As defined in the Securities Act of 1933, an angel investor is an accredited investor
who has an individual or joint net worth that exceeds $1 million at the time in
which an investment is made. They are also individuals who have a personal income
of at least $200K in each of the two most recent years of investment or have a joint
account in excess of $300K in each of those years, and will have the same expected
income level in the current year. Angels invest their own personal wealth in early-stage
(seed and start-up) companies.
Several decades ago, the word “angels” referred to people who helped
fund Broadway entertainment. However, in today’s business world, the term
“angel investors” takes on a whole new meaning. First used by William
Wetzel, former director of the Center for Venture Research at the University of
New Hampshire, many entrepreneurs view angel investor funding as “money from
heaven” because of the opportunity to finance their early stage enterprises.
The reasons why many wealthy individuals want to become angel investors vary considerably.
Some people seek a means to employ themselves, while others want to create jobs
for their families and their future generations. Some really enjoy helping other
start-ups succeed, while others simply have a hedonistic approach to investment,
taking pleasure in risk-taking in a company’s success. In addition, there
are those who are only interested on the economic gain and rate of return on an
investment. Regardless of the reason, many angels share a few things in common:
- Their average investment is anywhere between $50K to $500K,
- They tend to invest in smaller amounts (ideal for early-stage development) in a
number of deals so that they can have a diversified portfolio,
- Even though profitability is their primary incentive, angel investors have local
investments that promote community development and job growth.
To become an angel investor takes more than just personal wealth for a desired investment.
According to Howard H. Stevenson, Sarofirm-Rock Professor of Business Administration
at Harvard Business School, “reading business plans, studying in business
school at angel seminars, and learning an industry by working in it” are ways
that “one can develop expertise that will promote success in investing.”
For both the entrepreneur and angel investor, Stevenson claims that “there
is nothing like doing it,” referring to working and having experience in a
In addition to having experience, angel investors should also define their personal
and financial goals, and invest with those who have a solid track record when assessing
any potential business opportunities.
- Personal and financial goals- Angel investors must share the same
goals as the entrepreneur in order to avoid some unpleasant, long-term surprises.
These include everything from overall company prospective, strategic sales, salary
distribution, exit strategies, etc. It is crucial to identify and see eye-to-eye
with all of the underlying goals of the entrepreneur before making any financial
- Experience- Lots of angel investors were once entrepreneurs, and
according to Lon McGowan, founder and CEO of iClick, “have been involved in
many successful companies of their own.” Therefore, they not only have the
financial means to invest in young companies, but they also have valuable industry
and marketing experience to support other young, hopeful companies, making them
excellent advisors and mentors.
- Capability- The most successful investments were made by entrepreneurs
with triumphant experiences; therefore, an investor’s track record is the
single greatest component that may be indicative of one’s overall potential.
William Sahlman and Howard Stevenson, from Harvard Business School, have
proposed a basic framework for each investment opportunity/entrepreneurial evaluation
as a three-sided model in which four vital components are organized and well-interconnected:
- business opportunity,
- a deal
Not only is each individual component crucial for a successful investment, but the
way they interact is also just as significant. A high-potential business opportunity
occurs when there is the right arrangement or combination of each element, whereas
poorly arranged/combined elements or lack of one or more of these essential components
will lead to failure. The Harvard Framework is as follows:
PEOPLE- refer to any significant stakeholders of the company, including
the entrepreneur, team members, investors, advisors, etc.
THE POTENTIAL BUSINESS OPPORTUNITY- refers to the business proposal/plan,
the consumer, the size of the business, etc.
CONTEXT- refers to the external factors that can influence the
success of a business, including industry trends, the state of the economy, consumer
supply and demand, technology development, etc.
DEAL- refers to the contract between an entrepreneur and an angel
investor, including the terms, agreement and pricing.
There are five requirements that Micah Baldwin, an angel investor who sold his SEO
consulting company, looks for in every business opportunity:
- A leader/CEO- this individual should be competent in operating
a business and dealing with the various challenges of their company. They should
be trustworthy and exude confidence to those who follow them.
- A real revenue path/exit strategy- an investor should envision
the marketing success, outlook and expectations of the business.
- Active involvement- every angel should be actively involved in
their business venture. They can support the company by mentoring, giving advice,
and even work behind the scenes.
- Avoiding convertible debt- this is a no-win situation because when
an investor makes money, there is very little interest; however, when the company
fails, their stock is of insignificant value.
- The desire to invest with other “quality” investors-
often times, when an investor approaches every business opportunity with this
method in mind, more than likely, others should heed their strategy.