+ What is an angel investor?
An angel is a high net-worth individual who invests his or her own money in start-up companies in exchange for an equity share of the businesses. ACA recommends that entrepreneurs work with investors who are accredited investors (who meet requirements of the Securities and Exchange Commission) and who can add value to the company via high quality mentoring and advice. Other important things to know about angels include:
- Many angels are former entrepreneurs themselves.
- They make investments in order to gain a return on their money, to participate in the entrepreneurial process, and often to give back to their communities by catalyzing economic growth.
- Angels make a return on their investment when the entrepreneur successfully grows the business and exits it, generally through a sale or merger.
- The Center for Venture Research estimates that U.S. angel investors invested $24.6 billion in about 71,000 small businesses in 2015. Many of the investments were in start-up or very early-stage companies.
- Angels tend to invest in companies that are located near them regionally (or to co-invest in a wider geography if a local investor they know and trust is involved).
+ Is angel investing risky?
Yes. The only academic study of American angel investments found that angels lose some or all of their money in 52 percent of their investment deals because the companies go out of business. The most sophisticated angels make at least ten investments in order to make a return on their investment, counting on one or two to provide nearly all of their return.
+ How do angels help small businesses?
In addition to financial capital, top angels mentor and coach their portfolio companies, often leading to more healthy growth. They introduce entrepreneurs to potential customers and investors, see around potential problem areas, and help the start-up firms gain credibility in their fields. It should be noted that the best angel capital goes to the innovative companies that have the potential to grow to hundreds of employees and $50 million in sales within 3 to 7 years of start-up.
+ What are angel groups?
Individual angels are joining together with other angels to evaluate and invest in entrepreneurial ventures. The angels can pool their capital to make larger investments. ACA has more than 400 angel groups in its database and many more across the globe. Angel organizations come in many forms, but all have certain characteristics:
- They meet regularly to review business proposals
- Selected entrepreneurs make presentations to the membership of the group
- Member angels decide whether to invest in the presenting business
- Angels work together to conduct due diligence to validate the plans, statements and history of the entrepreneurial team
+ Why are angel groups important?
Angel groups are generally easier for entrepreneurs to find and often become the central connector of deals in their communities, include some of the most sophisticated and active angel investors in the country, have been recognized for job creation and generation of additional venture capital for companies, and are a leading indicator of angel investor activity.
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+ What kind of companies do angels invest in?
Angels look for new innovative companies that can grow quickly in sales and value (creating jobs along the way). Examples of angel-backed businesses include Google, Yahoo, Amazon, Starbucks, Facebook, Costco, and PayPal.
+ How do I know my business is right for an angel group investment?
Angel investment is the right source of funding for only a small proportion of entrepreneurial businesses. When considering yourself for investment by an individual angel or angel group, ask yourself these key questions:
- Am I willing to give up some amount of ownership and control of my company?
- Can I demonstrate that my company is likely to realize significant revenues and earnings in the next 3-7 years?
- Can I demonstrate that my company will produce a significant return for investors?
- Am I willing take the advice from investors and accept board of director decisions I may not always agree with?
- Do I have an exit plan for the company that may mean I'm not involved in 3-7 years?
+ When should I approach an angel group?
In general, the best time to seek angel funding is when:
- Your product is developed or near completion.
- You have existing customers or potential customers who will confirm they will buy from you.
- You've invested your own dollars and exhausted other alternatives, including friends and family.
- You can demonstrate that the business is likely to grow rapidly and reach at least $10 million in annual revenues in the next 3-7 years.
- Your business plan is in top shape.
+ What criteria do angel groups use to select entrepreneurs?
No two groups are exactly alike, but generally groups expect to at least see the following:
- A strong management team with experience and proven skills.
- Unique product or service distinguished by an identified competitive advantage and large market
- Your personal financial investment in the company and investments from your friends and/or family
- A clear picture of the market for your product or service and realistic plan for market penetration
- An exit strategy for the investor that is reachable within 5 to 7 years The potential for a strong return on investment
+ What kinds of term sheets and legal documents do angels use?
Sophisticated angels, working with their attorneys, use a series of legal agreements to govern their relationships with the companies they invest in. A starting point is the model legal documents developed for the National Venture Capital Association by a committee of attorneys across the country. For those looking for simpler documents, see the Angel Term Sheet developed by the Alliance of Angels. Other standard documents are included in this article.
+ Will angel groups sign non-disclosure agreements? If they don't, how do entrepreneurs protect confidentiality?
During the initial portions of the evaluation process, the vast majority of angel organizations will not sign non-disclosure agreements (NDAs for short). Angel groups just see too many deals, often in a similar space. When submitting executive summaries and even business plans, the entrepreneur needs to explain the business so that the potential investors can understand the company's opportunity for success, but don't learn about any confidential issues. If you have intellectual property that has not been patented, it is best not to disclose it to the angel group when you are first submitting your company for investment. Remember that angel groups are most interested in the business behind the technology or idea they don't invest in the inventions but in the business models and management teams that will grow the companies. If your company makes it through to final due diligence, the angel group may need to research intellectual property issues and then would sign non-disclosure agreements at that time.