Five Reasons Why Angel Investors (Think “Shark Tank”) Matter To The Economy

Thomas Lohnes / AFP/Getty Images

A hallmark of angel investors is aggressive risk-taking in the hopes that when a company's ready to go on the market, they'll see big returns

If you’ve watched “Shark Tank” on ABC (or its British forbear “Dragon’s Den” on BBC in America), you’ve seen, to some extent, angel investors in action.  Underneath the high-gloss of ratings-driven reality TV, you can catch a glimpse of this opaque, mysterious investment market.  As Colleen Debaise of the Wall Street Journal explains, angel investments can act as bridges “between that money you’ve gotten from friends and family and the venture capital that you hope to secure down the road.”  Of course, there’s a price to pay:

“An angel is a wealthy individual willing to invest in a company at its earlier stages in exchange for an ownership stake, often in the form of preferred stock or convertible debt. Angels are considered one of the oldest sources of capital for start-up entrepreneurs…

But little is known or understood about the angel market, largely because it consists of individuals who make investments quietly.”

Angels, Debaise notes, are willing to take big risks in a company’s early stages if they see big opportunities for expansion–and profit.  In other words, these investors are picky, and in exchange for taking on serious risk, they can demand serious concessions from entrepreneurs.

At the same point, this class of stealth investors is incredibly important to business development in this country–and therefore, to the economy as a whole.  That’s the overarching takeaway from the report “The Angel Investor Market In 2011: The Recovery Continues” by Jeffrey Sohl.  He’s Director of the Center for Venture Research at the University of New Hampshire.  The report’s short, but heavy on the numbers.  So we’ve broken it down into the five key things you should know about the angel investment market right now.

  1. Angel Investors Create Jobs: According to Sohl’s calculations, these investments created 165,000 American jobs in 2011, “or 2.5 jobs per angel investment.”
  2. Investments Are Up–By A Lot: The short version is that more people are putting more money into more businesses.  In other words, the market for this particular type of aggressive, high-risk investment has grown.  Last year, angels invested $22.5 billion–a 12 percent increase from 2010.  And the number of people in the game has increased by 20 percent.  Last year, 318,480 people pumped money into 66,230 ventures.  And they were willing to put more cash into each deal.  That’s good news, since angel investment seriously contracted when the economy tanked in 2008 and 2009.  In 2010, activity picked up, and last year, it gained more steam.  “It appears that optimism in angel investing is taking hold,” a UNH news release quotes Sohl.
  3. After Two Years, Angels Are Taking More Risks: This is good news for early-stage entrepreneurs.  The years 2009 and 2010 were lean years for start-ups.  In 2010, only 31 percent of angel funding went to seed and start-up projects, while 67 percent of funding went to early- and expansion-stage–and somewhat safer–investments.  Here’s another way to look at it: The investors whose signature move is taking aggressive, well-reasoned risks weren’t taking many risks.  But last year, the overall angel investment portfolio’s balance shifted, with 42 percent of capital going to seed and start-up companies, while only 55 percent went to companies in early- and expansion-stages.
  4. And Optimism Aside, Angel Investing Is Still Really Risky: Investors can leave a company for any number of reasons.  Last year, nearly a quarter of angels saw the door when their investments went bankrupt.  Meanwhile, 54 percent of investors left when their company merged or was acquired by another business.  And, when angels left companies, they only got out with a profit about half the time.  Meanwhile, Sohl writes, “annual returns for angels’ exits (mergers and acquisitions, notes and IPO’s) were between 18 percent and 28 percent, however, these returns were quite variable.
  5. High-Tech Is Still The Hot Investment:  Last year, nearly one-in-four angel investments went toward software, while one-in-five went into health care and medical equipment, and media trailed the pack. Here’s the full breakdown of the deals:
Sector
Software
Health Care/Med Devices
Industrial/Energy
Biotech
IT Services
Media
Percent of Deals23%19%13%13%7%5%

Source: Center for Venture Research, UNH

Comments

  • http://www.angelsden.com/ Bill Morrow

    Angels ARE important.
    TV shows pretending to show angel investing create an overly aggressive tableau … they are pantomime shows and say more about the egos of the “sharks” or “dragons” than illustrating what the real world is about.
    Enjoy those shows for the spectacle that they are, but do not for one minute believe that real angels behave like this.

    • aloder

      Good point, Bill. I mainly drew on that example because for many non-entrepreneur laypeople, there’s no practical comparison to the term “angel investor.” Outside business circles, it’s a mysterious world, indeed.

      As a business reporter, I am very interested in the effects of this class of investor on the economy, especially in New Hampshire/New England. If you (or someone you know) can shed some light on the state of the market here, and how it works, I’d love to hear from you. I can be reached at aloder@nhpr.org

      • http://www.angelsden.com/ Bill Morrow

        Hey Amanda … angels are very active in NE especially, which is good.

        I am old enough to remember when banks would lend you money without taking your first born as collateral, nowadays if you are looking to grow your business and have exhausted your family’s resources, there are few other places that you CAN go.

        The engine room of any economy is small companies employing 3/4 people … if you can convince an angel to invest you not only get their money, but much more importantly you get their skills and expertise and contacts.
        Yes you have to give away a part of your company, but many consider this a worthwhile swap.

        Its not for everyone, some cannot give up their 100% stake/control and that’s fine …. for others its a route to quicker growth and possible expansion beyond their own levels of expertise.

      • Ron Carmouche

        I know there is a vast investment area (areas) that are yet unknown to Angel Investors due to cultual and custom innovations that has its own scope and majorly over looked…

        This investment % can be alot more impressive if they do their homework & research in these areas. They would be much surprised to descover this untapped new way of investing out there.

        Food For Thoughts!

        Ron Carmouche’

  • http://twitter.com/MIZZSUCKAFREE Ms Suckafree Ellis

    Are you an expert in the field Bill?

    • http://www.angelsden.com/ Bill Morrow

      “expert” is not a term I like, but I do run Europe and Asia’s largest angel network (www.angelsden.com) and we are opening up in another 22 countries this year, so I certainly know a thing or two about this area.
      We have over 5000 angels registered with us, across the world and over 400 of them log on every day looking for deals to invest in.
      We receive 120 business plans a day to feed their hunger …. there is no shortage of growth capital out there, just a shortage of people who have proven that their is a market for their product and who have some form of unique selling point.

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