What the Devil is an Angel Investor?
An angel investor is not necessarily a heavenly creature in white framed by a glow of soft light handing out money to entrepreneurs in need. This week's Q&A focuses on the realities of the angel investor and what their role typically is in the money game.
Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Q: How do I become an angel investor? What's the typical minimum investment amount required?
A: An angel investor (also called a private or seed investor) is typically a wealthy individual or retired entrepreneur that has capital available to invest in a risky new business - a type of venture most investors aren’t willing to or probably shouldn’t back.
Individuals often participate in angel investing for reasons apart from pure monetary yield – reasons like the positive feedback of mentoring new entrepreneurs or perhaps simply keeping abreast of developments in particular business environments.
The angel investor usually does so in exchange for ownership equity or convertible debt. Convertible debt is typically a type of bond that an angel investor can convert into a specified number of shares of the new company or cash of equal value. Ownership equity is the ownership of company assets that too often comes burdened with debt or other liabilities attached.
Devil's in the Details
Becoming an angel investor depends in large part on an individual’s financial condition, contacts, and depth of experience in business. Angel investors typically fill the “seed funding” gap between family and friends' assistance and the more robust financing acquired through formal venture capital. There is no minimum investment amount for individual angel investors - investment amounts can range from a few thousand to a few million dollars depending on the financial strength of the individual angel donor.
Angels typically and solely invest their own funds,but some prefer investing in equity crowdfunding – the online offering of private company securities to a group of people for investment. Crowdfunding is often subject to securities and financial regulation, but it enables broad groups of investors with varying degrees of financial strength to fund startup companies in return for a small pieces of those businesses.
Occasionally, an angel investor is part of a founding group and might later actively engage in management of the start-up, but usually in a non-executive position. Why get bogged down in the daily minutiae of running a business?
With little question, start-up investments are generally extremely risky, and if success does come, are often diluted by future investment events; thus, they require a very high ROI. According to studies, typical angel investors give less than 10% of their portfolio to start-up endeavors. And because of the frequency of high front-end losses, most professional angels seek target returns of at least 10 or more times their original investment obtainable within five years through some previously defined exit strategy such as an IPO or an acquisition.
The stakes are high… as are the occasional rewards.