Frequently Asked Questions about the Connecticut Angel Guild
What is an Angel Investor?
Angels are individuals who invest their own funds, unlike venture capitalists, who manage the pooled money of others. Under the US Securities laws, angel investors must be Accredited Investors.
What is an Accredited Investor?
Under Rule 501 of Regulation D of the Securities Act of 1933, Accredited Investors include:
- a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
What is the Funding Gap served by Angel Investors?
Angel capital fills the gap in start-up financing between "friends and family" who provide seed funding, and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under US$1-2 million. Thus, angel investment is a common second round of financing for high-growth start-ups.
Angels and venture capital funds provided nearly equal amounts of funding for start-ups but angels invest in more than ten times as many companies. Angels invested $25.6 billion into 51,000 companies in 2006 compared to venture capitalists who invested $26.1 billion into 3,522 companies. The average angel financing is about US$500,000 while the average venture investment is $7 million.
Healthcare services, and medical devices and equipment accounted for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software (18 percent) and biotech (18 percent). The remaining investments were approximately equally weighted across high-tech sectors.
What is the average angel investment?
Angels typically invest between $25,000 and $100,000 per transaction, and up to $500,000 as a group. They invest in one to four transaction per year. On average, angels are patient, with an average term for holding an investment of eight years. For the risk and added value they provide, angels seek returns of at least ten times their investment.
What is an Angel Group?
The term "angel" originally came from England where it was used to describe wealthy individuals who provided money for theatrical productions. In 1978, William Wetzel, founder of the Center for Venture Research at the University of New Hampshire completed a pioneering study on how entrepreneurs raised seed capital in the USA, and he began using the term "angel" to describe investors that supported them. According to the Center for Venture Research, there were 234,000 active angel investors in the U.S. in 2006.
In the late 1980's, angels started to coalesce into informed groups to share deal flow and due diligence, and pool their funds to make larger investments. Angel groups are generally local organizations made up of 10 to 150 accredited investors interested in early-stage investing. There are over 300 angel groups in the U.S. with approximately 10,000 individual angel investors.
Angel groups syndicate deals to other angel groups through organizations like Angel Capital Association. A sponsoring group has typically done its due diligence and negotiated a term sheet before networking with other groups to raise additional capital.