fool’s gold? This page intentionally left blank scott a shane FOOL’S GOLD? The Truth Behind Angel Investing in America 2009 Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Copyright © 2009 by Oxford University Press, Inc Published by Oxford University Press, Inc 198 Madison Avenue, New York, NY 10016 www.oup.com Oxford is a registered trademark of Oxford University Press All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press Library of Congress Cataloging-in-Publication Data Shane, Scott Andrew, 1964– Fool’s gold? : the truth behind angel investing in America / Scott A Shane p cm Includes index ISBN 978-0-19-533108-0 Venture capital—United States Small business—United States—Finance Investments—United States I Title HG4963.S52 2009 332.60973—dc22 2008012706 Printed in the United States of America on acid-free paper to lynne, ryan, and hannah This page intentionally left blank Contents Acknowledgments ix Introduction one What Is Angel Investing and Why Do People Do It? 13 two How Big Is the Angel Capital Market? 30 three four five six Who Are Angel Investors? 43 How Many Companies Need Angels? 54 What Do Angel Investments Look Like? 78 Who Gets Angel Money? 102 seven How Does the Angel Investment Process Work? 126 eight How Well Do Angel Investments Perform? 144 nine ten What Are Angel Groups? 163 How Do the Best Angels Invest? 186 eleven What Makes a Place Good for Angel Investing? 201 twelve Conclusions 220 Notes 233 Index 271 This page intentionally left blank Acknowledgments I decided to write this book because I had trouble finding accurate data on angel investing I had become interested in angel investing, having joined the North Coast Angel Fund, an angel group in Northeast Ohio, and having conducted a series of focus groups with leading angel investors in Atlanta, Cleveland, Denver, and Philadelphia on behalf of five of the Federal Reserve regional banks As my interest in angel investing grew, I began to read everything I could about the topic and began a series of conversations with entrepreneurs, angels, and government officials I attended the Angel Capital Association’s annual and regional meetings and their Power of Angel Investing Seminars Unfortunately, the more people I talked to and the more things I read, the more confused I became, and the less I thought I understood angel investing The problem was not that the sources of information were unclear—invariably I understood exactly what people were saying Rather, the problem was that all the sources I consulted were long on opinion and short on data While each opinion alone seemed to make sense, I had made the typical academic’s mistake of examining a lot of sources and looking for patterns in the answers As a result, I was left with a jumble of opinions that contradicted each other and little data to figure out which one was right Moreover, when a source provided data to back up its point of view, those data often had two troubling weaknesses First, the data were not internally consistent For instance, one source said that 50,000 U.S businesses per year receive angel investments, but that 10 percent of 17 Zuckerman, G 2006 How the pros tell if a stock is a bargain Wall Street Journal, December Downloaded from http://online.wsj.com/article_print/ SB116510103905339242.html 18 Zheng, S 2007 Are IPOs really overpriced? Journal of Empirical Finance, 14: 287–309 19 Pukthuanthong-Le, K., and Varaiya, N Forthcoming IPO pricing, block sales, and long term performance Financial Review 20 Ibid 21 Haar, N., Starr, J., and MacMillan, I 1988 Informal risk capital investors: Investment patterns on the East Coast of the USA Journal of Business Venturing, 3: 11–29 22 This comparison of the Band of Angels’ data to the overall angel investing performance indicates that we need to treat studies of the performance of angel investments with extreme caution Angels may be less likely to report their poorer investments, which would inflate the magnitude of their returns Moreover, the angels who have been surveyed are far from representative of the overall population of angel investors The data naturally overweight more established angels since less established angels may not yet have had many exits If performance is positively related to experience, then the results will be overstated Respondents are also likely to over represent the most successful angels since they are easiest to identify and probably the most willing to talk to surveyors 23 Another problem is that informal equity investments confound friends-andfamily investments with angel investments 24 Prior to Wiltbank’s effort, there were other studies of the performance of angel investments One study looked at 1,200 angel investors’ liquidated investments and found that over an average of eight years, 39 percent lost money, 19 percent broke even, 30 percent generated more than a 50 percent internal rate of return, and 12 percent generated more than a 100 percent internal rate of return (See Benjamin, G., and Margulis, J 2001 The Angel Investor’s Handbook Princeton, NJ: Bloomberg Press.) Another study of 128 exited investments made by 51 business angels in the United Kingdom found that 34 percent lost all the investment, 13 percent returned only as much as the capital invested, 23 percent had a return of more than 50 percent and only 10 percent generated more than a 100 percent return (See Mason, C., and Harrison, R 1999 The Rates of Return from Informal Venture Capital Investments: Some UK Evidence Paper Presented at the Babson College-Kauffman Foundation Entrepreneurship Research Conference, University of South Carolina, May 12–15, Columbia, SC.) However, these studies are less well designed than Wiltbank’s study, which makes the results that they provide less likely to be accurate 25 Only 13 percent of the angels surveyed in Wiltbank’s study answered the questionnaire 26 The converse is not true If the data show high performance, those results could easily be driven by a few, highly successful angels and not represent the performance of the typical angel investor 262 Notes to Pages 157–159 27 Wiltbank, R., and Boeker, W 2007 Angel Performance Project Presentation to the Kauffman Foundation Conference on Entrepreneurship and Innovation Data, November 2, Kansas City, MO 28 Wiltbank, R., and Boeker, W 2007 Returns to Angel Investors in Groups Working Paper, Ewing Marion Kauffman Foundation, Kansas City, MO 29 Ibid 30 Wiltbank, R 2006 At the Individual Level: Outlining Angel Investing in the United States Downloaded from www.willamette.edu/~wiltbank/ AtTheIndividualLevel7.pdf 31 Because all of the angel investors in Wiltbank’s sample are accredited investors, we can estimate the cost to them of spending 426 hours on a venture The minimum income level to meet SEC accreditation requirements is $200,000 per year for a single person, which we can use as a conservative estimate of minimum annual income of someone in the sample IRS data shows that the average adjusted gross income of people who earn more than $200,000 per year was $608,545 in 2005 (Calculated from data downloaded from www.irs.gov/taxstats/indtaxstats/article/0,,id=96981,00 html.) Assuming that people who earn $608,545 per year work an average of forty hours per week and take two weeks of vacation per year, we can estimate the opportunity cost of an accredited angel’s time conservatively at $304.27 per hour (Readers should note that this is a very conservative estimate The typical angel is married Therefore, most of the angels in the sample would have to exceed $300,000 per year in income to meet SEC accreditation requirements Moreover, the respondents have an average net worth of $10.9 million People with an average net worth that high probably have incomes considerably higher than $200,000 per year.) 32 Wiltbank, R 2006 Angel Investor Research Downloaded from www.willamette.edu/~wiltbank/AngelInvestorResearch2.ppt 33 For the period ending in September 2004 See www.prnewswire.com/ cgi-bin/stories.pl?ACCT=109&STORY=/www/story/01–19–2005/ 0002862967&EDATE Chapter Angel groups should not be confused with “super angels,” very high net worth individuals who make large magnitude investments in start-up companies, through organizations that employ professional staff to evaluate deals and monitor investments (See Shane, S 2005 Angel Investing A Report Prepared for the Federal Reserve Banks of Atlanta, Cleveland, Kansas City, Philadelphia, and Richmond October 1.) The relationships between different the dimensions of angel groups that are reported in this chapter are based on regressions that include a variety of different variables For instance, the regression to predict the age of the angel group included the size of the group; the external investment rate in the area; the patent rate in the area; whether the group was located in an angel tax credit state; whether the group Notes to Pages 159–163 263 10 11 12 13 14 15 16 17 18 19 20 264 was located in California; whether the group was a limited liability company, non-profit mutual benefit corporation, or S or C corporation; whether the group likes to invest at start-up stage, the early stage, the expansion stage, or the late stage; whether the group is manager-led; whether the group allows sidecar funds; whether the group must invest in the state; and whether the investment region is within four hours drive of the group Sobieski, I 2006 Sustainability Issues in Angel Investing Presentation to the Angel Capital Association, April 26, New York, NY For instance, the median age of angels who are members of the groups that make up the Angel Capital Association is significantly older than the median age of individual angels (See Hudson, M 2007 ACA Briefing and Angel Group Stats Presentation to the Angel Capital Association, May 24, Chicago, IL.) Hudson, ACA Briefing and Angel Group Stats; Becker-Blease, J., and Sohl, J 2007 Do women-owned businesses have equal access to angel capital? Journal of Business Venturing, 22: 503–21; Benjamin, G., and Margulis, J 2005 Angel Capital New York: Wiley Finance Hudson, ACA Briefing and Angel Group Stats Ibid U.S Small Business Administration 2002 Small Business Investment Company Program, Washington, DC: U.S Government Printing Office Amis, D., and Stevenson, H 2001 Winning Angels London: Pearson Education, p 39 Angel Capital Association 2007 Angel Group Confidence Report March 27, Angel Capital Association, Kansas City, MO Center for Venture Research 2005 The Angel Investor Market in 2005: The Angel Market Exhibits Modest Growth Downloaded from www.unh.edu/ Centers_CVR/2006pressrelease.cfm Hudson, ACA Briefing and Angel Group Stats Ewing Marion Kauffman Foundation 2002 Business Angel Investing Groups Growing in North America Downloaded from www.emkf.org Ibid May, J 2002 Structured angel groups in the USA: The Dinner Club experience Venture Capital, 4(4): 337–42 Hudson, ACA Briefing and Angel Group Stats Ibid Preston, S 2007 Angel Investment Groups, Networks and Funds: A Guidebook to Developing the Right Angel Organization for Your Community Downloaded from www.kauffman.org/items.cfm?itemID=590 May, J., and Simmons, C 2001 Every Business Needs an Angel New York: Crown Books Angel Capital Association, Angel Group Confidence Report Ewing Marion Kauffman Foundation, Business Angel Investing Groups Growing Notes to Pages 163–169 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 Shane, Angel Investing Ibid Ibid Ibid Van Osnabrugge, M., and Robinson, R 2000 Angel Investing: Matching Start-up Funds with Start-up Companies—A Guide for Entrepreneurs, Individual Investors, and Venture Capitalists San Francisco: Jossey-Bass Wainwright, F., and Groeninger, A 2005 Note on Angel Investing Tuck School of Business Administration at Dartmouth Center for Private Equity and Entrepreneurship, Case Number 5-0001 Sobieski, Sustainability Issues in Angel Investing Shane, Angel Investing Ewing Marion Kauffman Foundation 2003 Angel Investing Group Best Practices Downloaded from www.emkf.org Ewing Marion Kauffman Foundation, Business Angel Investing Groups Growing Shane, Angel Investing Payne, W., and Macarty, M 2002 The anatomy of an angel investing network: Tech Coast Angels Venture Capital, 4(4): 331–36 Angel Capital Association, Angel Group Confidence Report Shane, Angel Investing Ibid Sobieski, Sustainability Issues in Angel Investing Verrill, D 2006 Angel Group Leader Compensation Roundtable Presentation to the Angel Capital Educational Foundation, April 27, New York, NY Angel Capital Association, Angel Group Confidence Report Sobieski, Sustainability Issues in Angel Investing Van Osnabrugge and Robinson, Angel Investing Shane, Angel Investing Ewing Marion Kauffman Foundation, Business Angel Investing Groups Growing Verrill, D 2006 Angel Group Leader Compensation Roundtable Presentation to the Angel Capital Educational Foundation, April 27, New York, NY Preston, Angel Investment Groups, Networks and Funds Shane, Angel Investing Some angel groups even include a co-investment requirement in their by-laws (see Shane, Angel Investing) Angel Capital Association, Angel Group Confidence Report Hudson, M 2007 ACA Briefing and Angel Group Stats Presentation to the Angel Capital Association, May 24, Chicago, IL Shane, Angel Investing Ibid Riding, A., Dal Cin, P., Duxbury, L., Haines, G., and Safrata, R 1993 Informal Investors in Canada: The Identification of Salient Characteristics Ottawa: Carleton University Notes to Pages 169–174 265 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 266 Shane, Angel Investing Riding, Dal Cin, Duxbury, Haines, and Safrata, Informal Investors in Canada Shane, Angel Investing Ibid., p 12 Preston, Angel Investment Groups, Networks and Funds Shane, Angel Investing May, Structured angel groups in the USA May and Simmons, Every Business Needs an Angel Linde and Prasad, Venture Support Systems Project; Riding, Dal Cin, Duxbury, Haines, and Safrata, Informal Investors in Canada Shane, Angel Investing, p 11 May, Structured angel groups in the USA Shane, Angel Investing Ibid May, Structured angel groups in the USA This comment was made by an angel at the Power of Angel Investing meeting in Chicago on May 23, 2007 Van Osnabrugge and Robinson, Angel Investing Shane, Angel Investing Wainwright and Groeninger, Note on Angel Investing Shane, Angel Investing Ibid., p 13 Hill, B., and Power, D 2002 Attracting Capital from Angels New York: John Wiley Shane, Angel Investing Riding, Dal Cin, Duxbury, Haines, and Safrata, Informal Investors in Canada Linde and Prasad, Venture Support Systems Project; Riding, Dal Cin, Duxbury, Haines, and Safrata, Informal Investors in Canada; Jensen, M 2002 Angel investors: opportunity amidst chaos Venture Capital, 4(4): 295–304 Shane, Angel Investing, p 21 Shane, Angel Investing Ibid Ibid Anonymous 2005 Giving ideas wings Economist, September 16, 38(8495) Van Osnabrugge and Robinson, Angel Investing Shane, Angel Investing Burlingham, B 1997 My life as an angel Inc., 19(10): July Downloaded from www.inc.com/magazine/19970701/1274.html Anonymous 2005 Giving ideas wings Economist, September 16, 38(8495) May and Simmons, Every Business Needs an Angel Shane, Angel Investing Ibid Sobieski, Sustainability Issues in Angel Investing Ewing Marion Kauffman Foundation, Business Angel Investing Groups Growing Notes to Pages 174–178 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 Hill and Power, Attracting Capital from Angels, p 194 Ewing Marion Kauffman Foundation, Angel Investing Group Best Practices Shane, Angel Investing Angel Capital Association, Angel Group Confidence Report; Mason, C., and Harrison, R 1996 Why “business angels” say no: A case study of opportunities rejected by an informal investor syndicate International Small Business Journal, 14(2): 35–35; Feeney, L., Haines, G., and Riding, A 1999 Private investors’ investment criteria: Insights from qualitative data Venture Capital, 1(2): 121–45; Riding, Dal Cin, Duxbury, Haines, and Safrata, Informal Investors in Canada Shane, Angel Investing; Ewing Marion Kauffman Foundation, Business Angel Investing Groups Growing Amatucci, F., and Sohl, J 2007 Business Angels: Investment Processes, Outcomes, and Current Trends Working Paper, Center for Venture Research, University of New Hampshire, Durham, NH Ibid Van Osnabrugge and Robinson, Angel Investing Shane, Angel Investing Ibid Ibid Ibid.; Ewing Marion Kauffman Foundation, Business Angel Investing Groups Growing Shane, Angel Investing Ewing Marion Kauffman Foundation, Angel Investing Group Best Practices Shane, Angel Investing Ibid Angel Capital Association 2007 An Introduction to Angel Investing Downloaded from www.angelcapitalassociation.org/; Mason, C., and Harrison, R 1996 Why “business angels” say no: A case study of opportunities rejected by an informal investor syndicate International Small Business Journal, 14(2): 35–51 Shane, Angel Investing Angel Capital Association, An Introduction to Angel Investing; Freear, J., Sohl, J., and Wetzel, W 1992 The investment attitudes, behavior and characteristics of high net worth individuals In N Churchill, S Birley, W Bygrave, D Muzyka, C Wahlbin, and W Wetzel (eds.), Frontiers of Entrepreneurship Research Babson Park, MA: Babson College, 274–387; Angel Capital Association, Angel Group Confidence Report Shane, Angel Investing Ibid Ibid Ibid Ibid Ibid Notes to Pages 178–184 267 Chapter 10 Wiltbank, R., and Boeker, W 2007 Returns to Angel Investors in Groups Working Paper, Ewing Marion Kauffman Foundation, Kansas City Wiltbank, R 2007 Angel Investor Research Downloaded from www.willamette.edu/~wiltbank/AngelInvestorResearch2.ppt Hession, J 2003 Financing High-Tech and Emerging Growth Companies, Presentation Downloaded from www.medtechignite.com/resources/ FinancingHighTechCompanies.ppt Van Osnabrugge, M 1998 Do serial and non-serial investors behave differently? An empirical and theoretical analysis Entrepreneurship Theory and Practice, Summer: 23–42 Ibid Wiltbank and Boeker, Returns to Angel Investors in Groups Eckhardt, J., and Shane, S Creative Destruction or Creative Accumulation? Working Paper, University of Wisconsin, Madison, WI Calculated from data downloaded from www.nsf.gov/statistics/seind06/c6/ c6s6.htm Van Osnabrugge, M 1998 Do serial and non-serial investors behave differently? An empirical and theoretical analysis Entrepreneurship Theory and Practice, Summer: 23–42 10 Amis, D., and Stevenson, H 2001 Winning Angels London: Pearson Education 11 Wiltbank and Boeker, Returns to Angel Investors in Groups 12 Ibid 13 Wong, A 2002 Angel Finance: The Other Venture Capital Working Paper, University of Chicago, Chicago, IL 14 Wiltbank and Boeker, Returns to Angel Investors in Groups 15 Villalobos, L., and Payne, B 2007 Valuation of Seed/Start-up Ventures Presentation to the Power of Angel Investing Seminar, May 24, Chicago, IL 16 Wiltbank and Boeker, Returns to Angel Investors in Groups 17 Ibid 18 Wiltbank, R 2005 Investment practices and outcomes of informal venture investors Venture Capital, 7(4): 343–57 19 Wiltbank, R., Read, S., Dew, N., and Sarasvathy, S 2006 Prediction and Control under Uncertainty: The Outcomes of New Venture Investors Working Paper, Willamette University, Salem, OR 20 Prowse, S 1998 Angel investors and the market for angel investments Journal of Banking and Finance, 22: 785–92 21 Ibid Chapter 11 Benjamin, G., and Margulis, J 2000 Angel Financing: How to Find and Invest in Private Equity New York: John Wiley, p 84 Coveney, P., and Moore, K 1998 Business Angels New York: John Wiley 268 Notes to Pages 187–202 Morrissette, S 2005 A Profile of Angel Investors: An Invisible Driver of Economic Growth Working Paper, College of St Francis, Joliet, IL; Aram, J 1989 Attitudes and behaviors of informal investors toward early-stage investments, technology-based ventures, and coinvestors Journal of Business Venturing, 4(5): 333–47; Riding, A., and Short, D 1987 On the estimation of the investment potential of informal investors: A capture-recapture approach Journal of Small Business and Entrepreneurship, 5(4): 26–40 Goldfarb, B., Hoberg, G., Kirsch D., and Triantis, A 2007 Are Angels Preferred Venture Investors? Working Paper, University of Maryland, College Park, MD Shane, S 2005 Angel Investing A Report Prepared for the Federal Reserve Banks of Atlanta, Cleveland, Kansas City, Philadelphia, and Richmond October 1, p 31 Benjamin and Margulis, Angel Financing, p 115 May, J., and Simmons, C 2001 Every Business Needs an Angel New York: Crown Books Shane, Angel Investing Hill, B., and Power, D 2002 Attracting Capital from Angels New York: John Wiley 10 Shane, Angel Investing 11 Ibid Angels tend to make investments out of their area only if they are superangels with a lot of money, a lot of connections around the country, and a lot of investment experience; or if someone else that they know and trust from outside the local area is co-investing with them 12 Van Osnabrugge, M 2000 A comparison of business angel and venture capitalist investment procedures: An agency theory-based analysis Venture Capital, 2(2): 91–109 13 Wong, A 2002 Angel Finance: The Other Venture Capital Working Paper, University of Chicago, Chicago, IL 14 Another possible explanation is past performance at angel investing To have successful angel investing, a region needs to have some initial successes on which future investing builds because the willingness of people to make additional investments depends on their performance with previous investments Thus, places that have had successful angel investing in the past are more likely to have people who want to make future investments In addition, successful investing provides a pool of capital from which future angel investments can be made Furthermore, successful angel investing changes the culture of a region and makes it more socially acceptable for people to engage in start-up activity, which increases the likelihood that angels will have companies to fund 15 Shane, Angel Investing, p 25 16 Shane, Angel Investing 17 If it is the average wealth of an area and not the proportion of very wealthy people that affects the rate of angel investment activity in an area, then lowering the state estate tax rate would not be likely to affect the amount of angel investment activity in a state Notes to Pages 202–208 269 18 Shane, Angel Investing 19 Ibid 20 Benjamin, G., and Margulis, J 2001 The Angel Investor’s Handbook Princeton, NJ: Bloomberg Press, p xxi 21 Industry Commission 1997 Informal Equity Investment Small Business Research Program Information Paper, April, Melbourne, Australia 22 Shane, Angel Investing 23 Bank of England 2001 Financing of Technology-Based Small Firms February, London, United Kingdom 24 San Jose, A., Roure, J., and Aeroudt, R 2005 Business angel academies: Unleashing the potential for business angel investing Venture Capital, 7(2): 149–65 25 Van Osnabrugge, M., and Robinson, R 2000 Angel Investing: Matching Start-up Funds with Start-up Companies—A Guide for Entrepreneurs, Individual Investors, and Venture Capitalists San Francisco: Jossey Bass, p 72 26 Harrison, R., and Mason, C 2000 Influences on the supply of informal venture capital in the UK: An exploratory study of investor attitudes International Small Business Journal, 18(4): 11–28 27 Shane, Angel Investing; European Commission 2002 Benchmarking Business Angels November 4, Brussels, Belgium 28 Harrison, R., and Mason, C 2000 Influences on the supply of informal venture capital in the UK: An exploratory study of investor attitudes International Small Business Journal, 18(4): 11–28 29 Crawford, S 2006 Angel Investment: State Strategies to Promote Entrepreneurship and Economic Development Issue Brief, Center for Best Practices, National Governors Association, July 12, Washington, DC 30 DeBaise, C 2007 On angels’ wings Wall Street Journal, March 19: R6, R9 31 Sandler, S 2004 Venture Capital and Tax Incentives: A Comparative Study of Canada and the United States Toronto: Canadian Tax Foundation 32 European Commission 2002 Benchmarking Business Angels November 4, Brussels, Belgium 33 Wiltbank, R 2006 At the Individual Level: Outlining Angel Investing in the United States Downloaded from www.willamette.edu/~wiltbank/ AtTheIndividualLevel7.pdf 34 May and Simmons, Every Business Needs an Angel 35 Angel Capital Association 2007 An Introduction to Angel Investing Downloaded from www.angelcapitalassociation.org/ 36 Ibid 37 Shane, Angel Investing; European Commission 2002 38 Benjamin and Margulis, Angel Financing 39 Current laws not preclude unaccredited investors from putting money into start-up companies; they only keep start-up companies from raising money from more than thirty-five unaccredited investors at a time Even then, companies can this as long as they provide a proper, legally documented disclosure to investors 270 Notes to Pages 209–218 Index ACA See Angel Capital Association accredited investors, 13–14, 16, 33, 187–89 active investors, passive investors v., 17, 18 ages angel groups and, 165–66 angel investors and, 47–48 distribution, 118t Alberg, Thomas, 6, Angel Capital Association (ACA), 56, 165–66, 168, 173, 180 angel capital market angel investing and prospect of market failure, 211 comparison with other types of investment and, 39–42 external equity investment and, 38–39 how big?, 30–42 how to finance new businesses and, 31–33 informal equity market and, 33–34 types of informal investors and, 34–38 angel funds, angel groups and, 171–72 angel groups age of, 165–66 angel funds and, 171–72 co-investment and, 173 decision to invest, 182–84 due diligence and, 181 due diligence process and, 181–82 facts, 183 funds or networks and, 169 identifying, 165–69 investing alone or together, 173–78 investment-funnel concept and, 178–84 investment process, 178 investment region and, 172–73 legal forms for, 168–69 magnitude of investment efforts and, 166–67 manager-led, 172 networks and, 169–73 numbers, 164–65 presentations by entrepreneurs with, 180–81 screening deals and, 179–80 size of, 166 source of funds for, 168 sourcing deals and, 179 stage of investment and, 167 what are, 163–85 where to find, 165 why angels invest alone and not with, 176–78 why angels join, 174–76 angel investing angel activity across country and, 203–4 angels and, 227–28 businesses appropriate for, 57–58 community aid through, 27 debt instrument statistics with, 22 definition of, 14–15 entrepreneurs and, 225–30 facts, 28, 41, 218 friend-of-friend’s business, paying it forward and, 27–28 general economic conditions and, 208 government levers and, 211–12 government measures with, 216–19 government’s role in increasing area, 210–19 angel investing (continued) higher education infrastructures and, 209 high-tech industries, external and, 206f hobby jobs and, 26 ideal places for, 201–19 informal investing v., 17–18 introduction, 3–12 IRS estimates of million-dollar households and, 217t job hunts through, 26–27 last word about, 231 learning new things through, 25–26 local businesses and, 202–3 making equity investments doesn’t define, 22 making money by, 23–24 myths, inaccuracies and misconceptions about, 10–12 other start-up investors and, 228–29 places with more activity than others with, 204–10 policy makers and, 229–30 private company involvement through, 24–25 prospect of failing angel capital marketing and, 211 questions, 8, reality of, 220–25 reason for long treatise on, 22–23 relevant industrial base and, 205–7 risk level doesn’t define, 21 seasoned entrepreneurs and, 209–10 seasoned managers and, 210 state angel tax credits, 213t tax policies and, 212–16 top ten metropolitan areas and, 204t varying statistics on, 30–31 wealth of area and, 207–8 what’s, 13–29 why it?, 13–29 angel investments active-investor myth and, 136–37 angels lending money in addition to, 80–81 average size/amount of, 79 business-plan myth and, 133–34 business values with, 97t common stock and, 81–82 convertible debt rarely used with, 82–83 deal evaluation and, 127–42 deal origination and, 127 evaluation tools and, 129f exit via acquisition with, 147–49 expected investment multiples and, 130f expected returns and, 128 272 Index extensive due-diligence myth and, 134–35 facts, 100–101, 142, 161 few exits via IPO with, 145–47 few positive exits with, 145–47 follow-on investments and, 89–90 growth of start-ups with, 149–53 high return expectations and, 128–31 identifying, 78–101 IPOs and, 146f lower rates of return and, 130–31 low investment multiples and, 129–30 majority ownership and, 97–100 net present value and, 129 performance of, 144–62 post-investment activities and, 139f process, 126–43 returns on, 157–60 selectivity myth and, 135–36 sheet provisions and, 86–89 staging, 83–84 start-ups achieving different levels with, 150t–153t start-ups company values and, 155t surviving start-up company values and, 156t thoughtful-decision myth and, 131–33 valuation methods and, 94–97 value-added investor myth and, 127–42 value of angle-backed companies at exit with, 153–57 varied nature of, 79–80 venture capitalists and, 90–94 written contracts and, 84–86 angel investors accredited, 19–20, 36–37 accredited investors as financially successful, 187–89 active, 17 adult, 48t age and, 47–48 age distribution of entrepreneurs and, 118t average thinking habits of, 52–53 “been-there-done-that” entrepreneurs and, 37–38 best investments by, 186–200 Blacks as, 46–47 businesses and gap-filling role of, 55–57 business status and, 114t company owners’ characteristics and, 116–22 criteria of, 102–4 early-stage companies, diversified investors and, 197–98 economic development and, 27 education level of, 48–49 entrepreneurial experience of, 49–51 entrepreneurs’ qualities and, 121–22 ethnic makeup of, 47t experts’ opinions about criteria influencing, 104–5 facts, 52, 122–24, 199 financial deals and, 193–94 gender and, 46 group, 17 high-growth businesses and, 105–6 household status of, 49 how many businesses look for, 62–63 how many businesses need, 54–77 identifying myths about, 43–53 income and net worth of, 44t income/wealth myths about, 43–45 individual, 17 industries familiar to, 111–12 industry distribution of new companies and, 109f industry preferences mirroring familyfriend investors and, 112–13 inexperience of, 51 informal investment portions and, 188f interest in experienced entrepreneurs by, 119f investments chosen by, 102–25 investments in business and, 120–21 investment size doesn’t define, 20 investment stage doesn’t define, 20–21 as involved investors, 196–97 knowledge of favorable industries by, 190–92 knowledge of investments by successful, 189–90 legal definition of, 13–14 many kinds of, 15–17 middle-aged entrepreneurs and, 118 minimizing risks, maximizing returns and, 198–99 overvaluing companies and, 194–96 parents or relatives, 14 passive, 17 policy makers and, 117–18 portfolio firm characteristics and, 115–16 retirement myths about, 45–46 SEC rules for unaccredited/accredited, 20 single establishment businesses and, 110t–111t start-ups and, 113–15 start-ups going public and, 192t start-up valuations and, 195t as subset of informal investors, 15 success and highly selective, 192–93 super, 17 teams not needed to be noticed by, 120 top ten criteria of, 105t types of, 35–38 unaccredited, 19–20, 36–37 unaccredited v accredited, 19–20 why it?, 13–29 why people become, 23–27 Band of Angels, 147, 158, 163, 178, 186, 187, 192, 199 Bechtolscheim, Andy, “been-there-done-that” entrepreneurs, 37–38 Blacks, 46–47, 47f, 53, 221 Brobeck, Phleger & Harrison, 79, 85, 88, 89, 98 business angels, entrepreneurs and, 14–15 businesses achievement of sales levels and percentage of 1996, 68t–73t actual sales achieved by, 63–66 amount of capital needed for, 61f angel investing and local, 202–3 angel investing appropriate for certain, 57–58 angel investors and, 54–77, 105–6 angel investors and high-growth, 105–6 angel-targeted growth rates achieved by how many, 74–76 capital needs of new, 60–62 characteristics of owners, 116–22 diversified investors and early-stage, 197–98 facts, 76 founded in 1996 with sales from 2002, 65t gap-filling role of angels for, 55–57 growth expectations of start-up, 59–60 how many look for angel investors?, 62–63 how many need angels?, 54–77 how to finance new, 31–33 industry distribution of high-growth, 66–74 single establishment, 110t–111t sources of capital with survey of recent, 31 supply/demand alignment and, 58–59 Business Week, 82 capital angel market, investing and prospect of failing, 211 businesses and amount of needed, 61f businesses and sources of, 31 Index 273 capital (continued) comparison with other types of investment and, 39–42 external equity investment and angel market, 38–39 informal equity market and, 33–34 new businesses and amount of needed, 60–62 new businesses and how to find, 31–33 size of angel market and, 30–42 types of informal investors and, 34–38 Census Bureau, SBO, 38, 39 Children of angels, 49 co-investments, 173 community aid, 27 companies See also businesses angel investing and private, 24–25 angel investments and start-up, 155t, 156t angel investors and owners of, 116–22 consumer finances survey, 33 contracts, written, 84–86 deal evaluation, angel investments and, 127–42 debt convertible, 82–83 instruments, 22, 33 debt instruments, 33 angel investments and statistics on, 22 decisions investment, 182–84 myths about thoughtful angel investing, 131–33 due diligence angel groups and, 181–82 myth, 134–35 process, 181–82 economic development, angel investors and, 27 education angel investing and infrastructures of higher, 209 angel investors and levels of, 48–49 entrepreneurs, 32 angel groups and presentations by, 180–81 angel investing and, 225–30 angel investors and experience as, 49–51 angel investors and qualities of, 121–22 angel investors’ interest in experienced, 119f “been-there-done-that,” 37–38 business angels and, 14–15 middle-aged, 118 274 Index seasoned, 209–10 Entrepreneurship in the United States Assessment, 34, 38 data, 35, 36, 45, 46, 47, 48, 49, 51, 62, 74, 79, 80, 93, 108, 112, 115, 130, 131, 145, 147, 148, 193, 202 equity investments, 22 equity markets, informal, 33–34 ethnicity, angel investors and makeup of, 47t evaluation tools, 129f external equity investment, angel capital market and, 38–39 family industry preferences mirroring investments of friends and, 112–13 members as investors, 35f Federal Reserve, survey of consumer finances, 33 survey of small business finances, 35, 38, 39, 40, 41, 61, 74, 79, 93, 99, 135, 145 financial deals, 193–94 Flipowski, Andrew, fools, 15 See also angel investors friends, 15 industry preferences mirroring investments of family and, 112–13 investors, 35f funds, angel groups and source of, 168 gender, 46, 53, 117, 118, 221 Global Entrepreneurship Monitor, 32, 45, 46, 49, 113 government levers and angel investing, 211–12 measures with angel investing, 216–19 growth angel investors, businesses and high, 105–6 angel-targeted rates of, 74–76 businesses and high, 66–74 expansion-stage investing and, 20 start-up businesses and expectations for, 59–60 start-ups of, 149–53 Gunner Circuit Systems Inc., 75 Harrison, Richard, 145, 146, 147 Haynes, George, 33, 34 high-tech industries, angel/external investing and, 206f Hill, B., 122 Hispanics, 47f, 117 hobby jobs, 26 Inc magazine, 31, 39, 148 income angel investors’ net worth and, 44t myths about angel investors’, 43–45 industrial base, 205–7 informal equity market angel capital market and, 33–34 debt instrument and, 33 informal investing angel investing v., 17–18 sources, 35f informal investors, 32 angel investors as subset of, 15 types of, 34–38 Initial Public Offering (IPO), 4, 5, 11, 95, 145–47, 146f, 148, 149, 156, 157, 158, 161, 186, 192, 199, 200, 223, 224, 228 introduction angel investing, 3–12 angel investing, prototypical story, 4–6 book’s audience, 9–12 goal, 6–7 so what?, 7–8 what to learn, investing growth/expansion-stage, 20 informal v angel, 17–18 later-stage, 20, 21 seed-stage, 20, 21 start-up-stage, 20 investment-funnel concepts, angel groups and, 178–84 investment multiples, 129–30 investments angel capital market and other types of, 39–42 angel groups and co-, 173 angel groups and regions for, 172–73 angel groups and stages of, 167 equity, 22 process, 178 region, 172–73 risk-levels, 21 investors See also angel investing; angel investors accredited, 13–14, 16, 33, 187–89 active, 17, 18 confusion about types of, 17–23 diversified, 197–98 equity investments don’t define angel, 22 friends and family, 15, 35f, 112–13 informal, 15, 34–38 informal investing v angel investing and, 17–18 institutional, 14–15 investment size doesn’t define angel, 20 investment stage doesn’t define angel, 20–21 knowledgeable v naïve, 19 passive, 17, 18 passive v active, 18 risk level doesn’t define angel, 21 start-up, 15, 228–29 unaccredited, 16 unaccredited v accredited angel, 19–20 why long treatise on definition of angel, 22–23 work colleagues, 35f IPO See Initial Public Offering IRS, million-dollar households estimates and, 217t job hunts, 26–27 Jobs, Steve, Kauffman Firm Survey, 39, 97, 115, 116, 120, 121 legal forms, 168–69 majority ownership, 97–100 managers, 172, 210 markets angel capital markets and informal equity, 33–34 external equity investments and angel capital, 38–39 how to finance new businesses and angel capital, 31–33 investments and angel capital, 39–42 prospect of failing capital, investing and angel, 211 types of informal investors and angel capital, 34–38 Mason, Colin, 145, 146, 147 May, John, 62, 159 McGlinn, Iain, money, 23–24 moral hazard, 83, 84, 198 myths angel investing, 10–12 angel investing and thoughtful decision, 131–33 angel investments and active-investor, 136–37 angel investments and business plan, 133–34 Index 275 myths (continued) angel investments and value-added investor, 127–42 angel investments selectivity, 135–36 angel investor, 43–53 angel investor income, 43–45 angel investors and retirement, 45–46 due diligence, 134–35 NASDAQ, National Science Foundation, 92, 115 neighbor, investors, 35f networks, angel groups, 169–73 net worth, angel investors’ income and, 44t New York Stock Exchange, 38 North Coast Angel Fund, 74, 75, 76, 137, 171 numbers, 164–65 Ou, Charles, 33, 34 Panel Study of Entrepreneurial Dynamics, 38, 60 parents/relatives, as angel investors, 14 passive investors, active investors v., 17, 18 “paying it forward,” 27–28 Payne, Bill, 37, 106 policy makers, 117–18, 229–30 Power, Dee, 122 PricewaterhouseCoopers, Venture Capital Money Tree, 37, 109 race, 46–47 See also Blacks; Hispanics; Whites relatives, investors, 35f relatives/parents, as angel investors, 14 retirement, angel investors and myths about, 45–46 returns angel investment, 157–60 expected, 128–31 lower rates of, 130–31 maximizing, 198–99 Reynolds, Paul, 59 risk levels investment, 21 minimizing, 198–99 Ritter, Jay, 145, 146 Robinson, Rob, 122 sales businesses and actual, 63–66 businesses founded in 1992 with 2002, 65t SBA See Small Business Administration SBIC See Small Business Investment Companies 276 Index SBO See Survey of Business Owners screening deals, 179–80 SEC See Securities and Exchange Commission Securities and Exchange Commission (SEC), 11, 15, 16 accredited/unaccredited angel investors and money-raising rules set by, 20 sheet provisions, angel investments and, 86–89 SIC See Standard Industrial Code Simmons, Cal, 62 Small Business Administration (SBA), 34 Small Business Investment Companies (SBIC), 32 Sobieski, Ian, 178 sourcing deals, 179 Spacey, Kevin, 27 Standard Industrial Code (SIC), 66 four-digit, 67, 194 start-ups achieving different levels with, 150t–153t angel investors and, 113–15 company values, 155t going public, 119t growth of, 149–53 investments, 20 sources of, 35f surviving company values with, 156t valuations, 195t stock, common, 81–82 Sudek, Richard, 105, 122 Survey of Business Owners (SBO), U.S Census Bureau’s, 38, 39, 63, 64, 74, 115, 116, 117, 118, 121 tax credits, state angel, 213t Tech Coast Angels, 106, 171, 197 thinking habits, average, 52–53 valuation methods, 94–97 Van Osnabrugge, Mark, 122 venture capitalists, 32, 37 angel investments and, 90–94 Villalobos, Luis, 159, 197 Whites, 46, 47f, 53 White, Samis, 59 Wiltbank, Rob, 90, 137, 158, 159, 160, 190, 196, 197 Wong, Andrew, 36–37, 83 work colleagues, investors, 35f Wozniak, Steve, ... he invested in return for half ownership of the Body Shop.3 There’s only one problem with these fascinating, exciting, and uplifting stories about angel investing They don’t represent angel investing. .. from the recent article you read in Inc magazine WHAT IS ANGEL INVESTING? Before we go any further, I need to define angel investing An angel investor is a person who provides capital, in the form... about angel investing thinking it will No, to make smart decisions about angel investing, you need to know that the typical investor in an angel group—a select group of accredited angel investors