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What You Should Know About Angel Investors

16 Dec What You Should Know About Angel Investors

Angel investment trends can be interesting to track for raising capital, but they should also be an integral part of business intelligence for your growth strategy. Expect trends to be rather fluid. For example, companies in the mobile sector are experiencing significant growth in share of investments, while healthcare startups—long the darlings of angel investors—saw investment share slow. In all, investments in entrepreneurial ventures is up. angel investing

Earlier this year, the advocacy group Angel Resource Institute, together with Silicon Valley Bank and research firm CB Insights, released the second annual Halo Report, with data from 783 deals, representing a combined value of $1.1 billion. Data for the report was conducted via voluntary survey and examination of publicly available data.

Here are a few additional conclusions about angel investors to be drawn from the report:

1. Industry categories of the dominant players are shifting. Internet-based businesses and healthcare startups have historically claimed the greatest share of  investment dollars from angels. However, there is some indication this is changing. In fact, the percentage of funds going to healthcare startups shrank last year, while the share of dollars offered to mobile-based companies rose.

Sectors receiving the greatest share of angel investing in 2012, based on dollar value, included:

  • Internet: 31.9 percent
  • Healthcare: 20.9 percent
  • Mobile and telecom: 13.3 percent
  • Industrial: 6 percent
  • Electronics: 3.8 percent
  • Consumer product and services: 5.3 percent
  • Services: 4.5 percent
  • All other industry categories combined: 14.2 percent

Tip:  Angel investors should still be a primary target if you’re launching a web-based business, but your position could be enhanced if you can show a tie-in to mobile technology.

2. Size matters, so be aware of the average company successfully engaging angel investors. In 2011 and 2012, the value of companies receiving angel investments has rested at a steady $2.5 million.

Tip: If you have a very small advantage, you are still at a disadvantage, even when approaching angel investors, but that doesn’t mean the arrangement is destined to failure. Leverage some of our company’s other attributes—does it cater to a dominating industry? can you show solid revenue?—in making your pitch.

3. You don’t need to be a veteran at securing investments. In fact, angel investors often seek out early-stage startups that are too small to catch the eye of most venture-capital firms. According to the report, 56 percent of angel investment deals in 2011 were with companies that had never received funding from an angel investor previously.

Tip: Don’t be overly concerned about being the new kid on the block. Every company receiving angel funding was once standing where you are. Keep in mind you have a better chance at securing funding for your small business than with some of the other investor opportunities out there.

4. You don’t need to make money in order to get money—but it sure helps. The report shows that 63 percent of companies receiving angel funding were actually able to show they had existing sources of revenue.

Tip: Expect to provide detailed financial data. If your company is already up and running, make a summary of your revenue projections and history a part of your presentation.

5.  Angel investors are primarily located on the east and west coasts of the U.S., but greatest growth in angel investors is being tracked in the northwest and southwest regions of the country.

As proof of this trend, the report lists the most active angel groups, based on number of deals completed. Note the dominance of coastal locations:

  • New York Angels, New York
  • Tech Coast Angels, Los Angeles
  • Launchpad Venture Group, Boston
  • Central Texas Angel Network, Austin
  • Golden Seeds, New York
  • Sand Hill Angels, Sunnyvale, Calif.
  • Investor’s Circle, Durham, N.C.
  • Alliance of Angels, Seattle, Wash.
  • CommonAngels, Boston
  • Maine Angels, Bar Harbor, Maine

Tip: If you’re located on the west or east coast, take advantage of the proximity to greater number of angel investors. If not, learn more industry trends in coastal regions that investors may have familiarity with and use this as your way of gaining trust and building relationships.

6. While it is possible you will be working with one individual, increasingly, trends are shifting to include multiple angel investors for a single fundraising round. Nearly 70 percent of angel investment deals were so-called “co-investments” in 2012, growing from 64 percent in 2011 and only 41 percent in 2010.

While communication may be a bit more challenging, the advantage should be clear. You are more likely to get your money. The median investment size for a startup with more than one investor in 2012 was $1.5 million. Note, however,  this is a trend that is leveling off. Levels from 2012 are down from $1.63 million in 2011 and $1.92 million in 2010.

Tip: Dealing with multiple people may mean you just have to step up your communications.

7. It’s helpful to have an idea of investment size as you build your growth strategy. The typical investment size via angel investing in 2012 was $600,000, representing a slight drop from the median investment of $625,000 captured a year earlier. If you were hoping for a bit more help, there is strong indication that size of investment is on the rise, however. The most common investment size in the final quarter of 2012 was a $690,000.

Tip: Don’t overestimate the funding you will receive when putting together your business strategy. Stay realistic, but approach investors with a specific figure in  mind. This will help you to be a much better negotiator.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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