Article: Angel investors

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Angel investors

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Definition of topic angel investors

An angel investor, angel or business angel is an individual who is able to provide capital for a startup company. Angel investors differ from other investors in the sense that they are private individuals who are willing to invest their own money. They do not represent a venture capital firm, a bank or a financial institute that usually provides funding.

Many angel investors have had success in the same industries that they invest in. [1] Angel investors can therefore bring the startup company valuable experience and business contacts, as most of the angel investors have been entrepreneurs themselves. Because of this, their motivation is not only monetary, they receive a psychological reward for their personal contributions in establishing the startup company.

Types of angel investors

The angel capital is provided in exchange for part of the ownership of the company. In some cases, convertible debt can also be used, which means that the debt can later be converted into stock.

An increasing number of angel investors are organizing themselves into networks of angels in order to share their knowledge and combine their investment capital. These networks give more visibility to angel investors by providing communication channel that can be used between angel investors and entrepreneurs who are seeking for finance. [2]

Relevance to software business

In 2007, the software industry was the industry to receive the highest share of angel investments, a number of 27 percent of the total angel investments [3]. Other industries with a high percent of angel investments were the healthcare industry (19 percent) and the biotechnology industry (12 percent). One reason why these industries gain a high amount of angel investments could be that the industries are able promise valuable intellectual properties and patents.

In 2007, angel investors invested to the start-up company in a few different phases: [3]

  • 39 percent of the investments to companies in the seed and start-up phase
  • 35 percent of the investments to companies in the post-seed phase, and
  • 21 percent of the investments to companies in the expansion phase.

Example of the phenomena

The total number of angel investments made in 2007 was $26 billion. [3]

Theoretical approaches

Compared to the venture capital industry, angel investors do not have access to effective communication channels in order to make contact with entrepreneurs. As such, angel capital tends to be more invisible than venture capital, making it hard and time-consuming for angel investors to find sufficient investement opportunities. Angel investment is therefore an sparetime activity for many people. As such, the activity becomes easily ad hoc and unscientific. [2]

Currently interesting research questions

Some interesting research questions regarding angel finance are: [4]

  • How big is the market for angel capital?
  • How much demand is there for angel capital?
  • What are the primary characteristics of angel investments?
  • What do the companies that receive angel financing look like?
  • What type of resources, other than monetary, can an angel investor provide to the startup company?
  • How does the geographic location of a firm affect on receiving angel capital?

Related Readings

  • LANG, J., 2002. The High-Tech Entrepreneur's Handbook: How to start and run a high-tech company, Pearson Education Limited, pp. 118
  • OSNABRUGGE, M. V. and ROBINSON, R. J., 2000. Angel Investing: Matching Start-up Funds with Start-up Companies - a Guide for Entrepreneurs and Individual Investors, Jossey Bass

Links to related articles

See also

References

  1. ↑ A. Wong, "Angel Finance: The Other Venture Capital," University of Chicago, 2002.
  2. ↑ 2.0 2.1 C. M. Mason, R. T. Harrison ,"Business Angel Networks and the Development of the Informal Venture Capital Market in the U.K.: Is There Still a Role for the Public Sector?," Small Business Economics 9: 111–123", 1997.
  3. ↑ 3.0 3.1 3.2 L. Wright, "Angel investors becoming more cautious in uncertain economy," Center for Venture Research Releases 2007 Angel Market Analysis, 2008.
  4. ↑ S. Shane, S. Heights ,"The Importance of Angel Investing in Financing the Growth of Entrepreneurial Ventures," U.S. Small Business Administration’s Office of Advocacy", 2008.
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