Anisa Din

Madison Pedigo
Ent Finance 3360.001

Angel Investors: Relationship to Startup Companies
Angel investors are entrepreneurs who are interested in helping other
entrepreneurs and startup companies by investing their own money into the
startups for a return. Angel investors are wealthy individuals who are accredited
investors. They are part of the 1% of the population and usually maintain a net
worth of over one million dollars. Forbes categorizes these investors who invest in
startups as angel investors. According to Reynolds survey, there are currently
756,000 angel investors in the U.S. Not only do angel investors provide their
capital, but they also provide financial and business advice as well as additional
funds to the company. Angel investors are important to startup companies.
According to a Harvard report, angel funded startups have a higher chance of
survival. For this reason, it is imperative to understand why startup companies
need angel investors and what those angels are looking for, understanding some
trends in angel investments such as the rise and fall of investments in different
industry sectors, as well as looking into examples of real angel investors such as the
popular angel investors or sharks from the hit show Shark Tank.
As stated before, angel investments are proven to give startups a higher
chance of survival. However, the investments that angels make in startups are high-
risk which is why investors are generally looking for a solid team of entrepreneurs
with a high demand market that could potentially give them a return ten times their
original investment within an average period of five years. Angel investors goals are
to get a great return on their investment, or ROI. According to Forbes, for angels to
get a good ROI, they diversify their investments in multiple startup companies,
which is why they invest in many different kinds of companies raising their chances
of getting high returns.

Table 1- Illustrates the different industries that angel investors invest in or have in their portfolios.
Knowing what angels goals are when they invest can help startup companies get
great investments into their company. Five key factors angel investors look for
when choosing which startup to invest their capital and time in is the team of
entrepreneurs, a clear and finished business plan, an appropriate valuation of the
company, integrity of the entrepreneurs, and entrepreneurs who understand the
risk of the business as well as the passion of the business. Angels look for a great
team who are experts in what theyre doing because it adds credibility to the
business as well as trust; it shows that they can hold their weight but can also take
advice when needed. As stated by Silicon Valley angel investor, John Rampton, If an
entrepreneur wants to make an impression, prove that theres past experiences and
0%
5%
10%
15%
20%
25%
30%
35%
40%
Investments
investments
credibility behind the team. Its your team thats going to win me over, not your half-
baked idea! Having a clear and solid business plan is imperative for angel investors
to even consider investing in the startup. Entrepreneurs need to understand basic
questions such as knowing who the competitors are, what the market is, and
advantages and disadvantages over their competition. One of the most important
questions that need to be answered through their business plan is how will the
investor get a return on their investment. For valuation, it is important that the
entrepreneur does not over value their pre-money and post-money valuation; that
shows that the entrepreneur did not do proper research. Integrity and
understanding the risk but maintaining the passion is also key in drawing in angel
investors to invest in the startup; if the entrepreneur does not believe in their own
company then the investors will not either. Startups need the capital and expertise
while angel investors want a piece of the startup and the adrenaline that they get
when watching a business flourish. Understanding what each need can help both
parties and create a win-win situation.
Every quarter, Silicon Valley Bank releases the Halo Report, which highlights
various trends of angel investments for the quarter. For the second quarter for
2014, Texas broke into the top three most active regions in the nation according to
dollars invested. Texas has two main angel groups that are extremely active, A
Central Texas Angel Network and Houston Angel Network. However, there are many
other regions that are also very active.

Table 2- Illustrates the various regions and the dollars invested per region

The Halo Report also shows how changes occurred from quarter 1 to quarter 2. One
interesting trend to follow and that many angels look at is which sector they should
invest in. According to the second quarter, the mobile sector decreased while the
healthcare sector rise significantly. Specifically Healthcare devices and supplies is
where most of the investments are being made.
16
California
17.4%
Northwest
2.4%
Southwest
5.0%
Great Plains
4.6%
Great Lakes
9.3%
Southeast
4.6%
Mid-Atlantic
23.3%
New
England
15.7%
New York
9.0%
Texas
6.1%
Texas
8.8%
Q2 2014 Share of Angel Group Dollars by Region

Table 3- Illustrates the rise and fall of different sectors between quarters

Another huge highlight is the rise of pre-money valuation. According to Fortune,
seed-stage deals rose to a whopping $5.1 million, while series A rounds climbed to
$9.4 million. The highest valuations were in the healthcare supplies and devices
sector during the seed stage.

Table 4- Illustrates the increase in pre-money valuation through the different stages
Median Healthcare Round Size Increases Significantly in Q2 2014
Both Internet and Mobile / Telecom Decline
$2.00
$1.03 $1.00
$1.56
$1.85
$1.05
$2.56
$0.85
$0.72
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Healthcare Internet Mobile / Telecom
Q4 2013 Q1 2014 Q2 2014
8

*For all deals involving angel groups, includes co-investors
$M

Table 5-Illustrates the rise in Pre-Money Valuation
These are all major trends from the quarter that are highlighted in the Halo Report.
A fast and exciting way to see angels at work is through the hit ABC show,
Shark Tank. Shark Tank is a show that allows entrepreneurs to come into the
shark tank and introduce the sharks or angel investors to their business and ask
them for money in exchange for equity in their business.

Table 6- Illustrates the hit ABC show Shark Tank that includes six angel investors or 'sharks'
The show is a great representation of what angel investors are looking for before
investing in the startups that come their way. The contestants need to prove that
they have a great product as well as a strategy to sell the product. Sharks also stress
Median Pre-Money Valuation Continues to Rise Quarter over Quarter
Pre-Money Valuation Up from $2.7M in Q1 2014 and $2.5M in 2013
9
$3.0M
Median
$1.5M
1
st
Quartile
$4.0M
3
rd
Quartile
$0.30M
$10M
* Including all rounds with angel groups pre-series A over rolling four quarters
the importance of the individual. According to Robert Herjavec, the CEO of the
Herjavek Group, one aspect that many entrepreneurs fail to remember is the
finance. Finance is the language of business. If you dont understand your basic
numbers, youre going to fail. As highlighted previously, the entrepreneur needs to
understand the numbers behind their business. Another key point that Herjavec
makes is that it is imperative to invest in ones self. Many of the times, the investor
looks more into the entrepreneur themselves rather than the business. It is
imperative that the investor trusts the entrepreneur with their investment.
Angel investors like investing in startups because not only is there a huge
potential for a great return but also in being apart of a great business and watching
a business from the start to the finish. For startups to get the attention of angel
investors, they need to understand what the angels are looking for, the different
trends within different sectors that angels are investing in as well as maintaining
their credibility through their passion in their business and knowing the finances
that go into their business.









Works Cited
"5 Things Angel Investors Should Look for in Startups." Inc.com. N.p., n.d. Web.
19 Oct. 2014. <http://www.inc.com/drew-hendricks/5-things-angel-
investors-should-look-for-in-a-startup.html>.
"Angel Investment Data and Trends - Q2 2014." CB Insights Blog. N.p., n.d.
Web. 19 Oct. 2014. <http://www.cbinsights.com/blog/q2-2014-angel-
investment-report/>.
"Angel Investors: How The Rich Invest." Forbes. Forbes Magazine, n.d. Web. 19
Oct. 2014. <http://www.forbes.com/sites/tanyaprive/2013/03/12/angels-
investors-how-the-rich-invest/>.
"FAQs on Angel Investing." / Angel Capital Association. N.p., n.d. Web. 19 Oct.
2014.
<http://www.angelcapitalassociation.org/entrepreneurs/faqs/#What_are_a
ngel_groups_>.
"Getting Started With Angel Investing." Entrepreneur. N.p., n.d. Web. 17 Oct.
2014. <http://www.entrepreneur.com/article/52742>.
Kim, Eugene. "'Shark Tank' Investor Says This Is The One Thing You Need To
Master Before Going On The Show." Business Insider. Business Insider,
Inc, 19 Oct. 2014. Web. 19 Oct. 2014.
<http://www.businessinsider.com/robert-herjavec-most-important-thing-in-
business-2014-10>.


** Highlighted is where all tables and charts are from- The Halo Report