The Angel Investor is the New Venture Capitalist

I started angel investing in the late 1990s. It was the heyday of the Venture Capitalist. Back in those days, entrepreneurs starting up a web company would stand up and ask for $5M in seed capital -- quite a sum by today’s standards. Back then the entrepreneur had to build their own server farm and buy all their computer equipment. They had to pay American wages for everything and so it cost quite a bit.

In the 10 years following, the cost of starting a web-based company dropped dramatically due to the falling cost of business services. Today those same companies now ask for $500K to get up and running because they pay only for the bandwidth they need from an existing server farm. They lease equipment rather than pay for it upfront and they offshore a number of functions to lower cost areas.

As the cost of business continues to devolve downwards, so do the funds sought to start a business. Today, a web-based company asks for $250K to get up and running. This level of fund raising takes most deals out of the Venture Capital realm and lands them in the area of angel Investors. Angels invest $200K to $2M in a deal with most rounds going for $500K to $1M. That’s too low for most VCs but just right for the individual investor seeking to get in on startup funding.

Angel groups have increased dramatically over the past five years. Some Venture Capitalists have repositioned themselves into the angel world and called themselves “Super Angels” indicating they are on the high-end of the angel world.

Another factor is the near disappearance of the IPO market which reduced returns. To maintain returns required to keep their investors engaged, Venture Capitalists are moving to later stage deals and engaging in private equity transactions. For these two reasons – deal flow falling below the threshold and investors requiring returns that push them into later stage deals, the VC community is about one-fourth what it was ten years ago.

Some VCs focus on the early stage companies and bring additional services to help startups such as management consulting, strategic partnerships, and back office administration. In their place now is the angel investor. Deal flow for angels is up along with the number of angel groups and their membership.

The angel investor is the new venture capitalist.

The Angel Investor is the New Venture Capitalist

I started angel investing in the late 1990s. It was the heyday of the Venture Capitalist. Back in those days, entrepreneurs starting up a web company would stand up and ask for $5M in seed capital -- quite a sum by today’s standards. Back then the entrepreneur had to build their own server farm and buy all their computer equipment. They had to pay American wages for everything and so it cost quite a bit.

In the 10 years following, the cost of starting a web-based company dropped dramatically due to the falling cost of business services. Today those same companies now ask for $500K to get up and running because they pay only for the bandwidth they need from an existing server farm. They lease equipment rather than pay for it upfront and they offshore a number of functions to lower cost areas.

As the cost of business continues to devolve downwards, so do the funds sought to start a business. Today, a web-based company asks for $250K to get up and running. This level of fund raising takes most deals out of the Venture Capital realm and lands them in the area of angel Investors. Angels invest $200K to $2M in a deal with most rounds going for $500K to $1M. That’s too low for most VCs but just right for the individual investor seeking to get in on startup funding.

Angel groups have increased dramatically over the past five years. Some Venture Capitalists have repositioned themselves into the angel world and called themselves “Super Angels” indicating they are on the high-end of the angel world.

Another factor is the near disappearance of the IPO market which reduced returns. To maintain returns required to keep their investors engaged, Venture Capitalists are moving to later stage deals and engaging in private equity transactions. For these two reasons – deal flow falling below the threshold and investors requiring returns that push them into later stage deals, the VC community is about one-fourth what it was ten years ago.

Some VCs focus on the early stage companies and bring additional services to help startups such as management consulting, strategic partnerships, and back office administration. In their place now is the angel investor. Deal flow for angels is up along with the number of angel groups and their membership.

The angel investor is the new venture capitalist.

What are Angel Investors and Why do You Want Them?

Angels are high net-worth individuals that are seeking to make a return on an investment (not donations). But they do usually have additional motivations such as “do a little good, make a little money, and have a little fun.”

To invest in startups they must meet the Accredited Investor requirement set out by the SEC which you can see at this link:

http://www.sec.gov/answers/accred.htm

Typically they are not professional investors but have substantial business experience having started and run their own business successfully. Often times they are ex-CEO and VPs of large companies, and there are many different kinds (such as the fund raiser, the networker, the Jack of all Trades, the strategist and the industry specialist).

Each angel has their own criteria for what makes a good investment. Some of the questions they may ask about your start-up include:
1. Does the company have a strong management team?
2. How large is the market? Is it growing fast?
3. Does the company have strong intellectual property protection?
4. Does the company have a platform product that can produce many products?
5. Is there a clear exit path for the company?

Angels bring expertise through industry experience as many have run successful businesses in the past. They potentially bring their network of experienced and successful people, and they often have a standing in the community - so if they lend their support to your start-up, it should help you in raising more funding and attracting support.

Assess the needs of your startup and look for angel investors who can bring more than just funding to your start-up. Even if they don’t invest, you may find some angel investors are good candidates to join your board of advisors. Angel investors typically know other angels that can be referred to your deal.


Best regards,
Hall T.