Q. Where did the term “angel investor” come from?
A. University of New Hampshire Professor William Wetzel coined the term “angel investor,” taken from the early 1900s’ practice whereby wealthy businessmen would invest in Broadway productions. Today “Angels” typically offer expertise, experience and contacts in addition to money.
Q. How would you describe angel investors and their activities?
A. Angel investors are individuals who invest in businesses looking for a higher return than found in traditional investments, and who often relish the thought of being a coach, a hands-on team member, or giving something back to the community. Many are successful entrepreneurs who want to help other entrepreneurs get their business off the ground. Angels usually provide the bridge capital from the self-funded stage of the business to the point the business qualifies for the level of funding provided by professional venture capitalists (VCs) or corporate strategic partners. An angel “round” of financing is typically $100,000 – $ 1 million. Professional VCs average $10 – $14 million per round, mostly in later stage companies, though a relative handful of seed stage VCs will fund smaller, earlier amounts, from $500,000 to $2.5 million.
Q. Are there many angel investors?
A. With more than 2,500,000 individuals in the U.S. with a net worth in excess of $1 million, it is estimated that there are perhaps 400,000 active angel investors in the U.S. alone, funding 50,000 businesses per year. By comparison, professional venture capital funds about 5,000 companies each year. The total angel investment per year is estimated at about $40 – $100 billion, about twice the total of all professional VCs. Also, there are at least 170 known angel groups throughout the United States. The Ewing Marion Kaufman Foundation in Kansas City has done research on business angel investing groups, along with William Wetzel at the University of New Hampshire’s Center for Venture Research.
Q. What is the profile of the typical angel investor?
A. The “average” private investor is 47 years old with an annual income of $130,000, a net worth of $750,000, is college educated, has been self employed and invests $37,000 per venture.
- The above statistics imply that most accredited investors do not earn over $200,000 AND have a net worth of over $1M. It is usually either/or, so that the “average” private investor, although accredited, would not meet the rules of accreditation. For instance, if there were two investors, one, an executive having an annual income of $200,000 and a net worth of $400,000, and the other, a retired person having an income of $40,000 and a net worth of $1.2M, their “average” would be an income of $120,000 and a net worth of $800,000. But they are both accredited.
- Most angels invest close to home and rarely put in more than a few hundred thousand dollars.
- Informal investment appears to be the largest source of external equity capital for small businesses. Nine out of 10 investments are devoted to small, mostly start-up firms with fewer than 20 employees.
- Nine out of 10 investors provide personal loans or loan guarantees to the firms they invest in. On average, this increases the available capital by 57%.
- Informal investors are older, have higher incomes, and are better educated than the average citizen, yet they are not often millionaires. They are a diverse group, displaying a wide range of personal characteristics and investment behavior.
- Seven out of 10 investments are made within 50 miles of the investors home or office.
- Investors expect an average 26% annual return at the time they invest, and they believe that about one-third of their investments are likely to result in a substantial capital loss.
- Investors accept an average of three deals for every 10 considered. The most common reasons given for rejecting a deal are insufficient growth potential, overpriced equity, lack of sufficient talent of the management, or lack of information about the entrepreneur or key personnel. There appears to be no shortage of informal capital funds. Investors included in the study would have invested almost 35% more than they did if acceptable opportunities had been available.
Q. What is the role of angel groups, such as New Mexico Angels?
A. The role of an angel investor group or network, such as New Mexico Angels, is to collaborate for sourcing, screening, and evaluating deals, while providing greater shared financial leverage and a deep pool of supporting resources. There are over 170 angel groups operating in the U.S., from casual associations of individuals, to rigorous, pooled investment clubs. Some of these groups also operate investment funds; at this time, New Mexico Private Investors does not operate such a fund, but may at a future date. NMA is now a member of the Angel Capital Association, recently formed by the Kauffman Foundation. We have done this to learn more about Best Angel Practices so that we might continually work to upgrade and improve our angel investing methods and practices. There is a cost to the organization of this membership, currently at $10 per member.
Q. Where does New Mexico Angels operate?
A. New Mexico Angels seeks to make investments primarily in New Mexico businesses throughout the state. Investors must be “accredited investors,” generally those individuals having at least $1 million net worth, or two immediate past years in which personal income exceeded $200,000 annually. Angels will make individual, not joint decisions, though each successful presenter is expected to attract multiple angel investors. New Mexico Angels urges all investors to perform their own “due diligence” and takes no responsibility for any investment made by any member. Also, New Mexico Angels has met with and seeks to work with neighboring angel groups, such as those in El Paso, TX, Tucson, AZ and Boulder, CO. Meetings will be held on consecutive days in both Albuquerque and Santa Fe to better serve our members in the Albuquerque and southern parts of New Mexico as well as Santa Fe and Northern New Mexico. In this way those who can not attend one of the meetings, will have the opportunity to attend the other meeting. Also, companies will be able to meet more potential investors.
Q. What is the legal form of NMA?
A. NMA is a New Mexico not-for-profit corporation, 501(c-6) – a member organization similar to a Chamber of Commerce.
Q. Describe the meetings and their frequency, as well as the costs involved in NMA.
A. NMA meets in the evenings to have two or three companies present at a dinner preceded by a networking social period. The presentation is followed by a member’s only session to review the presentation and move ahead toward investing by getting interested members to finish off the Due Diligence and work out terms for investing. However, the frequency of these meetings will be a function of the quality of the companies seeking investment, but should be at least quarterly. We are currently considering other formats as well, including breakfast and/or lunch meetings that might be utilized for companies that need smaller amounts of capital to get started.
Also, there are Screening Meetings held for companies seeking funding held by the NMA Screening Committee to discuss the potential merits of investing in one of the companies. In order to present to our entire group, a company must first pass muster with the Screening Committee. NMA actually has two separate and distinct Screening Committees, one for technology companies and one for non-technology companies.
In order to simplify the costs of these Screening and Angel Investment Dinner meetings, to offset the costs associated with doing business, including travel, postage, website control, postage, printing, etc., there will be a modest annual charge for the years’ meetings. The current annual fee for members is $600, with an additional charge of $300 to cover all of the year’s events, including meals. However, prospective members and guests may attend one dinner meeting for $200 or one breakfast or lunch meeting for $60 to further assess their own individual merits of membership. Spouses and Significant Others of members attend the meetings for simply the cost of the meal.
Q. Do all Angel organizations charge their members a membership fee?
A. According to the Angel Capital Association, 87% of organizations charge membership fees. Most of the ones with no fees are informal organizations (investment clubs) with no structure (ie., not an LLC or 501c, etc.). Of those that charge fees, the lowest is $250 per year, with the highest being over $5,000 per year. The average membership fee is $1,108, and the median membership fee is $1,000.