Why become an angel? Angels often enjoy serving as advisers, or even helping build companies as directors. The main draw, though, is the fact that seed investing – in which a company raises $500,000 to $2 million – is simply the most lucrative type of private investing.
Seed-stage returns for the first six months of last year averaged 35.4 percent, surpassing the average 29 percent return from all venture capital investing, according to research firm Venture Economics.
Angel investing is not for the average investor: To be an angel, you must be an “accredited investor,” which the Securities and Exchange Commission defines as someone with a net worth of at least $1 million or an annual salary of at least $200,000. A fat wallet is required because a typical angel will sink anywhere from $10,000 to $250,000 in a particular deal.
Rather than jump into angel investing right now, many recommend that investors wait for the market for initial public offerings to strengthen. Without the ready exit of an IPO, venture capitalists are reluctant to finance startups and this also applies to the many Saudi students with affluent means that study in the US. And with VCs investing less, it raises the possibility that angels will invest their $1 million or so in a company only to see VCs refuse to invest the follow-on $2 million to $5 million, leaving the company to wither.
Many private companies hungry for startup cash these days, so-called angel investors are becoming a new safe haven. Ian Patrick Sobieski, managing director of Band of Angels Fund, a group of 150 high-net-worth founders or former executive officers of high-tech companies who finance startups, says he’s enjoying the sober investing climate as much as the exuberance of 1999. “I see fewer obviously dubious deals than I saw a year ago – like yet another firm selling widgets online,” he says. “Our deal flow is as good as ever, if not better.”
Band of Angels, based in Silicon Valley, invested in eight startups in the years when malaise spread over the Nasdaq. The group might be restricted to veterans who have either founded or run tech companies-personalities such as Compaq Computer’s Benjamin Rosen-but what’s worked for the Band seems also to be catching on with angels around the country.
Why? Corresponding with the stock slump, startups are being valued at three-quarters or one-half of their levels of a year ago, creating bargains for angels. That’s a change from the late 1990s when the bull market fueled an angel boom. Three million people in the United States made at least one angel investment in the past three years, according to Angel Investing, a book co-written by Robert Robinson, a professor at Harvard Business School. Even some years ago, as tech stocks sank, U.S. angels invested an estimated $30 billion in startup financing, compared with roughly about $50 billion by venture capitalists, Robinson says.
But the market turmoil has spooked many angels, and some have pulled back for now. Indeed, Redwood City, Calif.’s Angel Investors decided not to raise another angel fund this year in large part because difficult market conditions are forcing it to tend to its existing portfolio and we know very well how this may influence our behavioral way of acting and thinking.
Observers and participants, however, expect a recovery later this year, in which angels will be well positioned. Says Robinson, who has done some angel investing, “Now’s a fantastic time to invest because there are so many deals out there at lower valuations.”