Private Investors (Angels)

In recent decades, the community of private investors (angels) has developed to massive dimensions. Angels are private investors who invest some of their money in the financing of ventures with the hope of gaining a high return due to the large risk involved in the investment. The angels community is obviously diverse. Some angels have extensive experience in the area of entrepreneurship; others are entirely financial investors who have no understanding of the industry and whose money is usually invested by experts in the respective fields of the venture.

In the field of technology, private investors initially financed almost every successful company. Various research has found that more than one half of successful startups relied on financing from angels in their early stages. In addition, companies that reached IPOs without financing from venture capital funds, while relying mainly on angels, usually did so in earlier stages and after securing smaller investment rounds. These companies were generally from industries that do not involve extensive R&D efforts. In the United States, angels have a particularly large share in financing early-stage companies outside California and New England. This phenomenon is explained by the relative shortage of venture capital financing in these areas.

Various research estimates the amounts of venture capital invested by angels in early-stage ventures to be in the range of $15 $30 billion per year which is invested by over 250,000 private investors.

These and other sources have recorded a substantial increase in these investments in the late 1990s and 2000, but this trend decelerated due to the crisis in the capital markets.

Private investors also constitute a considerable portion of investors in venture capital funds. Many funds allow parallel investments by certain private investors who are able either to invest large amounts of money, or can bring "added value" and a cooperative alliance, which the fund and its portfolio companies may find attractive.

Angels usually invest in less than four ventures per year and generally invest less than $1 million annually. It was found that, in most cases, angels preferred to invest in companies located in geographic proximity to them even if they were not acquainted with the entrepreneurs. Angels usually prefer to see a considerable investment by the entrepreneurs in the company, or, in other words, companies in which some of the entrepreneur's wealth has been invested. As opposed to venture capital funds, angels do not generally require strict supervision and monitoring mechanisms, but like VC funds, they assist entrepreneurs in building contacts in the industry, recruiting manpower, and planning investments.

In recent decades, the phenomenon of investment clubs that examine investments in startups together and invest in selected companies has become increasingly prevalent. In addition, many web-based virtual angel networks have emerged in recent years. These networks are sometimes founded on an acquaintance or a certain link between the angels and the potential entrepreneurs. For instance, several virtual clubs have recently been established which enable alumni of a certain university to become acquainted with companies seeking financing, the entrepreneurs of whom are also alumni of the same university. Successful angel networks provide their members with investment screening services as well as support services for the entrepreneurs. Some angel networks combine elements of incubators, leveraging the entrepreneurial capabilities of the participating angels.

As for control mechanisms, venture capital funds usually have broader representation on boards of directors than angels and are generally more involved in the daily management of the companies. Since in most cases the investment in companies neither occupies a central place on the angels' agenda nor involves large portions of the angels' wealth, angels do not usually have high expectations with respect to their involvement in the company. However, in the case of angels who are investing in companies in a field in which they are experienced, their investment could be invaluable to the company, both from the point of view of the managerial experience which the investor can impart to the company, and from the points of views of connections and reputation which the company could benefit from.

From Concept to Wall Street(c) A Complete Guide to Entrepreneurship and Venture Capital
From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital
ISBN: 0130348031
EAN: 2147483647
Year: 2005
Pages: 131

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