Besides VC, I hardly knew anything else in terms of financing a business or start-up until I joined Mannheim Business Angels Network last year. After digging, it turned out that for each stage of a company’s life, there may be financial needs and which require outside funding. Different types are Seed Capital, Working Capital, Mezzanine Capital or Bridge Capital. Before determining the type of capital, we need to find them.
So, what is Angel Investment ?
In modern terms, angel investment is a pool of capital to help business start-ups, it exists in the form of angel groups or angel networks. Angel investment also shares research as well as providing advice to the portfolio companies.
Is Angel Investment important?
The concept of angel investment is a powerful source of financing high-growth companies, it has emerged over the past decades across the world. In addition to the capital provided by angel investment, angel investors play a key role in providing strategic and operational expertise as well as social capital (their networks) for new ventures.
Estimates across the world also indicate that angel investment has been consistently larger than seed or early-stage venture capital investment provided by banks, despite some dot come fall-offs in the late 1990s and recent financial crisis.
While VC tends to attract the bulk of the attention from media or policy makers, the primary source of external seed capital in many countries is still angel financing. Angel investors tend to be less sensitive to market cycles than venture capitalists. However, in the current market environment, the lack of exits (through an IPO or M&A) has put a strain on both angel and venture investment.
Angel investments also support a much wider range of innovation than VC firms, in terms of industry sectors and geographical locations.
Angel groups or networks can also catalyse entrepreneurs and investors to find each other more rapidly.
Estimates also showed that companies backed by angel investments have been important contributors to economic and job growth.
How does Angel Investment react to the internet boom ?
Internet has created opportunities for firms-creation with smaller amounts of initial capital than more traditional technology or science sectors. These « lean start-ups » allow greater capital efficiency and more rapid testing and adjustment of products or business models.
Areas of interest for angel investors
Angel investors can also be involved in companies that are not necessarily technology-intensive or high-growth as well as companies in later stages of development. Like VCs, angel investors tend to invest in a portfolio of companies, not just in one or two.
Policies or legal aspects on Angel investments ?
Because Angel investing has a local nature, therefore there is no « homogeneous » national angel market. The sophistication and dynamics of angel invetments can vary greatly across regions within countries.
How much money rougly could we expect to get from an angel ?
From Angel Resource Institute, average and mean common investment from business angels size from $600,000 to $931,000 in 2014.
Adding co-investors to angel investment substantially increases the amount to a round size of between $1.7M to $2.5M.
According to various statistics and estimates, Healthcare still draws largest funding rounds and is most capital-intensive.
Do companies need to be making money already to pitch an Angel Investment?
They don’t have to, but it helps: in average it showed that 63% of companies received angel funding had revenue to point to already.
What if the companies have never received investment before?
Angel investors typically seek out early-stage startups that aren’t big enough for the VC firms. In 2014, 60% of Angel Investment deals were with new companies which had never received funding from an angel investor before.
Angel Investment does not mean working with a single person …
The trend showed almost 70% of angel investment deals were co-investments in 2014. When Angel Investments couples with co-investment, it gets more money ! Co-investing has become more common.
Conclusion :
Sometimes the lack of knowledge about angel investment is because often individual angel investors have preferred to keep information about their investments private. Although industry has professionalized with the formation of groups and networks, accurate data collection and pool still remain a major challenge.
Some countries have angel tax incentive programmes and which is still a challenge for policy makers in countries.
Being a good angel investor requires a combination of both skill-sets as well as specific technical skills in conducting due diligence and/or determining company valuations. Therefore training and mentoring, in which new angel investors can learn from experienced angel investors is a very important part of the process.
A healthy entrepreneurial ecosystem is critical for successful Angel Investing. It involves from entrepreneurs, investors, large companies, universities, governments to service providers. It can only flourish when each stakeholders in this ecosystem play a role.
Next week I will continue with Crowdfunding.
