Angel Investing Overview
What is an Angel Investor?
Angel investing could be compared to a game of capitalism chess as being successful requires anticipating short and long term industry moves, similar to how chess players plan multiple moves. Most portrayals of angel investing do not cover the details behind making these decisions, so below we provide a bit more insight for those interesting in the concept.
The term angel investing continues to gain a broader understanding thanks in part to several years of the TV show Shark Tank, but there still remains a gap between TV and reality. So, what specifically is an angel investor?
Angel Investing
The concept of angel investing did not originate in Silicon Valley (or on TV) but instead began during the mid-1970s to describe individuals financing Broadway theater productions. In the early 1980’s, William Wetzel, a professor at the University of New Hampshire, studied how start-ups raise capital and began using the term “angel” to describe those investing into early-stage companies.
Unlike investing in public companies, angel investments are private transactions which are illiquid and not easy to sell or liquidate once an investment is made. The horizon for an angel investment can be as short as 12 months but usually is closer to 3-5 years before investors begin to see a return. Successful angel investors view the longer time horizon as a tradeoff for an opportunity to realize outsized returns and potentially become one of the first investors in early market trends.
Investment Rate
The Shark Tank TV show makes for great stories but fails to mention the highly selective nature of the show. Companies appearing on Shark Tank account for less than 1% of the thousands of start-ups that apply. For the broader angel investing universe, research from the University of New Hampshire indicates only 31% of start-ups seeking capital in 2020 were successfully funded. Both statistics indicate the challenging environment for start-ups raising capital and selective nature of investors.
Due to the long-term nature of angel investments, the due diligence process on a company and its management team can also be extensive. The process may take 30-60 days and involve management discussions, customer reviews, term sheet drafting, corporate legal understanding, and financial or tax analysis. These aspects of a deal tend to not have the TV drama of interviewing founders but are a necessary part of any solid investment.
Overall Outlook
We expect the start-up universe to continue expanding and providing additional opportunities for angel investors as more companies move toward virtual models where founders are not constrained by the limits of physical locations when building teams. Another trend is syndication of deals where angel investors invite a small group to co-invest alongside and benefit from the experience of an active angel investor without a requirement to be part of a larger investment fund. Angel investing will always require more involvement when compared to public stock investing, but it’s the ability to partner with companies as they take their first steps which makes it an exciting process.