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Are You Cut Out to Be An Angel Investor?

Are You Cut Out to Be an Angel?

See if you fit this profile.

The average investment made by an angel investor in a startup venture is about $37,000. Angel investors expect an average 26 percent annual return at the time they invest. If they do more than a couple of angel deals, they believe that one-third of their angel investments will result in substantial capital losses. 

You don’t have to fit this profile like a glove in order to be a successful angel, but it helps to know who angel investors are before you decide to be one. Here are some more bits of the profile:

Nine out of 10 angels provide personal loans or loan guarantees to the firms in which they invest.

Angels who invest in the “seed stage” of a company (when its average value is around half a million dollars) will wait 72 months for their expected return on investment. Those who invest in the startup or early stage (when company value is $1.3 million to $2.5 million) will wait 60 months, on average, for their ROI. (See table below.)

Average Angel Investment Terms by Stage of Company

Seed

Startup

Early

Expansion

Average company value at time of investment ($million)

0.5

1.3

2.5

5

Average % of total equity purchased

20

20

20

15

Expected returns (%)

60

50

40

20

Time to exit (months)

72

60

60

44

Source: Robert T. Slee, Private Capital Markets, Wiley, 2011

Do Entrepreneurs Dig You?

Entrepreneurs prefer to do angel deals with investors who are themselves successful entrepreneurs, business owners in related fields or industries, self-employed professionals like lawyers and CPAs, and/or people with sales and marketing experience. Alternatively they seek an investor who, regardless of professional experience, believes in the entrepreneur’s vision passionately and wants to help make the dream come true.

They want investors who have the means to take risks and are unlikely to call in a loan or demand their money back.

They may want an investor who can offer good advice, strategic connections, or solution to a problem — but never one who is meddlesome.

Are you cut out to be that species of investor?

More Angel Characteristics

The “average” angel is 47 years old, with an annual income of $90,000 and a net worth of $750,000. He or she is college-educated, and has been self-employed at some point. (This aggregated profile may or may not be useful as a model for you specifically — if you’re not close to 47, for example, don’t be discouraged on that basis alone.)

Some venture capitalists do angel investing on the side, looking for early access to the most talented entrepreneurs or the coolest technology.

In reviewing potential targets, angel investors may review and reject many offers before making a selection. The most common reasons given for rejecting a deal are:

  • Insufficient growth potential
  • Overpriced equity
  • Insufficient management talent
  • Lack of information about the entrepreneur or key personnel

Angels rarely risk more than a few hundred thousand dollars in a venture. Angel groups, on the other hand, generally invest from $100,000 to $2 million per deal.

Certainly angel investors are a diverse lot, but the above data and facts give you a feel for who does angel deals and what they can expect for the risk they take on.

Sources:

  • Robert T. Slee, Private Capital Markets, 2nd Edition, Wiley & Sons, NJ, 2011
  • Center for Venture Research at the University of New Hampshire
  • Private Capital Markets Project, Graziadio School of Business and Management, Pepperdine University

The primary author of this article was David M. Freedman. Thanks to Rob Slee for permission to adapt material from his book, Private Capital Markets, Chapter 23. Slee is president of Robertson & Foley, a middle-market investment banking firm based in Charlotte, NC.

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About David M. Freedman

David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…

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