 40s. This wealth is likely to have been made through a startup developed during the ′tech boom′. Early winners offer fresher advice for younger entrepreneurs by drawing on business lessons learned recently rather than decades ago. They tend to belong to angel networks and may prefer to pool their funds.
- The professionals: Aged between 40 and 65, these angels forged lucrative professional careers be it as a banker or a lawyer and may have made their wealth through a combination of their salary and their wise investments. They don′t tend to actively seek out startup opportunities or belong to networks – instead preferring to invest in what they come across in their professional daily dealings.
- Experienced entrepreneurs: Experienced entrepreneurs are those who have accrued their wealth through the sale of their own businesses. They are usually over 50 years old and may be semi-retired. This group generally has the largest number of startup investments and often belong to networks. They usually seek to invest in industries they were most involved in.
How to find angel investors?
Angel investors could be anyone from an old friend, relative or local doctor, but they generally need to have a significant amount of money on hand as well as a keen interest in the proposed business idea. Simply having a broad network of professional contacts from a variety of areas would be the best way to find angels.
However, there are a number of angel networks in Australia which can be easily found via the internet.