Becoming An Angel
Excerpt taken from SW FL's Regional Angel Fund Assessment
An in depth feasibility study on establishing a regional source of early stage capital to invest in entrepreneurial and emerging growth companies located in Southwest Florida or the state of Florida.
Angel investor groups vary in structure, from formal to informal. Formal groups follow strict participation requirements that guide members minimum investment activity and event attendance. Some groups pool members capital to make investments on the groups behalf, while others allow individual members to invest in specific deals of interest. A typical angel groups investment ranges widely from $50,000 to $250,000 per deal, depending on how many group members are interested in the deal.
While no two angel groups operate exactly alike, most angel groups maintain a local or regional geographic focus in order to maximize members ability to actively engage in the growth of their investments. Angel groups often have web sites that provide directions for business plan submission. After screening business plans for top-quality deals that match the groups criteria, these groups organize regular monthly breakfast or dinner meetings for members to hear pitches from companies selected to present. If the group (or members of the group) decides to proceed, interested members commonly collaborate on due diligence and deal negotiation. Based on the groups structure, investments are either made directly by individual members, or by the group as a whole.
Most groups apply standard terms to their investments, with some flexibility to negotiate. Angels typically invest between $25,000 and $100,000 per transaction individually, and up to $500,000 as a group. They invest in one to four transactions per year. On average, angels are patient, with an average term for holding an investment of eight years. For the risk and added value they provide, angels seek returns of at least ten times their investment.
MITs Entrepreneurship Center identifies four types of angel investors:
These angels are active investors who guide and coach the management team to help them grow the company. They usually work with a limited set of start-ups. Guardian angels can invest significant amounts of time in the company, especially after they have developed confidence in the entrepreneur.
These angels have entrepreneurial experience themselves and may have limited angel-investing experience. They primarily seek high rates of return by investing in start-up companies outside their area of expertise, (e.g., investing in an unfamiliar industry).
These angels are, or have been, senior executives in major companies in the start-up’s target industry. Usually, other angels approach Operational Expertise Angels for due diligence insights and confirmation of the deal quality.
These angels are high net worth investors who have little relevant entrepreneurial experience and who invest in companies in which they have little industry experience. Usually these angels are high net worth individuals who have made money through the stock market, real estate, inheritance, and through professional occupations not related to starting up companies (such as doctors, dentists, lawyers, accountants, engineers, consultants, brokers, etc.).
Angel investors differ from venture capitalists because typically, angel investors have a double bottom line. They have made it; they are not working for a living, therefore, outside of the real income, or return on investment (ROI), they invest for psychic income reasons.
One of the reasons is the desire to stay in the game without putting on a uniform (i.e. the adrenaline rush), the ability to live vicariously through an entrepreneur’s efforts while avoiding the firing line. Another reason is mentorship and a chance to pay back society by helping the next generation of entrepreneurs. Thus, they are often willing to invest in less proven, riskier deals to help entrepreneurs get to the next stage. Other reasons are listed in the table to right, many of which distinguish angels from venture capitalist. There are many nice venture capitalists, but none of them are motivated by the desire to pay back society.