FAQ for Wannabe Angel Investors (USA)
These represent my reflections only and are in no way a criticism or endorsement of any community or school of thought
· Who are Angel Investors AKA Business Angel, Informal Angel?: Generally wealthy professionals such as doctors or lawyers, former business associates -- or better yet, seasoned entrepreneurs interested in helping out the next generation.
· Are Angel Investors millionaires? - Contrary to popular belief, most angels are not millionaires. Typically, they earn between $60,000 and $100,000 a year.
o Years Investing – 9
o Number of Investments – 10
o Total Exits/closures – 2
o Years as an Entrepreneur – 14.5
o Number ventures founded – 2.7
o Age – 57
o Percent of Wealth in Angel Investing – 10%
o Education - Master’s degree
· What motivates an Angel? - Unlike VCs, angels are not motivated purely by profit. Many are passionate about helping entrepreneurs esp if they have been one themselves. Some are in for the thrill, some to overcome boredom and some who believe in a cause but the bottom-line is that they have the money and willing to invest. As an entrepreneur it is absolutely important to understand what motivates the Angel and vice versa
· How do I as an individual qualify to become an Angel?
The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
· a bank, insurance company, registered investment company, business development company, or small business investment company;
· an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
· a charitable organization, corporation, or partnership with assets exceeding $5 million;
· a director, executive officer, or general partner of the company selling the securities;
· a business in which all the equity owners are accredited investors;
· a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
· a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
· a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.
o http://www.sec.gov/answers/accred.htm
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· How can I become a certified accredited investor?
SEC has laid down reasonable guidelines but this is neither a legal interpretation nor a policy. However, Investors should expect that you verify you are an accredited investor.
Sec has adopted “Safe Harbour” to provide some certainty that issues are complying with reasonable steps. Read more here - SEC.
Third party angel groups, wealth management companies can securely and anonymously certify you
o EarlyIQ
· Mentoring for Angel Investors
· Reports for Angel Investors
· What Stage do Angels invest in?
1. 34% Seed Stage
2. 39% Startup
3. 18% Early Growth
· Industries they invest in
o 19% Software
o 18% Health/Biotech
o 16% Business Products & Services
o 15% Consumer Products & Services
o 12% Hardware
o 12% Other
o 7% Media/Entertainment
45% of the companies that received financing from angels had no revenues when they received the angel investment.
· Returns for Angel Investors –
Returns to Angel Investors in Groups – Robert Wiltbank, Warren Boeker (Our findings in this study are based on the largest data set of accredited angel investors collected to date, with information on exits from 539 angels. These investors have experienced 1,137 “exits” (acquisitions or Initial Public Offerings that provided positive returns, or firm closures that led to negative returns)
Note: Study has severe survivor bias and self-selection bias. Actual results should be less favorable.
o The average return of angel investments in this study is 2.6 times the investment in 3.5 years approximately 27 percent Internal Rate of Return (IRR). This average return compares favorably with the IRRs of other types of private equity investment. (In the UK it is 2.2 times the invested capital.
o Three factors that appear to impact these angel investors’ outcomes
1. Due diligence time: More hours of due diligence positively relates to greater returns.
2. Experience: An angel investor’s expertise in the industry of the venture in which they invest also is related to greater returns.
3. Participation: Angel investors that interacted with their portfolio companies at least a couple of times per month by mentoring, coaching, providing leads, and/or monitoring performance experienced greater returns.
4. One factor—angel or venture capital investors making follow-on investments in their portfolio companies—is related to lower performance, although additional research may be needed to better understand these results and the factor that affect them.
o The most likely outcome in any one angel investment is failure, but ‘winning’ investments are very attractive.
· Read more: Interesting Articles
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