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Angel investor
From Wikipedia, the free encyclopedia
An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.
Contents
1 Description 1.1 Source and extent of funding 1.2 Investment profile 1.3 Profile of investor community 1.4 Angel investing in the UK 2 See also 3 References 4 External links
Description
Source and extent of funding
Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund.[1][2] Although typically reflecting the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc. Angel capital fills the gap in start-up financing between "friends and family" (sometimes humorously given the acronym FFF, which stands for "friends, family and fools") who provide seed funding, and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under US$12 million.[3] Thus, angel investment is a common second round of financing for high-growth start-ups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but into more than ten times as many companies (US$26 billion vs. $30.69 billion in the US in 2007, into 57,000 companies vs. 3,918 companies).[4]
[5]
Of the US companies that received angel funding in 2007, the average capital raised was about US$450,000. However, there is no set amount per se for angel investors, and the range can go anywhere from a few thousand, to a few million dollars. Software accounted for the largest share of angel investments, with 27 percent of total angel investments in 2007, followed by healthcare services, and medical devices and equipment (19 percent) and biotech (12 percent). The remaining investments were approximately equally weighted across high-tech sectors.[4] Angel financing, while more readily available than venture financing,[5] is still extremely difficult to raise.[6]
Investment profile
Angel investments bear extremely high risk and are usually subject to dilution from future
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investment rounds. As such, they require a very high return on investment[7]. Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period[8]. After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments is, in reality, typically as 'low' as 20-30%[9]. While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures, which may be too small or young to qualify for traditional loans.
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A study by NESTA [16] in 2009 estimated that there were between 4,000 and 6,000 angel investors in the UK with an average investment size of 42,000 per investment. Furthermore, each angel investor on average acquired 8% of the venture in the deal with 10 per cent of investments accounting for more than 20 per cent of the venture. In terms of returns, 35 percent of investments produced returns of between one times and five times of the initial investment, whilst 9 per cent produced returns of multiples of ten times or more. The mean return, however, was 2.2 times investment in 3.6 years and an approximate internal rate of return of 22 per cent gross.
See also
Entrepreneurship Pre-money valuation Private equity Venture funding
References
1. ^ Joe Hadzima. "All Financing Sources Are Not Equal (http://enterpriseforum.mit.edu/mindshare/startingup/financing-sources.html)". Boston Business Journal. http://enterpriseforum.mit.edu/mindshare/startingup/financing-sources.html. 2. ^ National Venture Capital Association (http://nvca.org/def.html) 3. ^ Handbook of Entrepreneurship Research (http://books.google.com/books? id=4KRnkLZfXtMC&pg=PA291&lpg=PA291&dq=typical+venture+investment+size&source=web&ots=TZCdKW2a 4. ^ a b UNH Center for Venture Research (http://wsbe.unh.edu/files/2007%20Media%20Release%20-% 20Lori%20Wright.pdf) 5. ^ a b PWC Money Tree Survey (https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/MoneyTree%20-%20Q2% 202008%20final.pdf) 6. ^ Angelsoft (http://www.angelsoft.net/industry) 7. ^ Kauffman Foundation (http://www.entrepreneurship.org/Resources/Detail/Default.aspx?id=11258) 8. ^ Kauffman Foundation (http://www.entrepreneurship.org/Resources/Detail/Default.aspx?id=11038) 9. ^ Angel Capital Educational Foundation (http://www.angelcapitaleducation.org/dir_resources/news_detail.aspx?id=144) 10. ^ University of New Hampshire (http://www.unh.edu/cvr/bio_wwetzel.htm) 11. ^ Center for Venture Research (http://www.unh.edu/news/docs/2007AngelMarketAnalysis.pdf) 12. ^ US Small Business Administration (http://www.sba.gov/advo/research/rs331tot.pdf) 13. ^ Angelsoft (http://angelsoft.net/entrepreneurs/find-groups.seam) 14. ^ Angel Capital Educational Foundation (http://www.angelcapitaleducation.org/dir_resources/news_detail.aspx?id=166) 15. ^ Techcrunch (http://www.techcrunch.com/2008/09/02/angelsoft-30-launches-with-400-angelinvestment-groups-in-tow/) 16. ^ Nesta - Siding With Angels (http://www.nesta.org.uk/siding-with-the-angels-pubs/)
External links
UNH Center for Venture Research (http://www.wsbe.unh.edu/Centers_CVR/news.cfm) Angel Capital Education Foundation (http://www.angelcapitaleducation.org/) Angel Capital Association (US/CA) (http://www.angelcapitalassociation.org/) European Business Angel Network (Europe) (http://www.eban.org/) National Angel Organization (CA) (http://www.angelinvestor.ca/) British Business Angels Association (UK) (http://www.bbaa.org.uk/) LINC Scotland (Scottish Angel Capital Association) (http://www.lincscot.co.uk/)
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Angelsoft (Angel collaboration network) (http://angelsoft.net/) Retrieved from "http://en.wikipedia.org/wiki/Angel_investor" Categories: Private equity | Venture capital This page was last modified on 12 October 2009 at 17:19. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. See Terms of Use for details. Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.
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