PROFILING THE ANGEL INVESTOR
Joseph R. Bell, Director, University of Northern Colorado
Kenneth M. Huggins, Metropolitan State College of Denver
Christine McClatchey, University of Northern Colorado
Abstract venture capital firms. The Small Business
Administration (SBA) has estimated there are
Angel Investors play a significant role in thousands of Angel Investors with the number
developing entrepreneurships firms but have not increasing. One out of every 750 in the US is an
commanded the same level of publicity as venture Angel Investor contributing to US dollars 40
capital firms. The survey questionnaire was billion in funding last year. (9) SBA also
provided to more than 50 Angel Investors. estimates that they have contributed up to $35
Although the focus of the survey is geographically billion in the economy. The typical Angel
narrow we believe the results are applicable Investor is usually a successful entrepreneur who
across a much broader investment community. desires to help another entrepreneur with a new
The purpose of the research was to learn more venture. Their most significant role is to provide
about Angel Investors such as how they obtain cash to a start-up firm. But identifying and
their investment opportunities, select investments contacting this elusive group can be difficult.
and a variety of other information. In contrast to Angel Investing, VCs will
usually invest in companies that have proven
Introduction themselves and need additional financing to fund
growth. It can be said that Angel Investors
“Fundamentally, Angel Investing is no usually take greater risk than venture capital firms
different from traditional venture investing (VC), and are compensated accordingly. Both the Angel
with the same level of expectations. But unlike Investor and the venture capital firm do not intend
standard VC, Angel Investing is more to be long-term investors in a firm. Usually 5-7
personalized and labor-intensive and totally years would be the typical timetable. Another
unscalable. As VC has become more bureau- distinction between venture capital firms and
cratized and risk-averse, the real mission of Angel Investors is that venture capital firms
venture capital – investing in innovation and usually have pooled funds whereas the Angel
entrepreneurs – seems to have been usurped by Investor is typically a wealthy individual, though
individual investors, popularly termed angels. Angels are beginning to invest via formal and
Indeed if you believe the buzz, angels are the only informal syndicates. The Angel Investor tends to
ones currently investing in innovative ideas and seek investments in companies in which they can
early-stage companies, while most VCs are busy add value. They try to be actively involved in the
licking their wounds or pretending to be workout firm by contributing their expertise or contacts.
investors and merger specialists.” (3) By actively contributing to the day-to-day
Angel investors are not a new phenomenon, operations of the firm often makes the difference
for example, “When in 1938 WW I flying ace between success and failure. Angels typically
Eddie Rickenbacker wanted capital to launch invest within a half-day’s drive of their primary
Eastern Airlines, it was Laurance Rockefeller who residence.
acted as the Angel Investor.” (7)
Although Angel Investors play a significant
role in developing entrepreneurial firms they have
not commanded the same level of publicity as
Purpose and Methodology of the Study:
All of them accept unsolicited business plans.
Much as the word “entrepreneurship” has About 31% of the business plans received
come to cover a broad spectrum of business were considered adequate but only 23% were
ventures. The term “Angel Investor” has can be classified as done professionally.
equally encompassing. For the purpose of our Respondents were asked to select the most
survey we attempted to capture a perspective of compelling factor for investment including Team,
those seed to early stage investors who Concept, Market Size, Market Sector, Financial
individually or collectively will invest dollar Projections and Other. Team was tied for most
amounts of less than $1 million. with surprisingly the write-in of Timing. Each
Though the focus of the survey is amassed 10 responses while Market Size and
geographically narrow we believe the results are Sector received zero responses. This seems to
indicative of a vibrant, active investment region contradict the VC area that suggests it is
and is thus applicable across a much broader significantly driven by Market Size. Concept
investment community. The National Venture received two responses while Financial
Capital Association for Quarter 3, 2001 ranked Projections received one.
Colorado third nationally in “Venture Capital
(VC) Invested by Colorado Venture Capital Types of Investments
Funds” and fifth in VC “Dollars Invested” in the Only about 28% of the respondents indicated
state. (8) Those investments and dollars came that they tend to specialize in a particular
exclusively from the geographic region industry. No particular industry really stood out
represented in our survey. The geographic in the group.
representation of our survey is further supported
in that over the last five years (1995-2000) the Investment Structure and Size
state has averaged seven Initial Public Offerings The Angel Investors structure their invest-
per year. This supports the desire on the part of ments in a variety of ways. The most common
the investor to seek out a harvest or exit in was a mix of debt and equity (50% of responders.)
contrast to those investments termed the “Living Most conversations suggested they used equity as
Dead”. (5) What these points suggest is an the vehicle with a warrant attached. The second
adequate degree of sophistication of the survey most frequent response was convertible preferred
group to allow our results to act as a credible stock closely followed by equity only (41.6%).
guide for generalized Angel activity. Respondents selected all that might apply.
The purpose of the research was to learn more
about Angel Investors and how they obtain their The typical investment amounts in the first
investment opportunities, how they select round in anyone company varied from less than
investments and a variety of other information. $29,000 to greater than $100,000. Approximately
The questionnaire was developed and tested 40% of the respondents indicated a first round
on a few Angel contacts known to the authors. investment of $40,000 to $100,000, whereas 48%
After some modifications it was provided to over indicated an investment of greater than $100,000.
50 Angel Investors.
Involvement in the Venture
Results of the Study: All the respondents indicated some level of
involvement in the operations of the business.
Business Plan General management and financial expertise were
The majority of the Angel Investor respond- the most common form of involvement. Some are
ents do require a business plan prior to consider- also involved in sales/marketing and strategic
ing an investment. planning.
The amount of involvement ranged from Miscellaneous Information
approximately one hour per week to more than 10 All the respondents indicated that luck played
hours per week. The majority are involved from a part in the success of the investment. All the
1-5 hours per week at 72%.. Only 36% required a Angel Investors have at least a college education
seat on the Board, whereas only 9% required and 68% had at least a masters degree.
control of the Board. The typical Angel Investor appears to have
acquired his/her wealth in various ways. The
Valuation Methods prominent method of acquiring wealth was
The Angel Investor appears to use a variety of through successful investments (52%.)
valuation methods and usually more than one
method for each investment. The vast majority Summary and Conclusion
(80%) also varied the method based upon the Angel Investors play an important role
round of the investment. providing financial assistance through seed capital
Note: “Other” identified a valuation based for many start-up firms. Although this is no doubt
upon Key People. the most important role of the Angel Investor,
they also provide other valuable services to small
Active Investments firms in the start-up phase. They provide hands-
The number of firms historically invested in on advisory and frequently participate in the day-
ranged from 3 to over 100; whereas the current to-day operations of the firms in which they have
active portfolio of investments ranged from 1 to invested. With the somewhat collapse of the
20. venture capital funds; Angel Investors continue to
be a vital service of funds for entrepreneurial
Harvesting the Investment enterprises.
Losers (lost entire investment)
Living Dead (existing business with no References
hope of harvest)
Tie-score (broke even) Angel Investor, Vol. 2, November 6
Singles (2-4 times your investment)
Doubles (4-6 times your investment) Benjamin, Gerald A. and Joel B. Margulis. Angel
Triples (6-9 times your investment) Financing: How to Find and Invest in Private
Home run (10 times or more your Equity. Wiley Investment Danvers, MA 2000
Dingman Center for Entrepreneurship, “Alterna-
The two most common methods of “harvest- tives to Venture Capital Financing.” University of
ing” the Angel’s investment were IPO’s and Maryland.
“Firm’s Target Investment Angels” – The Denver
Outlook Post, Sept. 23, 2001
The vast majority of Respondents have
changed very little their investment habits since “Fundamentals–Venture-Capital Funds are Reel-
the dot-bomb circa April 2000. While 66% term ing” – Karen Buer, Bloomberg Wealth Manager,
the next 12-24 months as bright for Angel October 2001, p.99-100.
Investors to receive better than average returns for
their new investments.
Gaston, Robert J., “Finding Private Funding
Capital for Your Firm”.
Gupta, Udayan. Venture Capital Journal,
Securities Data Publishing, July 1, 2001.
PR Newswire, London, June 11, 2001
“Seed Capital Network,” http://www.seedcapital
network.com, Sept. 4, 2001 and Aug. 9, 2001.
Ruhnka, John C. The “Living Dead” Phenomenon
in Venture Capital Investment. Journal of
Business Venturing March 1991, pp1-19.
Spencer Trash Venture, Inc., angelinvestor