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Center for Entrepreneurial Studies

 

Angel Financing

Angel investors—high net-worth individuals—represent as essential source of funding for early stage, high-risk ventures. Conservative estimates put the magnitude of angel investments at approximately $20 billion per year; venture capitalists contributed only half that much in 1996.

Characteristics of Angel Investors

The term "angel" originated in the early 1900's to describe wealthy businessmen who invested in Broadway productions. Today, the term refers to private individuals who contribute their skills and money to start-up companies. Typically successful entrepreneurs, these investors offer expertise, experience, and contacts that can be invaluable to the new venture. Angel investors often work in groups to improve the efficiency of their due diligence and to allow them to complete larger deals. The most important considerations in the angel investor's decision are the personal characteristics of the entrepreneur and the market-product potential of the business. Geography and industry focus are surprisingly unimportant.

Finding an Angel

Although there are many angel investors across much of the country, their desire for privacy makes them difficult to identify and contact. A number of formal sources have developed, including directories, conventions, incubators, and electronic networks. See Additional Resources below. In addition, professional advisors, such as attorneys, accountants, and bankers, can provide assistance in the search for private investors. Placement agents can be hired, but this is a more expensive route. The most valuable source is the entrepreneur's own network of friends and family who can provide personal endorsement to the investor.

Pros and Cons of Angel Financing

Despite the relative obscurity of angels, it takes much less time, on average, to meet with and receive funds from a private investor than a venture capital firm. The due diligence is less involved with an angel investor, and angels typically expect a lower rate of return.

While many angel investors take a board position or an important consulting role, angel-funded entrepreneurs can be dissatisfied with the level of involvement. Venture capitalists often provide considerably more support in the management of the business, setting of targets, and staffing.

An entrepreneur in search of capital must identify the start-up's non-financial needs and determine the required skills for investors. Before accepting angel financing, the entrepreneur should understand the investor's motivations and goals and establish guidelines for their respective roles.

For more information on angel investing, read GSB Case Number E127: Angel Investing: Innovation Within the Establishment.

Educators Corner, from Stanford Technology Ventures Program, has a podcast: Angel Investing Revealed.

Additional Resources

GSB Entrepreneur Club
Databases/Directories
Forums
Venture Capital Clubs
Matching Services/Networks

Please refer to our Helpful Links section for more information on Funding/Venture Capital.