What is an Angel Investor?
Angel Investors are private investors who finance early stage businesses. These people usually have extensive industry knowledge and experience. Because of their understanding, they invest their own money either individually, as a group, or on behalf of a company. Investment decisions, therefore, are based on trust and the quality of their founders and their pitch.
However, many Angel Investors are focused on more than just financial returns. These people are often excited by making a positive change in the world; being on the forefront of innovation; and consequently mentoring the next generation of entrepreneurs.With the rapid increase in start ups emerging within Australia and around the world, angel investors are becoming more and more common. According to the Center of Venture Research, the US alone has over 300,000 active angels that collectively invest more than US$24 billion per year. These angels can provide invaluable Seed and Series A funding to cement your business within your target market and against competitors.
The Benefits of being an Angel Investor
Investing in startups has traditionally been the reserve of a few ultra-wealthy connected individuals and venture capital firms.
The internet has given potential investors access to education on the benefits of startup investing, as well as access to startups seeking investment.
Countries around the world are realising that high growth businesses drive employment, innovation and productivity. They have reformed laws, taxes and policies to encourage the startup sector and wider participation from investors.
High Average Returns
In 2012, Tech Crunch reported on a study by Professor Robert Wilbank who “compiled the largest data set on angel investor financial returns that exists”. The report was based on more than 1,200 exited investments made by angel investors over a 15-year time-frame, collected separately across both North America and England. He found that overall angel investors returned 2.5 times their original investment over a period of about four years. That equates to an annualised 25% return.
Investor Ram Shriram invested $100K in Google which yielded:
In 2004 at $85 a share.
Peter Thiel, cofounder of Paypal, invested close to $500K in Facebook, yielding:
After the IPO in August 2012.
Amazon’s founder, Jeff Bezos, also invested $250k in Google, his return:
People who are the best in their class
Angel Investors often form the basis of their judgement on the founder(s), rather than the startup itself.
People with an authentic connection
Investors are drawn to people who desire to make significant change in the world, as oppposed to those who just want individual success.
Founders that are in it for life
The merit of your business and the possibility of Angel Investment relies on your commitment and passion to the cause.
Billion, or trillion dollar global market potential.
Successfully identifying niche, marketable gaps in an industry is vital to an investor’s final decision
On trend – businesses with the right timing to solve global issues.
Angel Investors are looking for the next Uber, finding marketable solutions to global issues.
Similar market validation and competitor proof points.
Do your research! Show the investor why your business is better than your competition.
What are your sales?
Who are your customers/users?
How fast are you growing?
The more information you can provide to investors during your pitch, the easier it is to confidently demonstrate your proactive business sense. This reflects well on you and your business from an investor’s perspective!
Here’s our favourite pitch deck template, which can help you raise up to $5m.
The Benefits and Detriments of Angel Investors
Like any business venture, Angel Investors weigh up the risk-versus-reward when investing, and so should you when pitching.
|Access to Funds||Angels can often provide considerable amounts of funds ($25,000 - $500,000) very quickly to an approved business.||Angel Investments are usually not as large as Seed or Series A funding, given the perceived risk of your business.|
|Industry Experience||Angel Investors are incredibly well versed and experts in their industry, and can pass on invaluable information to you.||Angel Investors are often serial entrepreneurs, and may be juggling a range of investments, meaning they are time pressed and hard to communicate with.|
|Return on Investment||Angel Investors are often willing to invest in smaller start ups that larger corporations will not, given their appraisal of your pitch||On average, Angel Investors expect around 25% return on their investment, so be wary of this cut to your profits.|
Angel Investors vs Venture Capitalists
There is a common misconception that Angel Investors and Venture Capitalists are the same, but there are many important distinctions.
Use this table to determine the right investment option for your business!
- Individual Investor (or group of autonomous investors)
- Often willing to invest in early-stage or smaller start ups, as well as larger companies
- Smaller investment amounts ($25,000 – $500,000)
- Have hands-on experience in industry
- Do not always require executive position
- Company or Firm
- Rarely interested in start ups
- Larger investment amounts ($1m+) due to size
- May only have contacts to refer to
- Requires seat on executive board
Tips for Angel Investors
Innovation has become the buzz word around the world for good reason, as it offers one of the main ways to power an economy and employment.
Intelligent, wealthy individuals, especially in the US, have been enamoured and investing in startups for many years given some of the following reasons:
Improved portfolio performances
Startup investments are a powerful diversification investment because they have a low correlation with other asset classes like stocks and bonds. A recent SharesPost whitepaper concluded that allocating just 5% to an alternative asset class such as private growth companies to a traditional portfolio, like 60% equity/40% bonds, could improve gross returns by 12%.
Australia now offers attractive tax incentives for supporting startups, such 10 years of tax free returns for investors.
In the long term this can help secure your financial assets and provide additional capital for you to use, invest, or save for a rainy day!
Potential for outsized returns
Startups offer the potential for incredible home run returns (commonly referred to as a black swan event). Almost no other investment class offers such incredible upside potential. For example, Amazon’s founder, Jeff Bezos, invested $250k in Google and netted $1.6bn. Peter Thiel, cofounder of Paypal, invested $500K in Facebook in exchange for 10.2%, and netted $1.6bn.