What do Yahoo, Google, Cisco, Amazon.com and Costco have in common? They were all funded by angel investors. An angel investor provides capital for a business startup in exchange for convertible debt or ownership equity. The Centre for Venture Research has estimated that there are more than 300,000 angel investors in the United States and 125 formal angel investor networks nationwide. In 2010 angels invested $20.1 billion in startups; up more than 14 percent from 2009.
Angels exist to fill the gap between friends-and-family funding and venture capital funding. Investments generally range from $20,000 to more than $1 million with an average in the $300,000 range. Some angels are members of angel groups or funds. This participation increases access to investment opportunities and allows for joint investment with other angels to hedge their risk. This also allows angels to investing companies without great financial commitments. The sectors in which angels most commonly invest: software/websites, medical devices, healthcare services, alternative/green energy and life science/biotechnology.
The appeal of being an angel is that you can receive a significant return on your investment in a relatively short period. If a company is successful, angels may expect to receive a seven to ten times return on their investment within five to seven years. However, angel investing is a high-risk/high-reward type of investment. Most startups will not succeed. Angels should not invest money they can’t live without. Angels often invest in companies in afield similar to which they have achieved success. They may act as advisors to companies and offer resources to help them succeed. For these reasons, angels often invest in companies in close proximity to them.
When investing in a company, angels invest in people just as much as they invest in the product or technology, so a strong management team is essential. Angels look for a market disruptor, game-changing technology or product that can obtain large market share quickly. Having a well-written business plan, qualified attorneys and CPAs, protected intellectual property and an exit strategy are all imperative for a startup to receive angel funding. Past entrepreneurial success also is looked at very favorably.
To encourage investment in early stage companies, the IRS is allowing investors who purchase stock in small businesses to exclude 100 percent of the gain on the sale of the stock if held for more than five years. This rare opportunity to receive tax-free income expires at the end of 2011.
Angel communities are budding throughout the United States. In several areas throughout the country, you can find angel groups or forums that meet regularly. Joining an angel group or meeting with a CPA or attorney who works with startups can be a good resource to match angels with companies. If you are a retired professional looking to stay active in your field or look to act as an advisor or mentor to young entrepreneurs, seek a high-return on your investment or perhaps just desire an alternative way to invest, then you may want to consider becoming an angel.
This is a guest post by Jason A. Brown, Chairman of the Angel Forum of Florida (www.aiffl.org).