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THE UNIVERSITY OF TEXAS AT DALLAS JINDAL NAVEEN SCHOOL OF MANAGEMENT

Angel Investors What entrepreneurs should know?


Individual Research Report
DIEM NGUYEN
11/5/2013

I.

General Information:
Angel Investors are individuals who provide financial capital for small business

star-ups or entrepreneurs, usually in exchange for convertible debt or ownership equity. The capital they provide can be a one-time seed funding or ongoing support to carry the company through difficult times. Angel investors are often retired entrepreneurs or executives, who are interested in investing for reasons that go beyond pure monetary return. They want to keep up with current changes in a particular business field by mentoring another generation of entrepreneurs, and making use of their experience and networks on a less than full-time basis1. Angel investors are usually found among an entrepreneurs family and friends. In general, angel investors need to meet the Securities Exchange Commission (SEC) requirements for being accredited investors. They each need to have a net worth of at least $1 million at the time of purchase, make at least $200,000 in each of the two most recent years (or $300,000 a year jointly with a spouse)2 and expect to earn the same amount reasonably in the current year.

1 2

. Entrepreneurship (p18) edited by Paul Muljadi . Accredited Investors in Rule 501 of Regulation D (SEC)

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II.

What angel investors could help entrepreneurs? Provide financial capital in one-time seed funding or continuing support
Help fill capital gap Provide valuable management advice and important contacts Network with people who can help build business Gain credibility in a field

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III.

Potential Angels in the United States:


There were approximately 268,000 active angel investors in the United States in

20123, while around 318,500 individuals were reported in 20114, which caused a reduction of 15.8%. However, while fewer angels were active in 2012, those that did invest have increased their individual investments substantially (from $70,700 in 2011 to $85,500 in 2012, which caused an increase of 20.9%).

Source: Center of Venture Research (pre 03 data) and Kauffman Foundation (04-09 data)

Center of Venture Research: The Angel Investor Market in 2012: A Moderating Recovery Continues 4 Center of Venture Research: The Angel Investor Market in 2011: The Recovery Continues

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IV.

Investment Preferences:
According to 2008 CAC Angel Group Confidence Survey, angel investors are

likely to invest in Software, Medical devices and equipment, Business Products or Services, Industrial/Energy, and IT Services.

In a large shift from 2011 to 2012, Software accounted 23% of total angel investments, which was the largest share of angel investments, followed by Healthcare/Medical Services 14% (vs. 19% in 2011), Retail 12%, Biotech 11% (vs. 13% in 2011), Industrial/Energy 7% (vs. 13% in 2009), and Media 7% (vs. 5% in 2011)5.

CVS Analysis Reports for year 2011 and 2012.

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Software 2011 2012 23% 23%

Healthcare Retail 19% 14% n.a. 12%

Biotech 13% 11%

Industrial/ Media Energy 13% 5% 7% 7%

IT Services 7% n.a.

V.

Investments in Stages:
In 2012, angel investors decreased their investments of seed and start-up

capital to 35% (vs. 42% in 2011 and 31% in 2010). Expansion financing increased with 29% of deals, up from 15% in 2011. Interest in early stage investing decreased with 33%, down from 40% in 2011. The seed and start-up stage is the stage that truly needs to attract angel investors the most. In consequence, the decrease in angel investments has been a significant concern for recent years.

VI.

How to attract Angel Investors?


According to Forbes, in order to find the right and suitable angels for startups,

there are some characteristics that the entrepreneurs need to know: Angels invest in people, more often than they invest in ideas: In the other words, network and trust.

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A complete business plan is always required: Smart business plans will bring more opportunities to attract angels successfully. Clearly explain your business model and exit strategy, so investors will know how you will make money, and how and when they will get their return. Do not make presentations too long.

Angels like to get involved directly with the team: In general, they are interested in local opportunities. In addition, in order to avoid losing lots of money, angel investors tend to limit the size of individual investments to $250,000 or less.

Financial projections and opportunities in the right ballpark: The 5th-year revenue projections should be around $20 - $100 million in order to attract angel investors. Moreover, entrepreneurs need a large and growing market to offset the huge risk of funding a startup.

Business domain and your character must be clean: Business sectors which have historical high failure rates are normally avoided by angel investors. They probably wont respond well to high pressure sales tactics, information overload, or bribes6.

Five things every entrepreneur should know about angel investors Martin Zwilling (2011, Forbes)

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References:
Muljadi, P. (2011). Entrepreneurship. 18. Retrieved from http://books.google.com/books?id=eNy7hA-rvOUC&lpg=PP1&pg=PA18 (2012) Accredited Investors. Securities Exchange and Commissions (SEC). Retrieved from http://www.sec.gov/answers/accred.htm Sohl, J. (2012). "The Angel Investor Market in 2012: A moderating recovery continues". Center of Venture Research. Retrieved from https://paulcollege.unh.edu/sites/paulcollege.unh.edu/files/2012_analysis_report.pdf Sohl, J. (2011). "The Angel Investor Market in 2011: The Recovery Continues. Center of Venture Research. Retrieved from https://paulcollege.unh.edu/sites/paulcollege.unh.edu/files/2011_analysis_report_0.pdf Zwilling, M. (2011, April 28). Five things every entrepreneur should know about angel investors. Forbes. Retrieved from http://www.forbes.com/sites/martinzwilling/2011/04/28/fivethings-every-entrepreneur-should-know-about-angel-investors/

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