A Profile of Angel Investors
STEPHEN G . MORRISSETTE
STEPHEN
G. MORRISSETTE
is at! assistant professor
at the College of Business
at University of St. Francis
injoliet, IL.
smorrissette @ stfrancis.edu
s
ourcing financial capital is a crucial
issue for new ventures. The primary
capital sources for new ventures are:
vary, these angels provide capital to 50,000
companies in the amount of $50 billion and
account for 70% of capital for new ventures.
Angel investors present an important
• Founder/friends/family: Most frequent topic because the new/small businesses that
they support are the dominant driver of the
source for start-up businesses.
• Angel investors: Wealthy individuals, typ- U.S. economy (Timmons and SpineUi [2004]):
ically fellow entrepreneurs, willing to
invest in the very early stages of a ven• Small companies provide 75% of all new
ture's development.
jobs.
• Venture capital funds ("VCs"): A mutual
• Over 90% of all employers are new/small
flind managed by professional investment
businesses.
managers. Fund investors are mosdy pen• Over 95% of the wealth in America has
sion funds and institutional investors
been created by entrepreneurial firms
(Fenn et al. [1995]). Typically will not
founded since 1980.
invest until a company is several years old.
Angel Investing Defined
It is noteworthy that a start-up company
can rarely source capital by borrowing money
The term business angels or angel investors
from a commercial bank. However, often the
describes wealthy individuals who provide capfounders infusion of cash is via personal borital for start-up companies. Also known us prirowing including home equity loans and subvate investors, this term emphasizes the
stantial credit card debt.
non-public and idiosyncratic nature of this
The second source, angel investors, is the
capital market. Another term, informal investors,
focus of this article. Angel investors (someis sometimes applied; this term contrasts the
times called informal investors) are wealthy indi- angel investing process w^ith the more formal
viduals (net worth over $1 million) cited by
and quantitative analysis done by venture capmany researchers as the most important source
ital professionals. The use of the word angel is
of capital for start-up firms. Worldwide, recent
apparendy derivedfix)mits use to describe fmanresearch estimates the amount of capital procial backers for theatrical productions (plays,
vided hy angels to be 11 times the amount
operas, etc), also called angels. Throughout hisprovided by venture capitalists (Reynolds,
tory, wealthy individuals (often the royal family)
Bygrave, Autio, et al. [2004]). While estimates
have sponsored and funded new ventures:
52
A PROFILE OF ANGEL INVESTORS
SUMMER 2007
Queen Isabella's funding of Christopher Columbus' venture in the 15th century is a familiar example (Benjamin
and MarguHs [2001]). In the 13th century, the famous
traveler-merchant Marco Polo was also funded by angel
investors. In his day, typically the angels received 75% of
the profit; the entrepreneur 25% (Hirsich and Peters
[2002]). In the 19th and 20th centuries, industrial giants
including Henry Ford and Alexander Graham Bell were
funded by angels. Henry Ford's five angel investors experienced very good investment returns: in 1903 the five
invested a total of $41,500; 15 years later their investment
was worth $145 million (Gaston [1989]).
Angel investors have noteworthy differences from
the better known VCs. Hill and Power offer a short and
insightful comparison between angels and VCs: "Angels
invest their own money; VCs invest other people's money"
(Hill and Power [2002], pp. 5). While there is a range of
angel types and VC characteristics. Exhibit 1 provides a
useful, albeit stereotypical, abbreviated comparison.
Angel Investing Statistics
Unlike pubhc stock offerings, private equity transactions (both by VCs and angels) are private affairs. Several sources and studies have increased the base of
knowledge for venture capital, the better-known private
equity market. The concentration of the VC industry
($18 bilhon invested in only 3,000 deals during 2003)
makes data collection more possible, as compared with
the large numbers of business angels, estimated to be
400,000 or even larger. Van Osnabrugge and Robinson
[2000] estimate that angel investments total more than
five times the amount invested by VCs and that angels
fund 30 times as many firms.
Angel investments are far more private too; in fact,
they are personal. Angel investments are not at all public
transactions. A given angel investment might only be
known by a handful of people. Since these transactions are
so private and are not pubhcized, statistical information is
sparse and estimates must be derived from small samples
or extrapolated from related data. Furthermore, the data
that has been collected is often proprietary, i.e., the facts
and figures collected by consultants and vendors in order
to serve the angel investor market. As such, estimates vary
widely; however, it appears that a reasonable summary
would be that 400,000 angels provide $50 billion in capital to over 50,000 companies each year—very large numbers for an almost invisible market (see Exhibit 2).
SUMMER 2007
PROEILE OF ANGEL INVESTORS
General consensus paints angel investors as welleducated, middle-aged men with significant business experience and substantial net worth. The following sections
provide a thorough discussion of angel investor characteristics, summarized in Exhibit 3. While over 125 sources
were examined, the primary angel investor studies are
summarized in Exhibit 4.
Demographics
The demographics of a "typical" business angel are:
male, around age 50, college educated, successful entrepreneur, wealthy. This distillation from dozens of studies
is a useful working description and clearly describes the
majority of angel investors; however, the following profile provides additional detail and variation around this
stereotype. Work by Gaston [1989], and various compilations by Freear, Sohl, and Wetzel ([1990], [1992],
[1993], [1994]) provide the most extensive databases of
angel investor demographics. While this foundation data
was collected in the late 1980s and early 1990s, later
work such as studies by Van Osnabrugge and Robinson
[2000] and Hill and Power [2002] have confirmed that
the profile still holds. Likewise independent proprietary
research by Benjamin and Margulis [2001] and Amis and
Stevenson [2001] show the same characteristics found
by the earlier studies.
Age Many studies have found the average age of
angel investors to be between 47-50 years old (Hill and
Power [2002]; Wetzel, and Freear [1994]; Freear, Sohol
and Wetzel [1991]; Van Osnabrugge and Robinson [2000];
Gaston [1989]; Aram [1989]). A recent study of Finnish
investors is an outlier in that it found an average age of
only 40 (Maula, Autio and Arenius [2003]). Hill and
Power [2002] found that 54% of angels were between
ages 46-55, whereas Gaston [1989] foundjust 31% in this
bracket. Gaston's ([1989] p. 18) distribution suggests:
Under 35 years old
35-44
45-54
55-64
Over 65
11%
33%
31%
19%
6%
Gender Angel investors are predominately male, and
studies peg their numbers at 84-97% male (Wetzel and
THE JOURNAL OF PRIVATE EQUITY
53
EXHIBIT
1
Differences between Business Angels and Venture Capitalists
Funding Source
Number of deals per year
Typical investment per
company
Company Stage
Geographic Focus
Industry Focus
Source of deals
Decision Maker
Business Angels
Angel's own money
One every two years
$25-250,000; average
$50-75,000
Small, start-up, early
stage
Usually near (within one
to two hours) of home
No focus, but prefer
industries they know
Other angels, friends,
business contacts
Individual, experienced
entrepreneur, personal,
50 years old
Minimal, informal,
subjective, judgment
Venture Capital
Investors
5-10 per year
$1-10 million; average
$4 million
Larger, expansion stage
Usually nationwide,
sometimes regional
Often focus on one or
two industries
Proposals submitted,
other VCs
Professional, MBAs,
committees, 40-year-olds
Extensive, formal,
analytical, spreadsheets
Complex,
Convertible
Investment Structure
Simple, common stock
Preferred Stock
Involvement
Hands-on
Strategic, Board Seat
Longer,
five
or
more
Shorter, three to five
Investment Time/Horizon
years
years
Less important, long-term Important, IPO or Sell
Exit/Harvest Strategy
investment horizon
Company
20-30% but often don't
Return on Investment
have
predetermined ROI Expect 30-50% ROI
Expectations
expectation
Analysis/Due Diligence
Sources: Van Osnabmgge & Robinson ([2000] pp. 106-1U), Benjamin & MarguUs ([2001] pp. 32-33); Hill & Power ([2002] pp. 24-26
National Venture Capital Association website at www.ncva.org, Gaston ([1989] pp. 14-27, 44-78), Freear, Sohl, and Wetzel [1994].
Freear [1996]; Freear, Sohol, and Wetzel [1991]; Gaston
[1989]).
Net Worth Most studies have found that angel
investors are wealthy, enjoying a net worth exceeding $1
million. This meets the criteria for accredited or sophisticated investors used by the United States Securities and
Exchange Commission. This demographic is often
assumed rather than tested; many researchers define their
sample using the SEC $1 million definition. Benjamin
and Margulis [2001] found most to be "self-made
54
A PROFILE OF ANGEL INVESTORS
61-61
249)
millionaires." Gaston [1989] found the following distribution of angel investor net worth: 39% of angel investors
had a net worth of under $500,000; 24% were between
$500,000-11 million; 37% were over $1 million. (Note:
these are nominal 1989 dollars.)
Business Background/Entrepreneurship Experience
The most noteworthy, but not surprising, finding
regarding business background is that most angel investors,
some 70%-85%, are entrepreneurs themselves (Sullivan
[1991]; Gaston [1989]; Van Osnabrugge and Robinson
SUMMER 2007
EXHIBIT 2
Estimates of Angel Investment Market Size
Estimate
Source
Number of Angels Investinj» Each Year
Benjamin & Margulis [2001]
400,000
Timmons & Spinelli [2004]
400,000
Van Osnabrugge & Robinson [2000]
300,000
Sohl [20041
220,000
Wetzel and Freear [19981
300,000
Note: pool of potential angel investors is 3-6 million individuals with net worth
above $1 million in Benjamin & Margulis [2001], Van Osnabrugge & Robinson
[2000], and Hill & Power [2002]. Freear, Sohl & Wetzel [1992] report 25% of
high net worth individuals are angels.
Number of Deals per Year
Van Osanbrugge & Robinson [2000]
60,000
Sohl [2003]
50,000
Hill & Power [20021
50,000
Benjamin & Margulis [2001]
140,000
Amount of Investment per Year
Benjamin & Margulis [2001]
$40-60 billion
Timmons & Spinelli [20041
$30 billion
Van Osnabrugge & Robinson [20001
$50-60 billion
NCVA, CuUen [1998]
$100 billion
Sohl [2003]
$40 billion
Sohl [2004]
$18 billion in 2003
Hill & Power [2002]
$40 billion
Benjamin & Margulis [1996]
$50-60 billion
[2000]; Aram [1989]). However, while angels have entrepreneurship in common, they come from many fields.
Sullivan [1991] found that no one professional background
accounts for more than 20% of angels; technical/engineering (17%) and healthcare (15%) are the two most frequently noted fields of expertise. It is noteworthy that
lawyers and doctors are less likely to be angel investors.
Some researchers have considered why such a large percentage of angels are themselves entrepreneurs by testing
whether it is their differing perception of risk or a perceived superior ability to select good investments (Maula,
Autio, and Arenius [2003]). Sullivan [1991] did find that
SUMMER 2007
angels who were/are entrepreneurs perceive less downside risk in start-ups than do other investors.
Education Several studies have found that most angel
investors (60%-80%) have a college degree and many
(28%-42%) also have graduate degrees (Van Osnabrugge
and Robinson [2000]; Hill and Power [2002]; Gaston
[1989]; Aram [1989]).
Deal Characteristics
Investment Size Van Osnabrugge and Robinson
[2000] cite over 10 studies showing that the average
THE JOURNAL OF PRIVATE EQUITY
55
EXHIBIT 3
Summary of Angel Investor Characteristics
Demographics:
Age
Gender
Education
Net Worth
Business Background
Deal Characteristics:
Investment Size
Frequency
Geography
Industry
Company Stage
Investment Process:
Sourcing
Co-Investing
Due Diligence
Contract Structure
Role/Involvement
Motivations
ROI Expectations
Holding Period
Investment Criteria
Non-financials
47-50 years old
85-95% male
60-80% have college degree
Most over $1 million
70% own/manage a business; 83% have entrepreneurial
experience
Average is $50-75,000; 85% is under $250,000
One deal every 18-24 months
Close to home (75-85% within 50 miles of home)
Eclectic; prefer industries they know; manufacturing
most common
Most invest during formation or company less than two
years old
Friends and business associates
Not invest alone; 80-90% of deals have multiple angels
Infonnal, subjective, focus on entrepreneur
80% of deals have simple common stock structure
Hands on; meet or talk with entrepreneur several times
each month; full or part-time employee 40% ofthe time
Most expect 25-30%
Average is five years
Focus on quality ofthe entrepreneur
Thrill/fun of helping start a new company is a
significant motivation for most angels
Sources: Primary sources are Caston [1989]; Freear, Sohl & Wetzel [1990, 1992, 1993, 1994J, Hill & Power [2002], Sullivan & Miller [1990,
and Benjamin & Margulis [2001].
investment ranges from $50,000 to $150,000, and their
data from angel matching services shows a median of
$75,000. Additional studies also show an average investment in the same $50-75,000 range (Hill and Power
[2002]; Aram [1989]; Gaston [1989]; Linde and Prasad
[2000]; Freear, Sohl, and Wetzel [1994]). These studies
find that a typical angel investor allocates 5%-20% of their
portfolio for new venture funding. It is noteworthy that
Benjamin and Margulis [2001] describe it as a bimodal
56
A PROFILE OP ANGEL INVESTORS
1996],
distribution with a bulge at $25-100,000 and one at
$100-250,000 as follows:
•
•
•
•
Investment under $25,000 (20%)
$25-99,000 (40%)
$100-250,000 (25%)
Over $250,000 (15%)
Gaston [1989] found an average of $37,500 (in 1989 dollars) with the following distribution of investment size:
SUMMER 2007
EXHIBIT 4
Primary Sources of Angel Investor Characteristics
Authors
Sample Size
Comment
Excellent theory-testing research using
intemational data; extensive up-to-date
literature review
More anecdotal than statistical
Proprietary, only partial data published;
would not provide full tabulation when
requested
Excellent survey of angel investor best
practices
Maula, Autio &
Arenius
2003
6007 adults in
Finland
Hill & Power
2002
50
Benjamin &
Margulis
2001
n/a
Amis &
Stevenson
2001
50
Van
Osnabrugge &
Robinson
2000
Mostly literature
review, primary
data on 70 Angel
matching services
Comprehensive review of literature, little or
no primary data
Sullivan &
Miller
1996
214
Insightful work segmenting angels into three
investor types (economic, hedonistic,
altruistic).
1996
279
(Canada)
Thorough study of psychological attributes of
angels
1994 &
1992
184
Duxbury,
Haines &
Riding
Freear, Sohl
and Wetzel
SUMMER 2007
Date
Freear, Sohl
and Wetzel
1993
409
Sullivan
1991
210
Sullivan &
Miller
1990
214
Freear, Sohl &
Wetzel
1990
284
Gaston
1989
435
Wetzel
1983
n/a
Compares angels with non-angels
Seven year longitudinal survey of members of
an investor matching network (1985-1992).
Found demographic data consistent with other
studies. Found investor behavior relatively
constant over time.
Found angels who are/were entrepreneurs
perceive less downside risk in start-ups than
do other angel investors
Interesting study which tests if two aspects of
finance theory (risk/retum tradeoff and
wealth-maximization objective) hold for
angels
Studied investors in new technology firms
Extensive profile of angel investor
characteristics including breakouts by angel
subtypes.
Considered the first/founding study of angel
investors; the stream of angel investor
literature begins here.
THE JOURNAL OF PRIVATE EQUITY
57
•
•
•
•
•
•
Investment under $35,000 (21%)
$35-85,000 (22%)
$85-175,000 (21%)
$175-350,000 (14%)
$350-875,000 (15%)
Over $875,000 (8%)
Frequency Most angels have about three deals in
their portfolio and do a deal about every 18-24 months.
The findings on deal frequency vary slightly:
2. Monitoring: Given the non-public nature of start-up
companies and the substantial information asymmetry between the investor and the entrepreneur,
many angel investors actively monitor their investments (Hill and Power [2002]). This active monitoring is easier to accomplish for geographically
proximate firms. See Lerner [1998] for a discussion
of this monitoring issue; his article puts this concept in the context of the classic moral hazard and
agency problem theories.
• Freear and Wetzel [1991]: one deal every two years
Gaston [1989] makes an interesting point about
• Gaston [1989]: one deal every 18 months (3.5 deals
geography: angels live everywhere, not just in large cities.
in portfolio)
Angel investing is not just a Silicon Valley or urban
• Freear, Sohol, and Wetzel [1992]: almost one deal per
metropohs phenomenon.
year
Industry Angels invest in a wide variety of industries
• Sullivan [1991]: one deal every two years
(Van Osnabrugge and Robinson [2000]). Gaston [1989]
found that 68% of angels had invested in a manufacturing
While space prohibits a detailed review, it is worth
venture
but at least 20% had invested in areas such as retail,
noting that an interesting stream of research exists on
financial services, construction and service businesses.
repeat angels. See the works in the bibliography by
However, angels prefer to invest in industries where they
Wright, Westhead, Rosa, and Van Osnabrugge. Van
have
some experience (Wetzel [1983]; Freear, Sohl, and
Osnabrugge [1998] found that 35% of angels are oneWetzel
[1995]; Aram [1989]; Van Osnabrugge and
time investors whereas 65% are repeat angels. Repeat
Robinson [2000]). Hill and Power [2002] provide a sucangels account for the majority of angel investments.
cinct summary: "I invest in what I know." A conflicting
Geography Most angels invest close to home.
finding
by Benjamin and Margulis [2001] was that 59%
Findings include:
of angels invest in industries in which they have no direct
• Riding and Short [1987]: 85% of investments within experience.
Stage Most angels invest in start-up and early stage
50 miles of home or office (even though 36% said
companies. In fact, 50%-75% invest in companies during
they have no geographic limitations)
• Benjamin and Margulis [2001]: 65% prefer invest- their first year or two of formation and/or operation
(Freear, Sohl, and Wetzel [1996]; Freear and Wetzel [1989];
ments close to home (within 300 miles)
Aram
[1989]; Sohl [2004]). This finding is in marked con• Aram [1989]: 86% of investments are within 150
trast to formal venture capital funds that invest primarily
miles of home (76% within 50 miles)
• Freear, Sohol, and Wetzel [1992]: 66% of investments in companies with operating histories of three tofiveyears.
are within 300 miles
• Freear, Sohol, and Wetzel [1994]: 52% prefer investInvestment Process
ments close to home; 24% have no geographic
limitation
Sourdng/Co-investing Angels typically find deals
through business associates and tend to invest with others
Researchers have offered two primary explanations
rather than alone. Because the data show the two are interfor this phenomenon:
twined, this section combines these seemingly distinct
characteristics, that is, how do angels find opportunities
1. Sourdng: Since angels source deals through business
and do they prefer to co-invest with other angels or act
contacts, given that business contacts are most often
alone? Angels source most deals from business associates,
geographic in nature, it is reasonable that angels
especially those who are also investing in the deal.
mostly discover deals in their own geographic area
Prior studies have clearly shown that angels find
(Hill and Power [2002]).
deals through personal contacts, friends and business
58
A PROFILE OF ANGEL INVESTORS
SUMMER 2007
associates being the most prevalent source in the range
of 57%-80% (Van Osnabrugge and Robinson [2000];
Benjamin and Margulis [2001]; Freear, Sohl, and Wetzel
[1990]). Consistent with the view that this market is very
private and inefficient compared to public capital markets, deals are rarely identified through intermediaries
such as attorneys, accountants and bankers, let alone
through some more formal market clearing house (Freear,
Sohol, and Wetzel [1990]). In addition to the typical personal networking method of sourcing deals, an increasing
number of angel investors subscribe to matching services
that allow entrepreneurs to post their business opportunities to be seen by angel investors who subscribe to the
matching service, which functions in a quasi-marketplace role.
Angels are approached by the entrepreneur and by
other investors in the firm. The role of the entrepreneur
is paramount: Maula, Autio, and Arenius [2003] found
that angels who are familiar with entrepreneurs (any entrepreneur) are four times more likely to invest than those
who do not have entrepreneur acquaintances. However,
angel investing is rarely a dyad between the entrepreneur
and investor. Most deals have multiple angel investors,
and studies suggest that there are typically two or three
angels in each deal, most (61%-95%) preferring to invest
alongside others (Gaston [1989]; Van Osnabrugge and
Robinson [2000]; Van Osnabrugge [1998]; Freear, Sohol,
and Wetzel [1994]).
It is also noteworthy that many deals have a lead
investor. Freear, Sohl, and Wetzel ([1990] pp. 228) found
that 57% of deals have a lead investor who is "not always
the first investor, but usually the most aggressive and provides others with a sense of security." These lead investors
often help recruit other investors and help facilitate or
coalesce the investment team.
Diligence Process While angel investors are very
careful with their money, their due diligence process is different from that of professional venture capitalists: it is less
analytical, less extensive, and more personal. Van
Osnabrugge and Robinson ([2000] pp. 162) quote one
angel to make this point: "It's about 70% just gut feeling
and 30% financial analysis."
Angels primarily assess the entrepreneur, not the
business plan; and building trust between the entrepreneur
and the potential angel is primary (Harrison, Dibben, and
Mason [1997]). An often-heard angel investing maxim is
"Better to invest in an A player with a B idea, than a B
player with an A idea."
SUMMER 2007
The number of deals actually consummated by venture capitalists is very small (under 1%) compared to the
number of deals they see, and even a small percentage of
those for which they do full due diligence. For angel
investors the numbers are less clear, but it appears that
they do a higher percentage of deals than venture capitalists (study results range from 4%-22%) (Sohl [2004];
Linde and Prasad [2000]; Gaston [1989]). A higher yield
rate could be viewed as consistent with an angel's method
of sourcing deals: most come via personal recommendation from the angel's business associates.
Deal Selection Factors The factors considered by
angel investors in accepting or rejecting deals is an important part of the investment process and treated separately
in the next section.
Contract/Structure Unlike the more sophisticated
deal terms and complex securities used by venture capitalists, angels mostly make simple common stock investments (Van Osnabrugge [1998]; Hill and Power [2002];
Gaston [1989]). However, recent studies show increased
use of convertible preferred stock (Benjamin and Margulis [2001]; Linde and Prasad [2000]). Perhaps as venture
capital investing became more widely known, angel
investors and entrepreneurs have adopted some venture
capital tactics.
Role/Involvement One of the most noteworthy
characteristics of angel investors is their active involvement in the firm. The majority of angels play a handson role; various studies have shown 66%-85% with active
roles (Van Osnabrugge and Robinson [2000]; Freear, Sohl,
and Wetzel [1992]; Freear, Sohl, and Wetzel [1995]).
Like venture capitalists, angels often (50%-60%) sit
on the firm's board of directors. Some studies, however,
have reported board member occurrence as low as 15%
and as high as 70% (Van Osnabrugge and Robinson
[2000]; Freear, Sohl, and Wetzel [1992]; Freear, Sohl, and
Wetzel [1990]; Gaston [1989]).
In fact, the distinction between entrepreneur and
investor is often rather blurry. As CuUen explains, "They're
called angel investors, a cross between venture capitalists
and entrepreneurs who like to roU up their sleeves and roU
the dice. These are individuals who are putting their money
and their varied talents to work in private companies."
(Cullen [1998] pp. 1). Often an angel investor, especially
a lead angel, becomes a co-founder, and very often an angel
functions as a full or part-time employee. Several studies
show 20%-40% of angels have some employee relationship (Van Osnabrugge and Robinson [2000]), specifically:
THE JOURNAL OF PRIVATE EQUITY
59
• 25% work fuU or part-time (Benjamin and Margulis
[2001])
• 18% work part-time, 15% full-time (Freear, Sohl,
and Wetzel [1992])
• 20% work fuU or part-time (Freear, Sohl, and Wetzel
[1990])
• 40% work full or part-time (22% part-time, 17%
fuU time) (Gaston [1989])
Some studies have quantified the amount of involvement. Linde and Prasad [2000] found that angels spend
one to two days per month helping the company. In his
study of 141 angels. Van Osnabrugge [1998] found angels
averaged approximately eight phone conversations and
over three personal visits per month with the invested
firms.
Several rationales for this high involvement have
been offered and some have been tested. First, this involvement is consistent with non-financial motivations discussed below, such as the enjoyment of helping start a
new firm and mentoring entrepreneurs. Leonard and
Swap [2000] refer to angels as "mentor capitalists." A
second reason is that many angels have very high needs
for achievement and dominance; angels need to feel that
they can influence the way their money is being used
(Duxbury, Haines, and Riding [1996]). Third, active
involvement is a tactic to mitigate the opaque nature of
private firms and reduce the information asymmetry
between the investor and the manager/entrepreneur (HiU
and Power [2002]).
Motivations
ROI expectations Return on investment is generally considered the primary, if not sole, motivation for
investors. The idea of utility in economic theory, would
define return to include non-financial benefits (Fania and
Miller [1972]). While fmancial profit is still the largest
motivation for investors, including angel investors, nonfinancial benefits are important to angel investors and are
discussed below.
Studies show that angel investors expect returns
around 30%, compared to an average return for the S&P
500 of 12%. However it is noteworthy that Van
Osnabrugge [2000] found that only 30% of angels claimed
to have calculated an expected rate of return and that
many were unable to provide return estimates. Average
expected returns from various studies follow:
60
A PROFILE OF ANGEL INVESTORS
•
•
•
•
•
•
•
34% (Hill and Power [2002])
30% (Benjamin and Margulis [2001])
32% (Freear, Sohol, and Wetzel [1995])
32% (Linde and Prasad [2000])
28% (Sullivan and Miller [1990])
25% (Gaston [1989])
33% for repeat angels (Van Osnabrugge [1998])
Holding Period Studies find that angel investors hold
their investments for about five years:
•
•
•
•
•
•
4.8 years (Freear, Sohl, and Wetzel [1995])
4 years (Linde and Prasad [2000])
5-6 years (Van Osnabrugge [1998])
5-7 years (Hoontrakul [2001])
5.1 years (Gaston [1989])
8 years (Benjamin and Margulis [2001])
Investment Criteria Several researchers have examined the criteria angel investors use to evaluate potential
investments (not to be confused with their motivation for
angel investing). Van Osnabrugge and Robinson [2000]
find that four of the top five investment criteria relate to
the entrepreneur: 1) enthusiasm of the entrepreneur, 2)
trustworthiness of the entrepreneur, 3) sale potential of the
entrepreneur's product, and 4) expertise of the entrepreneur. Hill and Power [2002] find the top three factors to
be quahty management, growth potential and barriers to
entry. It is noteworthy that both studies find that ROI is
not the top criterion.
Non-financial motivations Perhaps the most distinguishing characteristic of angel investors, compared to
venture capitalists and the general investor, is the significance of non-financial motivations. Clearly, angel investors
value these non-financial benefits of new venture investing
more than VCs and general investors do.
One perspective is that, like works of fine art, diamonds and home ownership, there is a "consumption"
benefit to the investment. Investors benefit from enjoying
the beauty of the art, wearing the jewelry and living in
the house in addition to the financial appreciation they
hope to gain from the investment.
In Van Osnabrugge and Robinson ([2000] pp. 117),
an angel investor encapsulates the importance of nonfmancial benefits better than the statistics cited below:
"I'm not in it for a fast buck. Besides, it's cheaper and
more fun than buying a yacht. I enjoy investing in
companies and getting involved; it's a real buzz." This
SUMMER 2007
sentiment is supported by SuUivan [1991], who finds that
for one-third of angel investors, return on investment is
not their primary motivation; rather, primary motivations include the fun of an interesting investment
and the enjoyment of an active role in starting the
company.
A broader perspective is that angel investors value
benefits of investing in new ventures that stretch beyond
the direct financial return on investment. While uncovering and measuring these benefits presents challenges to
a scholar, several studies cited below provide interesting
insights into this important dimension of angel investing,
with the most comprehensive and interesting work offered
by Sullivan and Miller.
Freear, Sohl, and Wetzel [1995] find that 50% of
angels accept lower returns because part of their return is
psychic income, such as the creation ofjobs in the community or the satisfaction of helping another entrepreneur
succeed. In addition to the rate of return, HiU and Power
([2002], pp. 33-40) illuminate two other motivations. First,
the thriU of helping a company start and succeed (citing
such investor comments as "I enjoy helping ... I try to be
useful in both funding and advising," and "the psychic
rewards are huge... like a board game."). The second motivation is psychic compensation. This is illustrated by
investor comments including "[The investment is] more
of a trophy to put on a shelf than a way of increasing personal wealth," and "I like being able to tell friends that I
am part ofthe 'club' that is making investments."
Linde and Prasad ([2000], pp. 81) observed that
"[t]hese angels invest in early stage companies because
they love the excitement of new venture start-ups. The
insights, skills and funds they bring to emerging ventures
are invaluable resources." Linde and Prasad [2000] also
found the following occurrence of non-financial reasons:
desire to "give back" (60%); enjoy involvement (56%);
networking (28%); other (44%); stay up-to-date (24%); and
challenge (24%).
As noted above, SuUivan and Miller have conducted
excellent research on the non-financial motivations of
angel investors. Their first study in 1990 used various
investment scenarios to determine whether angel investors
would give up some portion of a guaranteed 20% financial return in order to invest in a situation identical in all
except its non-fmancial aspects. Their findings were illuminating: a large percentage of angel investors were willing
to accept a lower return in exchange for non-financial
benefits (SuUivan and MiUer [1990]):
SUMMER 2007
•
•
•
•
•
•
Socially beneficial product (83%)
Fun to be a part of the company (66%)
Creation of local jobs (65%)
Firm nearby vs. 300 miles away (63%)
Interacting with highly regarded investors (61%)
Company committed to social ideals you support
(59%)
• Exciting investment (47%)
Sullivan and Miller [1996] also conducted very
interesting research segmenting angels into three types
or clusters: economic (maximize wealth), hedonistic
(non-economic or psychic income), and altruistic (help
entrepreneur and/or society).
• Economic Investor: (47% of total)
• Only financial motivations are important
• Highest ROI expectations (30% versus 21% for
hedonistic)
• Perceives more risk than other clusters (2—3x)
• Largest average investment
• Hedonistic Investor: (31% of total)
• Emphasis on enjoyment aspects of investing
(enjoys entrepreneurial process, enjoys fun of
interesting investment)
• Lowest ROI expectations (21% versus 30%
economic)
• More likely to invest with a group
• Slightly older than other clusters
• Altruistic Investor: (22% of total)
• See value in supporting new business and/or
socially beneficial product
• More patient investors (longest holding period—
seven years)
• Average investment smaUer
It is important to note that for aU three clusters, economic benefits remain the highest factor, and all three
segments average about 2.5 investments. However, it is
interesting that the economic investor cluster comprises
less than half (47%) of aU angels.
Angel Investor Classification Schemas
In addition to the segments noted by SuUivan above,
several other researchers have found clusters of angel
THE JOURNAL OF PRIVATE EQUITY
61
investors sharing similar characteristics among these same
variables. Following are brief descriptions of a few of these
classification schemas.
Gaston [1989] (the most comprehensive description
including frequency is indicated in parentheses):
• Business Devils (27%): wants/obtains absolute control, 51% or more
• The Godfather (5%): semi-retired, mentor, wealthier
• Peers (33%): fellow successful entrepreneurs
• Cousin Randy (10%): relatives who invest
• Dr. Kildare (9%): doctors, lawyers, accountants
• Corporate Achievers (13%): successful executives
from large corporations
• Daddy Warbucks (33%): wealthiest, providing 68%
of total angel funding
• High-Tech Angels (13%): invest only in high-tech
• The Stockholder (11%): less active/involved investors
• Very Hungry Angels (15%): want to invest more
than entrepreneur wants
Hill and Power [2002]:
•
•
•
•
•
•
•
•
•
•
Lead Dogs (bring other angels to the deal)
Guardian Angels (advocates/mentors)
Silver Spoons (second generation money)
Dark Angels (want to take over)
Arch Angels (angels that have done a lot of deals)
Cherubs (neophyte angels, usually follow other
angels)
Will-work-for-equity Angels (barter services for a
share of ownership)
Corporation Angels (companies that invest in startups, often as a R&D strategy)
Fallen Angels (reputation as a high-flyer with serious
liquidity or loss of wealth problems)
Angel-Knows-Best (angels that become overbearing)
Benjamin and Marguhs [1986] describe nine types
of angels:
• Value Added: very experienced angel, active
• Deep Pocket: successful entrepreneurs who have
sold their firms
• Consortium: loose group of three to six angels
working together
• Partner: high desire for control; may want to take
over someday
62
A PROFILE OF ANGEL INVESTORS
• Family: angels from same family pooling funds; one
family member leads
• Barter: active, hands-on; invest cash and services in
exchange for more equity
• Socially Responsible: invest in ventures that address
social problems
• Unaccredited: less wealthy, less experienced
• Managers: former entrepreneurs or execudves; want
to be active
CONCLUSION
The literature on angel investors is modest and recent
compared to its scholarly ancestors in entrepreneurship
and economics. However, over 25 years a full and consistent picture has emerged: angel investors are mostly
(80%) successful entrepreneurs who provide valuable capital (averaging about two to three deals of $75,000 each)
and invaluable assistance (70%—80% are hands-on) to
young firms in their community (70%-80% within 50
miles of home). They are not in it just for the financial
returns; they enjoy the fun and challenge of the new venture process and like helping.
The group is interesting and important: angel investment is a very large and important source of capital for
start-up firms and, by implication, an important force in our
economy given the known stadstic that small firms generate almost all job growth. The data implies that Schumpeter [1934] was right: the economy does seem to depend
on entrepreneurs, and entrepreneurs depend on angels.
This article synthesizes into a knowledge base what
we know about angel investors and, as such, provides a
foundation for additional/deeper research on angels such
as the author's forthcoming study on the angel investors
who found new banks.
For this researcher, walking in the land of angel
investors has been an exhilaratingjourney. Angel investors
are fascinating people who drive most of the job creation
in the United States, yet they are invisible. If nothing else,
perhaps readers of this study have also enjoyed the journey
and better understand this hidden and powerful economic
force.
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