The term “angel investor” is used to describe a wide variety of investors in early stage companies. From the reality-show world of Shark Tank where entrepreneurs are grilled in front of a prime-time audience to established professional networks of angel investors including Tech Coast Angels, New York Angels, Golden Seeds and others, it is clear that there is more than one type of angel.
The origin of the term “Angel Investor” can be traced back to Broadway, when wealthy patrons invested their own money to launch Broadway shows. Today’s angel investors are typically high net worth individuals who invest either solo or as part of an angel group to provide both investment capital and guidance to early stage companies.
Angel Investing Involves….
- A high degree of risk:
- A need for portfolio diversification:
- Patient capital:
- More than just the money:
Risk: Investing in early stage companies involves a high degree of risk. The statistics are quite sobering and data on angel investor performance conducted by the Social Service Research Foundation indicates that historically 30-40% of the early stage company investments resulted in a full or partial loss. Most angels are Accredited Investors” as defined by the SEC who must meet certain net worth and income requirements. Given the stage of these companies, there is certainly more “art” than “science” in making an investment decision.
Diversification: With the risk profile of these early stage investments, it is important to have a portfolio of investments to increase the probability that there will be some “winners” as well as “losers” in your portfolio. Each angel investor needs to determine how much capital they are prepared to invest in this sector and whether they can construct a portfolio of individual investments or should consider investing in a fund to provide that diversification.
Patient Capital: Early stage investments are highly illiquid. You should be prepared to be investor for several years and also to be willing and able to participate in subsequent rounds of financing for your portfolio companies.
More than the Money: For many angel investors, the opportunity to get involved in exciting new ventures and mentor entrepreneurs is an important ingredient in the desire to act as an angel.
Angel Investing can be rewarding both financially and due to the real impact you can have on early stage companies. Before you get measured for your wings, make sure you understand your personal risk tolerance, your ability to make a sufficient capital investment to this sector to provide diversification and your willingness to truly invest for the long term.