A Profile of Angel Investors

Author(s): Stephen G. Morrissette

Source: The Journal of Private Equity , Summer 2007, Vol. 10, No. 3 (Summer 2007), pp.
52-66
Published by: Euromoney Institutional Investor PLC

Stable URL: https://www.jstor.org/stable/43503520

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 A Profile of Angel Investors
Stephen G. Morrissette

Stephen
vary, these angels provide capital to 50,000
G. Morrissette
issue for new ventures. The primary companies in the amount of $50 billion and
is an assistant professor
capital sources for new ventures are: account for 70% of capital for new ventures.
at the College of Business
at University of St.
Sourcing issue capital for sources financial new ventures. for capital new ventures The is a primary crucial are:
Francis
Angel investors present an important
injoliet, IL. • Founder /friends /family: Most frequent topic because the new/small businesses that
smorrissette@stfrancis.edu source for start-up businesses. they support are the dominant driver of the
• Angel investors: Wealthy individuals, typ- U.S. economy (Timmons and Spinelli [2004]):
ically fellow entrepreneurs, wil ing to
invest in the very early stages of a ven- • Small companies provide 75% of all new
ture's development. jobs.
• Venture capital funds ("VCs"): A mutual • Over 90% of all employers are new/small
fund managed by professional investment businesses.

managers. Fund investors are mosdy pen- • Over 95% of the wealth in America has
sion funds and institutional investors been created by entrepreneurial firms
(Fenn et al. [1995]). Typically will not founded since 1980.
invest until a company is several years old.

Angel Investing Defined

It is noteworthy that a start-up company
can rarely source capital by borrowing money The term business angels or angel investors
from a commercial bank. However, often describes
the wealthy individuals who provide cap-
founder s infusion of cash is via personal bor-
ital for start-up companies. Also known as pri-
vate investors, this term emphasizes the
rowing including home equity loans and sub-
stantial credit card debt. non-public and idiosyncratic nature of this
The second source, angel investors, is the capital market. Another term, informal investors,
focus of this article. Angel investors (some- is sometimes applied; this term contrasts the
times called informal investors) are wealthy indi- angel investing process with the more formal
viduals (net worth over $1 million) cited by and quantitative analysis done by venture cap-
many researchers as the most important source ital professionals. The use of the word angel is
of capital for start-up firms. Worldwide, recent apparendy derived feom its use to describe finan-
research estimates the amount of capital pro- cial backers for theatrical productions (plays,
vided by angels to be 11 times the amount operas, etc), also called angels. Throughout his-
provided by venture capitalists (Reynolds, tory, wealthy individuals (often the royal family)
Bygrave, Autio, et al. [2004]). While estimates have sponsored and funded new ventures:

52 A Profile of Angel Investors Summer 2007

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Queen Isabella s funding of Christopher Columbus' ven- PROFILE OF ANGEL INVESTORS

ture in the 15th century is a familiar example (Benjamin

and Margulis [2001]). In the 13th century, the famous
traveler-merchant Marco Polo was also funded by angel
investors. In his day, typically the angels received 75% of
the profit; the entrepreneur 25% (Hirsich and Peters
[2002]). In the 19th and 20th centuries, industrial giants
General consensus paints angel investors as w
educated, middle-aged men with significant business e
rience and substantial net worth. The following sec
provide a thorough discussion of angel investor ch
teristics, summarized in Exhibit 3. While over 125 sou

including Henry Ford and Alexander Graham Bell were were examined, the primary angel investor studie
summarized in Exhibit 4.
funded by angels. Henry Ford's five angel investors expe-
rienced very good investment returns: in 1903 the five
invested a total of $41, 500; 15 years later their investment Demographics
was worth $145 million (Gaston [1989]).
Angel investors have noteworthy differences from The demographics of a "typical" business angel are:
the better known VCs. Hill and Power offer a short and male, around age 50, college educated, successful entre-
insightful comparison between angels and VCs: "Angels preneur, wealthy. This distillation from dozens of studies
invest their own money; VCs invest other people's money"is a useful working description and clearly describes the
majority of angel investors; however, the following pro-
(Hill and Power [2002], pp. 5). While there is a range of
angel types and VC characteristics, Exhibit 1 provides file
a provides additional detail and variation around this
useful, albeit stereotypical, abbreviated comparison. stereotype. Work by Gaston [1989], and various compi-
lations by Freear, Sohl, and Wetzel ([1990], [1992],
[1993], [1994]) provide the most extensive databases of
Angel Investing Statistics
angel investor demographics. While this foundation data
Unlike public stock offerings, private equity trans- was collected in the late 1980s and early 1990s, later
work such as studies by Van Osnabrugge and Robinson
actions (both by VCs and angels) are private affairs. Sev-
eral sources and studies have increased the base of [2000] and Hill and Power [2002] have confirmed that
knowledge for venture capital, the better-knownthe profile still holds. Likewise independent proprietary
private
equity market. The concentration of the VC industry by Benjamin and Margulis [2001] and Amis and
research
($18 billion invested in only 3,000 deals during Stevenson
2003) [2001] show the same characteristics found
makes data collection more possible, as compared by with
the earlier studies.
the large numbers of business angels, estimated to Age be Many studies have found the average age of
angel
400,000 or even larger. Van Osnabrugge and Robinson investors to be between 47-50 years old (Hill and
Power
[2000] estimate that angel investments total more than [2002]; Wetzel, and Freear [1994]; Freear, Sohol
and
five times the amount invested by VCs and that angels Wetzel [1991]; Van Osnabrugge and Robinson [2000];
fund 30 times as many firms. Gaston [1989]; Aram [1989]). A recent study of Finnish
investors
Angel investments are far more private too; in fact, is an outlier in that it found an average age of
only 40 (Maula, Autio and Arenius [2003]). Hill and
they are personal. Angel investments are not at all public
transactions. A given angel investment might only Powerbe[2002] found that 54% of angels were between
ages are
known by a handful of people. Since these transactions 46-55, whereas Gaston [1989] found just 31% in this
so private and are not publicized, statistical information is Gaston's ([1989] p. 18) distribution suggests:
bracket.
sparse and estimates must be derived from small samples
or extrapolated from related data. Furthermore, the data Under 35 years old 11%
35-44 33%
that has been collected is often proprietary, i.e., the facts
45-54 31%
and figures collected by consultants and vendors in order
55-64 19%
to serve the angel investor market. As such, estimates vary
Over 65 6%
widely; however, it appears that a reasonable summary
would be that 400,000 angels provide $50 billion in cap-
ital to over 50,000 companies each year - very large num-Gender Angel investo
bers for an almost invisible market (see Exhibit 2). studies peg their num

Summer 2007 The Journal of Private Equity 53

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Exhibit 1
Differences between Business Angels and Venture Capitalists

Funding Source

Number of deals per year One every two years

Typical investment per $25-

company

„ Small, start-up, early T

Company „ Stage stage T Larger
„ , » -»-i Usually near (within one Usually nationwide,
Geographic „ ť , » -»-i Focus . . J. ^ V i
ť

T t
T Industry t

„ fA «
oiOther angels, friends,
fA cicâls Proposals
ļ • . . .ļ * T /-N submitted,

Individual, experienced r „ r , , „ .
_ . . w . ^ r , Professional, „ r , ' , MBAs, „ .
Decision _ . . w Maker . entrepreneur, ^ personal, , ' ',
.. committees, 40-year-olds

* i • /-p- ' Minimal, informal, ' Extensive, formal,

Analysis/Due * i J • /-p- ' Diligence . , ' , ¿ ' *
J

Investment Struct
Involvement

t a- a rr- iTT • Longer, ° five or more Shorter, three to five

t Investment a- a rr- Time/Horizon iTT • °

„ . „T ^ Less important, ' long-term Important, ť IPO or Sell

„ Exit/Harvest . „T ^ Strategy .

n , j 20-30% but often don't

e on nves en have predetermined ROI Expect 30-50%
Expectations ^

Source
Nation

Freea
millionaires." Gaston [1989] found the following distri-
[1989]).
Net Worth Most studies have found that angel
investors are wealthy, enjoying a net worth exceeding $1
million. This meets the criteria for accredited or sophis-
ticated investors used by the United States Securities and
Exchange Commission. This demographic is often
assumed rather than tested; many researchers define their
sample using the SEC $1 million definition. Benjamin
and Margulis [2001] found most to be "self-made
bution of angel investor net worth: 39% of angel investors
had a net worth of under $500,000; 24% were between
$500,000-$l million; 37% were over $1 million. (Note:
these are nominal 1989 dollars.)
Business Background /Entrepreneur ship Experience
The most noteworthy, but not surprising, finding
regarding business background is that most angel investors,
some 70%- 85%, are entrepreneurs themselves (Sullivan
[1991]; Gaston [1989]; Van Osnabrugge and Robinson

54 A Profile of Angel Investors Summer 2007

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Exhibit 2
Estimates of Angel Investment Market Size

Estimate Source

Number of Angels Investing Each Year

220,000

Note: pool of pot

above $1 million
[2000], and Hill

Number of Deals per Year

50,000

50,000

Amount of Investment per Year

$100 billion

$40 billion

$ 1 8 billion in 2003 Sohl [20041

[2000]; Aram [1989]).

angels who Ho
w
preneurship in risk
side common
in s
Sullivan [1991] found
Educationtha
Se
accounts investors
for more (6
tha
neering (28%-
(17%) and42%)
healta
quently andfields
noted Robins of
lawyers and[1989];
doctorsAram
are
Some researchers have
centage of angels
Deal Characteristics are the
whether it is their diffe
ceived Investment Size Van
superior Osnabrugge and Robinson
ability t
Autio, and[2000] cite over 10 studies showing that the
Arenius [200average

Summer 2007 The Journal of Private Equity 55

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Exhibit 3
Summary of Angel Investor Characteristics

Demographics:

Age

Gender

Education

Net Worth

Business Backgrou

Deal Characteristics:

Investment Size

Frequency

Geography

Industry Eclectic; prefer in

Compa

Investment Process:

Sourcing

Co-Investing

Due Diligence

Contract Structure 80% of deals have simple common stock structure

Role/Involvement Hands on; meet or talk with entrepre

Motivations

ROI Expectations

Holding Period

Investment Criteria Focus on quality of the entrepreneur

Non-financials Thrill/fun of helping start

Sources: Primary sources are Gas

and Benjamin & Margulis [2001].

investment distribution
ranges from $5
data from $100-250,000
angel matching a
$75,000. Additional studies
• Investment
ment in the same $50-75
• $25-99,000
[2002]; Aram [1989]; Gast
• $100-250,00
[2000]; Freear, Sohl, and W
• Over $250,
find that a typical angel inve
portfolio for Gaston
new [1989]
venture fu
Benjamin and Margulis
lars) with [20
the f

56 A Profile of Angel Investors Summer 2007

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Exhibit 4
Primary Sources of Ángel Investor Characteristics

Authors

Maula,
A .Aullo
2003 & 2003 ,6007
j adults
Arenius A . Finland , j .
in Exceli», international
international th^ry-testing
data; data; extensive up-to-date
extensive i^ch up-to-date using

Hill & Power

R „ Proprietary, only partial data published;

enjamin
Margulis
200 1 n/a °
would
. ,
not provide full tabulation wh
°

Amis
Stevenson

yan Mostly literature

^ t 0 review, primary Comprehensive review of literature, little or
Osnabrugge ^ t & 0 2000 , . '21 A i - a *
Robinson , . 0n ™êel A i no primary - data a *
0 0 Insightful work segmenting angels into three
0 Sullivan & 0 irkfwr ~1/f - 4. ^ t Za - *•
irkfwr 1996 214 ~1/f investor - 4. ^ types (economic, t hed
MlUer

ndlllvo
Duxbury (X ly7U / a ' t

Riding

Freear, Sohl 1994 & , 0 . „ , with ... t

and Wetzel 1992 , 0 8 . Compares „ angels , with ... non-angels t
Seven year longitudinal survey of members of
F ~ . an investor matching network (1985-1992).
F anTwetzel ^ 993 409 Found demographic data consistent with ot
studies. Found investor behavior relatively

Found
Sullivan 1 99 1 210 perceive less downside risk in start-ups than

Interesti
Sullivan &
Miller wealth-maximization objective) hold for

W
Ex
Gaston 1989 435 characteristics including breakouts by angel

Con
Wetzel 1983 n/a investors; the stream of angel investor

Summer 2007 The Journal of Private Equity 57

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 • Investment under $35,000 (21%)
• $35-85,000 (22%)
• $85-175,000 (21%)
• $175-350,000 (14%)
• $350-875,000 (15%)
• Over $875,000 (8%)
Frequency Most angels have about three deals in
their portfolio and do a deal about every 18-24 months.
The findings on deal frequency vary slightly:
• Freear and Wetzel [1991]: one deal every two years
• Gaston [1989]: one deal every 18 months (3.5 deals
in portfolio)
• Freear ; Sohol, and Wetzel [1992]: almost one deal per
year
• Sullivan [1991]: one deal every two years
While space prohibits a detailed review, it is worth
noting that an interesting stream of research exists on
repeat angels. See the works in the bibliography by
Wright, Westhead, Rosa, and Van Osnabrugge. Van
Osnabrugge [1998] found that 35% of angels are one-
time investors whereas 65% are repeat angels. Repeat
angels account for the majority of angel investments.
Geography Most angels invest close to home.
Findings include:
• Riding and Short [1987]: 85% of investments within
50 miles of home or office (even though 36% said
they have no geographic limitations)
• Benjamin and Margulis [2001]: 65% prefer invest-
ments close to home (within 300 miles)
• Aram [1989]: 86% of investments are within 150
miles of home (76% within 50 miles)
• Freear ; Sohol , and Wetzel [1992]: 66% of investments
are within 300 miles
• Freear, Sohol, and Wetzel [1994]: 52% prefer invest-
ments close to home; 24% have no geographic
limitation
Researchers have offered two primary explanations
for this phenomenon:
1 . Sourcing: Since angels source deals through business
contacts, given that business contacts are most often
geographic in nature, it is reasonable that angels
mostly discover deals in their own geographic area
(Hill and Power [2002]).
58 A Profile of Angel
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2. Monitoring : Given the non-public nature of start-up
companies and the substantial information asym-
metry between the investor and the entrepreneur,
many angel investors actively monitor their invest-
ments (Hill and Power [2002]). This active moni-
toring is easier to accomplish for geographically
proximate firms. See Lerner [1998] for a discussion
of this monitoring issue; his article puts this con-
cept in the context of the classic moral hazard and
agency problem theories.
Gaston [1989] makes an interesting point about
geography: angels live everywhere, not just in large cities.
Angel investing is not just a Silicon Valley or urban
metropolis phenomenon.
Industry Angels invest in a wide variety of industries
(Van Osnabrugge and Robinson [2000]). Gaston [1989]
found that 68% of angels had invested in a manufacturing
venture but at least 20% had invested in areas such as retail,
financial services, construction and service businesses.
However, angels prefer to invest in industries where they
have some experience (Wetzel [1983]; Freear, Sohl, and
Wetzel [1995]; Aram [1989]; Van Osnabrugge and
Robinson [2000]). Hill and Power [2002] provide a suc-
cinct summary: "I invest in what I know." A conflicting
finding by Benjamin and Margulis [2001] was that 59%
of angels invest in industries in which they have no direct
experience.
Stage Most angels invest in start-up and early stage
companies. In fact, 50%-75% invest in companies during
their first year or two of formation and/ or operation
(Freear, Sohl, and Wetzel [1996]; Freear and Wetzel [1989];
Aram [1989]; Sohl [2004]). This finding is in marked con-
trast to formal venture capital funds that invest primarily
in companies with operating histories of three to five years.
Investment Process
Sourcing/ Co-investing Angels typically find deals
through business associates and tend to invest with others
rather than alone. Because the data show the two are inter-
twined, this section combines these seemingly distinct
characteristics, that is, how do angels find opportunities
and do they prefer to co-invest with other angels or act
alone? Angels source most deals from business associates,
especially those who are also investing in the deal.
Prior studies have clearly shown that angels find
deals through personal contacts, friends and business
Investors Summer 2007
associates being the most prevalent source in the range
of 57%- 80% (Van Osnabrugge and Robinson [2000];
Benjamin and Margulis [2001]; Freear, Sohl, and Wetzel
[1990]). Consistent with the view that this market is very
private and inefficient compared to public capital mar-
kets, deals are rarely identified through intermediaries
such as attorneys, accountants and bankers, let alone
through some more formal market clearing house (Freear,
Sohol, and Wetzel [1990]). In addition to the typical per-
sonal networking method of sourcing deals, an increasing
number of angel investors subscribe to matching services
that allow entrepreneurs to post their business opportu-
nities to be seen by angel investors who subscribe to the
matching service, which functions in a quasi-market-
place role.
The number of deals actually consummated by ven-
ture capitalists is very small (under 1%) compared to the
number of deals they see, and even a small percentage of
those for which they do full due diligence. For angel
investors the numbers are less clear, but it appears that
they do a higher percentage of deals than venture capi-
talists (study results range from 4%-22%) (Sohl [2004];
Linde and Prasad [2000]; Gaston [1989]). A higher yield
rate could be viewed as consistent with an angel s method
of sourcing deals: most come via personal recommenda-
tion from the angel's business associates.
Deal Selection Factors The factors considered by
angel investors in accepting or rejecting deals is an impor-
tant part of the investment process and treated separately
in the next section.

Angels are approached by the entrepreneur and by Contract /Structure Unlike the more sophisticated
other investors in the firm. The role of the entrepreneur deal terms and complex securities used by venture capi-
is paramount: Maula, Autio, and Arenius [2003] found talists, angels mostly make simple common stock invest-
that angels who are familiar with entrepreneurs (any entre- ments (Van Osnabrugge [1998]; Hill and Power [2002];
preneur) are four times more likely to invest than those Gaston [1989]). However, recent studies show increased
who do not have entrepreneur acquaintances. However, use of convertible preferred stock (Benjamin and Mar-
angel investing is rarely a dyad between the entrepreneur gulis [2001]; Linde and Prasad [2000]). Perhaps as venture
and investor. Most deals have multiple angel investors, capital investing became more widely known, angel
and studies suggest that there are typically two or three investors and entrepreneurs have adopted some venture
angels in each deal, most (61% - 95%) preferring to invest capital tactics.
alongside others (Gaston [1989]; Van Osnabrugge and Role /Involvement One of the most noteworthy
Robinson [2000]; Van Osnabrugge [1998]; Freear, Sohol, characteristics of angel investors is their active involve-
and Wetzel [1994]). ment in the firm. The majority of angels play a hands-
It is also noteworthy that many deals have a lead on role; various studies have shown 66%- 85% with active
investor. Freear, Sohl, and Wetzel ([1990] pp. 228) found roles (Van Osnabrugge and Robinson [2000]; Freear, Sohl,
that 57% of deals have a lead investor who is "not always and Wetzel [1992]; Freear, Sohl, and Wetzel [1995]).
the first investor, but usually the most aggressive and pro- Like venture capitalists, angels often (50%-60%) sit
vides others with a sense of security." These lead investors on the firm's board of directors. Some studies, however,
often help recruit other investors and help facilitate or have reported board member occurrence as low as 15%
coalesce the investment team. and as high as 70% (Van Osnabrugge and Robinson
Diligence Process While angel investors are very [2000]; Freear, Sohl, and Wetzel [1992]; Freear, Sohl, and
careful with their money, their due diligence process is dif- Wetzel [1990]; Gaston [1989]).
ferent from that of professional venture capitalists: it is less In fact, the distinction between entrepreneur and
analytical, less extensive, and more personal. Van investor is often rather blurry. As Cullen explains, "They're
Osnabrugge and Robinson ([2000] pp. 162) quote one called angel investors, a cross between venture capitalists
angel to make this point: "Its about 70% just gut feeling and entrepreneurs who like to roll up their sleeves and roll
and 30% financial analysis." the dice. These are individuals who are putting their money
Angels primarily assess the entrepreneur, not the and their varied talents to work in private companies."
business plan; and building trust between the entrepreneur (Cullen [1998] pp. 1). Often an angel investor, especially
and the potential angel is primary (Harrison, Dibben, and a lead angel, becomes a co-founder, and very often an angel
Mason [1997]). An often-heard angel investing maxim is functions as a full or part-time employee. Several studies
"Better to invest in an A player with a B idea, than a B show 20%-40% of angels have some employee relation-
player with an A idea." ship (Van Osnabrugge and Robinson [2000]), specifically:

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 • 25% work full or part-time (Benjamin and Margulis • 34% (HÜ1 and Power [2002])
[2001]) • 30% (Benjamin and Margulis [2001])
• 18% work part-time, 15% full-time (Freear, Sohl, • 32% (Freear, Sohol, and Wetzel [1995])
and Wetzel [1992]) • 32% (Linde and Prasad [2000])
• 20% work filli or part-time (Freear, Sohl, and Wetzel • 28% (Sullivan and Miller [1990])
[1990]) • 25% (Gaston [1989])
• 40% work full or part-time (22% part-time, 17% • 33% for repeat angels (Van Osnabrugge [1998])
full time) (Gaston [1989])
Holding Period Studies find that angel investors hold
Some studies have quantified the amount of involve- their investments for about five years:
ment. Linde and Prasad [2000] found that angels spend
one to two days per month helping the company, In his • 4.8 years (Freear, Sohl, and Wetzel [1995])
study of 141 angels, Van Osnabrugge [1998] found angels • 4 years (Linde and Prasad [2000])
averaged approximately eight phone conversations and • 5-6 years (Van Osnabrugge [1998])
over three personal visits per month with the invested • 5-7 years (Hoontrakul [2001])
firms. • 5.1 years (Gaston [1989])
Several rationales for this high involvement have • 8 years (Benjamin and Margulis [2001])
been offered and some have been tested. First, this involve-
ment is consistent with non-financial motivations dis- Investment Criteria Several researchers have exam-
cussed below, such as the enjoyment of helping start ained the criteria angel investors use to evaluate potential
new firm and mentoring entrepreneurs. Leonard and investments (not to be confused with their motivation for
Swap [2000] refer to angels as "mentor capitalists." A angel investing). Van Osnabrugge and Robinson [2000]
second reason is that many angels have very high needsfind that four of the top five investment criteria relate to
for achievement and dominance; angels need to feel thatthe entrepreneur: 1) enthusiasm of the entrepreneur, 2)
they can influence the way their money is being used trustworthiness of the entrepreneur, 3) sale potential of the
(Duxbury, Haines, and Riding [1996]). Third, active entrepreneur s product, and 4) expertise of the entrepre-
involvement is a tactic to mitigate the opaque nature ofneur. Hill and Power [2002] find the top three factors to
private firms and reduce the information asymmetry be quality management, growth potential and barriers to
between the investor and the manager/entrepreneur (Hill entry. It is noteworthy that both studies find that ROI is
and Power [2002]). not the top criterion.
Non-financial motivations Perhaps the most distin-
Motivations guishing characteristic of angel investors, compared to
venture capitalists and the general investor, is the signifi-
ROI expectations Return on investment is gener- cance of non-financial motivations. Clearly, angel investors
ally considered the primary, if not sole, motivation value
for these non-financial benefits of new venture investing
investors. The idea of utility in economic theory, would
more than VCs and general investors do.
define return to include non-financial benefits (Fama and One perspective is that, like works of fine art, dia-
Miller [1972]). While financial profit is still the largest
monds and home ownership, there is a "consumption"
motivation for investors, including angel investors, non-
benefit to the investment. Investors benefit from enjoying
financial benefits are important to angel investors and the
are beauty of the art, wearing the jewelry and living in
discussed below. the house in addition to the financial appreciation they
Studies show that angel investors expect returns hope to gain from the investment.
around 30%, compared to an average return for the S&P In Van Osnabrugge and Robinson ([2000] pp. 117),
500 of 12%. However it is noteworthy that Vanan angel investor encapsulates the importance of non-
Osnabrugge [2000] found that only 30% of angels claimedfinancial benefits better than the statistics cited below:
to have calculated an expected rate of return and that "I'm not in it for a fast buck. Besides, it's cheaper and
many were unable to provide return estimates. Averagemore fun than buying a yacht. I enjoy investing in
expected returns from various studies follow: companies and getting involved; it's a real buzz." This

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sentiment is supported by Sullivan [1991], who finds that • Socially beneficial product (83%)
for one-third of angel investors, return on investment is • Fun to be a part of the company (66%)
not their primary motivation; rather, primary motiva- • Creation of local jobs (65%)
tions include the fun of an interesting investment • Firm nearby vs. 300 miles away (63%)
and the enjoyment of an active role in starting the • Interacting with highly regarded investors (61%)
company. • Company committed to social ideals you support
A broader perspective is that angel investors value (59%)
benefits of investing in new ventures that stretch beyond • Exciting investment (47%)
the direct financial return on investment. While uncov-
ering and measuring these benefits presents challenges to Sullivan and Miller [1996] also conducted very
a scholar, several studies cited below provide interesting interesting research segmenting angels into three types
insights into this important dimension of angel investing, or clusters: economic (maximize wealth), hedonistic
with the most comprehensive and interesting work offered (non-economic or psychic income), and altruistic (help
by Sullivan and Miller. entrepreneur and/or society).
Freear, Sohl, and Wetzel [1995] find that 50% of
angels accept lower returns because part of their return is • Economic Investor: (47% of total)
psychic income , such as the creation of jobs in the commu- • Only financial motivations are important
nity or the satisfaction of helping another entrepreneur • Highest ROI expectations (30% versus 21% for
succeed. In addition to the rate of return, Hill and Power hedonistic)
([2002], pp. 33-40) illuminate two other motivations. First, • Perceives more risk than other clusters (2- 3x)
the thrill of helping a company start and succeed (citing • Largest average investment
such investor comments as "I enjoy helping ... I try to be
useful in both funding and advising," and "the psychic • Hedonistic Investor: (31% of total)
rewards are huge... like a board game"). The second moti- • Emphasis on enjoyment aspects of investing
vation is psychic compensation. This is illustrated by (enjoys entrepreneurial process, enjoys fun of
investor comments including "[The investment is] more interesting investment)
of a trophy to put on a shelf than a way of increasing per- • Lowest ROI expectations (21% versus 30%
sonal wealth," and "I like being able to tell friends that I economic)
am part of the 'club' that is making investments." • More likely to invest with a group
Linde and Prasad ([2000], pp. 81) observed that • Slightly older than other clusters
"[t]hese angels invest in early stage companies because
they love the excitement of new venture start-ups. The • Altruistic Investor: (22% of total)
insights, skills and funds they bring to emerging ventures • See value in supporting new business and/or
are invaluable resources." Linde and Prasad [2000] also socially beneficial product
found the following occurrence of non-financial reasons: • More patient investors (longest holding period -
desire to "give back" (60%); enjoy involvement (56%); seven years)
networking (28%); other (44%); stay up-to-date (24%); and • Average investment smaller
challenge (24%).
As noted above, Sullivan and Miller have conducted It is important to note that for all three clusters, eco-
excellent research on the non-financial motivations of nomic benefits remain the highest factor, and all three
angel investors. Their first study in 1990 used various segments average about 2.5 investments. However, it is
interesting that the economic investor cluster comprises
investment scenarios to determine whether angel investors
would give up some portion of a guaranteed 20% finan-
less than half (47%) of all angels.
cial return in order to invest in a situation identical in all

except its non-financial aspects. Their findings were illu- Angel Investor Classification Schemas
minating: a large percentage of angel investors were willing
to accept a lower return in exchange for non-financial In addition to the segments noted by Sullivan above,
benefits (Sullivan and Miller [1990]): several other researchers have found clusters of angel

Summer 2007 The Journal of Private Equity 61

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investors sharing similar characteristics among these same
variables. Following are brief descriptions of a few of these
classification schémas.
Gaston [1989] (the most comprehensive description
including frequency is indicated in parentheses):
• Business Devils (27%): wants/obtains absolute con-
trol, 51% or more
• The Godfather (5%): semi-retired, mentor, wealthier
• Family: angels from same family pooling funds; one
family member leads
• Barter: active, hands-on; invest cash and services in
exchange for more equity
• Socially Responsible: invest in ventures that address
social problems
• Unaccredited: less wealthy, less experienced
• Managers: former entrepreneurs or executives; want
to be active

• Peers (33%): fellow successful entrepreneurs

• Cousin Randy (10%): relatives who invest
• Dr. Kildare (9%): doctors, lawyers, accountants
• Corporate Achievers (13%): successful executives
from large corporations
• Daddy Warbucks (33%): wealthiest, providing 68%
of total angel funding
• High-Tech Angels (13%): invest only in high-tech
• The Stockholder (1 1%) : less active/involved investors
• Very Hungry Angels (15%): want to invest more and invaluable assistance (70%- 80% are hands
than entrepreneur wants young firms in their community (70%- 80% wit
Hill and Power [2002]:
• Lead Dogs (bring other angels to the deal)
• Guardian Angels (advocates/mentors)
• Silver Spoons (second generation money)
• Dark Angels (want to take over)
• Arch Angels (angels that have done a lot of deals)
• Cherubs (neophyte angels, usually follow other peter [1934] was right: the economy does seem to
angels)
• Will-work-for-equity Angels (barter services for a
share of ownership)
• Corporation Angels (companies that invest in start-
ups, often as a R&D strategy)
• Fallen Angels (reputation as a high-flyer with serious
liquidity or loss of wealth problems)
• Angel-Knows-Best (angels that become overbearing)
Benjamin and Margulis [1986] describe nine types
of angels:
• Value Added: very experienced angel, active
• Deep Pocket: successful entrepreneurs who have
sold their firms
• Consortium: loose group of three to six angels
working together
• Partner: high desire for control; may want to take
over someday
CONCLUSION
The literature on angel investors is modest and r
compared to its scholarly ancestors in entrepren
and economics. However, over 25 years a full an
sistent picture has emerged: angel investors are m
(80%) successful entrepreneurs who provide valuab
ital (averaging about two to three deals of $75,00
miles of home). They are not in it just for the fi
returns; they enjoy the fun and challenge of the ne
ture process and like helping.
The group is interesting and important: angel in
ment is a very large and important source of cap
start-up firms and, by implication, an important forc
economy given the known statistic that small firms
erate almost all job growth. The data implies that Sc
on entrepreneurs, and entrepreneurs depend on ang
This article synthesizes into a knowledge base
we know about angel investors and, as such, pro
foundation for additional/deeper research on ang
as the author s forthcoming study on the angel inv
who found new banks.
For this researcher, walking in the land of angel
investors has been an exhilarating journey. Angel investors
are fascinating people who drive most of the job creation
in the United States, yet they are invisible. If nothing else,
perhaps readers of this study have also enjoyed the journey
and better understand this hidden and powerful economic
force.
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