Business Investment or Divine Intervention: Understanding Angel Investors

    September 20, 2002

You’ve already gone to friends and family for help. You know your company doesn’t qualify for a bank loan. And it’s too early for venture capital. So what’s an entrepreneur to do? Start looking for an angel investor. Angel investors — private individuals who invest their own money in companies — fund more companies at an earlier stage with more dollars than any other kind of capital.

But just who is an angel investor?

A recent survey was launched to find out. Fifty angel investors from San Diego to Silicon Valley – from Phoenix to Chicago – from New York City to Memphis participated in a survey conducted by Dee Power and Brian Hill, authors of “Attracting Capital From Angels’ and “Inside Secrets to Venture Capital.” Here are some of the survey results.

What are the average characteristics of an angel investor? * 49 years old with a postgraduate college degree * Invests an average of $72,000 in each investment * Has more than 5 years experience investing in private companies

Let’s break this survey information down even further –

Age of Investors:

* 29% were younger than 45 years old

* 17% were 56 years or older

*The youngest angel was 25

* No angel “admitted” to being older than 75

Investment Experience: * 78% of the angels had more than five years of experience investing in private companies * 11% had less than 1 year experience * 11% had from 3 to 4 year’s experience

Investment Qualifications: * 90% of the angels were accredited — defined by the Securities and Exchange Commission as an individual with an income of at least $200,000 per year or with a net worth that exceeds $1 million, not including the value of the residence.

Investment Expectations: Angels invest for a number of reasons, and one of those reasons is obviously to get a handsome return on their money.

* On average, angels expect a 34% annual return on their investment

How Do Angels Value A Transaction?

Angel investors were asked to rate a number of factors from most important to least important when they value a company prior to investing. Their rating was then compared to how venture capitalists and entrepreneurs rated the factors. The more points a factor received the more important it’s rated.

Factors Angels Entrepreneurs Venture Capitalist Pts / Rank Pts / Rank Pts / Rank

Quality of management 7.1 1 5.5 1 5.4 1

Growth potential 4.7 2 5.4 2 4.2 4

Barriers to competitive entry 4.2 5 5.4 2 4.1 7

ROI 3.9 7 5.3 4 4.2 4

Competition 4.0 6 5.3 4 4.2 4

Proprietary (unique)product 4.4 3 5.1 6 4.4 3

Size of market 4.3 4 5.1 6 4.6 2

Stage of development of the company 3.7 9 5.1 6 3.8 8

Industry the company is in 3.8 8 4.9 9 3.6 9

In real estate it’s location, location, location — but with investors it’s all management.

Quality of management was the number one factor for angels, entrepreneurs and venture capitalists. It’s most important with angel investors, and that makes sense given most angels invest at a very early stage. Venture capitalists believe that a top quality management team is a must as well.

Entrepreneurs? Well there is little variation from the most important factor to the least important, only six-tenths of one point. For comparison purposes angels have a 3.3 variation in their rating points. Why do entrepreneurs have such a close clustering of the factors? It may be that entrepreneurs aren’t really sure what’s important. With each of the factors, a significant number of entrepreneurs said it was most important, and a significant number said it was the least.

What Does This Mean For The Entrepreneur?

Make sure your investor presentation or business plan, clearly identifies your market, demonstrates the growth potential of your company and shows how your management team is qualified and capable.

Keep in mind, too, that angels are individuals. While we can compile statistics from surveys and interviews to get a composite angel, each angel is unique. You could be sitting next to your angel right now — and not even know it.

Dee Power is the co-author with Brian Hill of ?Attracting Capital
From Angels? and
?Inside Secrets To Venture Capital?
Available at, online booksellers and book stores