An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund. Although typically reflecting the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc. The Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar tables evidence that angel-funded startup companies are less likely to fail than companies that rely on other forms of initial financing

How did the Angel term came?

Variously attributed to early 19th century English theatre investors and 19th century Broadway investors who made risky investments out of love for the arts; frequently losing everything!

In 1978, William Wetzel, a professor at the University of New Hampshire, in his pioneering study on Seed Capital, described the providers of this kind of early stage financing as “Angels”. Interesting that Henry Ford, the auto magnate, received $40,000 from Angel Investors. Similarly, Apple Computer, Amazon.com, The Body Shop and many others received “first– in” risk capital from Business Angels!

What motivates them?
They have accumulated a certain wealth; now they seek satisfaction by giving their personal time, know-how and money in a business that they know well. And they want to make money
too! They make risky decisions without the benefit of a Board of Directors or Investment Committee for support and consultation. They invest locally; one-two hours travel time
from their home! Often it’s a part-time involvement for them.
They invest in un-listed companies primarily; and not more than 5-15% of their wealth in any one deal.

Why is there a need in the market for an Angel Investor?
According to European Commission, Business Angel investment has become necessary for several reasons:

  • Banks and Institutional Venture Funds cost structures’tend to prohibit small deals.
  • The time consuming due-diligence required is not offset by an expected payback, in absolute terms, needed by large institutions and funds.
  • Further, in times of financial stress (like now!), big players tend to pull-back their resources and become more risk averse upon the direction of their Boards of Directors.

Sources: Wikipedia, presentation of Mr. Ed Sanborn

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