An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A startup company or start-up is a Company with a limited operating history In Finance, a convertible bond (or convertible debenture is a type of bond that can be converted into shares of Stock in the issuing company In accounting terms after all liabilities are paid ownership equity is the remaining interest in Assets If valuations placed on assets do not exceed liabilities A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital. Investment or investing is a term with several closely-related meanings in Business management, Finance and Economics, related to saving
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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. Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies 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. In Common law legal systems a trust is an arrangement whereby Property (including real tangible and intangible is managed by one person (or persons or organizations
Angel capital fills the gap in start-up financing between "friends and family" (sometimes humorously called "friends, family, and fools") who provide seed funding, and venture capital. A seed round, sometimes known as a friends and family round or seed funding, is a Securities offering whereby one or more parties that have some connection 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$1–2 million. 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$25. 6 billion vs. $26. 1 billion in the US in 2006, into 51,000 companies vs. 3,522 companies[1], [2]). Of the 51,000 US companies that received angel funding in 2006, the average capital raised was about US$500,000. Healthcare services, and medical devices and equipment accounted for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software (18 percent) and biotech (18 percent). The remaining investments were approximately equally weighted across high-tech sectors.
Investment profile
Angel investments bear extremely high risk, and thus require a very high return on investment. Risk is a Concept that denotes the precise probability of specific eventualities In Finance, rate of return ( ROR) also known as return on investment ( ROI) rate of profit or sometimes just return, is 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. An exit strategy is a means of escaping one's current situation typically an unfavourable situation Initial public offering (IPO, also referred to simply as a "public offering" is when a company issues Common stock or shares to the public for the first 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. 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 might, in reality, be as 'low' as 20-30%. The internal rate of return (IRR is a Capital budgeting metric used by firms to decide whether they should make Investments It is an indicator of the efficiency 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. A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money
Profile of investor community
The term "angel" originally comes from England where it was used to describe wealthy individuals who provided money for theatrical productions. In 1978, William Wetzel, then a professor at the University of New Hampshire and founder of its Center for Venture Research, completed a pioneering study on how entrepreneurs raised seed capital in the USA, and he began using the term "angel" to describe the investors that supported them. University of New Hampshire ( UNH) is a public university in the University System of New Hampshire (USNH United States.
Angel investors are often retired entrepreneurs or executives, who may be interested in angel investing for reasons that go beyond pure monetary return. These include wanting to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs, and making use of their experience and networks on a less-than-full-time basis. Thus, in addition to funds, angel investors can often provide valuable management advice and important contacts.
According to the Center for Venture Research, there were 234,000 active angel investors in the U. S. in 2006. Beginning in the late 1980s, angels started to coalesce into informal groups with the goal of sharing deal flow and due diligence work, and pooling their funds to make larger investments. Deal flow, or dealflow is a term used by finance professionals such as venture capitalists, angel investors, Private equity investors and investment Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person or the performance of an act with a certain Standard Angel groups are generally local organizations made up of 10 to 150 accredited investors interested in early-stage investing. Accredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk Investments Limited partnerships In 1996 there were about 10 angel groups in the U. S. ; as of 2008 there are over 300, with a roughly equal number in all other countries combined; these groups accounted for approximately 10,000 individual angel investors in 2008. The more advanced of these groups have full time, professional staffs; associated investment funds; sophisticated web-based platforms for processing funding applications; and annual operating budgets of well over US$250,000. A recent development, particularly in North America, has been the emergence of networks of angel groups, through which companies that apply for funding to one group are then brought before other groups to raise additional capital.
See also
References
- ^ UNH Center for Venture Research http://wsbe.unh.edu/Centers_CVR/2006pressrelease.cfm
- ^ PWC MoneyTree http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical
- UNH Center for Venture Research
- Angel Capital Education Foundation
- Angel Capital Association (US/CA)
- European Business Angel Network (Europe)
- National Angel Organization (CA)
- British Business Angels Association (UK)
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