Angel Investor Primer

By Jack McGowan

Angel investors are wealthy individuals who invest their own funds in what are typically early-stage companies with high growth potential. Most angels are Accredited Investors as defined by the U.S. Securities and Exchange Commission, which means they have net worth of at least $1 million and recurring annual income of at least $200,000. A survey conducted by The Center for Venture Research at the University of New Hampshire indicates that there are more than 250,000 angel investors in the U.S.

Go Big or Go Home

Angel investing is a high-risk, high potential reward endeavor. According to data compiled by the Center for Venture Research, angel investments that have a successful “exit” (typically through a merger or acquisition) yield annual returns in the range of 20%-30%. On the downside, approximately 40% of companies that receive angel investments end up in bankruptcy.

Safety in Numbers?

A growing trend over the last decade has been for angel investors to work together in groups. These angel groups may organize in one of several forms, ranging from informal investment clubs to formal funds with paid staff and required investment commitments from each member. The benefits of collaboration include increased financial capacity to co-invest in larger deals, increased breadth of skills and experience when conducting due diligence and increased deal flow from the broader network.

Local Angel Activity

The Western New York Venture Association www.wnyventure.com facilitates interaction between entrepreneurs and angel investors. The WNYVA holds a series of forums throughout the year that feature presentations by companies seeking private investment. The presenters are pre-screened and receive coaching from experienced angels and business professionals before making their presentations. Non-WNYVA members are welcome to attend these forums to network and observe presenter “pitches.”

The Buffalo Angel Network, an affiliate of the WNYVA, is limited to Accredited Investors. This group meets monthly to review potential investment opportunities, share due diligence and co-invest. Each individual makes his or her own decision whether to invest in any deal. Group members are expected to be seriously interested in potential investment, but no number of investments per member is required. Buffalo Angel Network members are experienced, sophisticated business people. Many have built and or run businesses themselves. Members have diverse backgrounds in areas including medical devices, media, internet, biotech, physical sciences, finance, law and accounting and draw on other resources as needed to evaluate investment opportunities.

The WNYVA screens almost one-hundred business plans per year, primarily from companies located in Upstate New York and Southern Ontario. The investment process is highly selective, with less than 10% of these opportunities receiving funds from group members in a typical year. This “yield rate” is consistent with rates reported by other angel groups nationwide.

Regional Collaboration

Another trend in angel investing is increased collaboration among angel groups. The WNYVA has shared deals and due diligence with the Rochester Angel Network and the Syracuse-based Seed Capital Fund of Central New York. WNYVA is also helping a new angel group that is forming in the Niagara Region of Ontario and has attended angel group meetings in Boston, Pittsburgh and Burlington, Ontario, to share best practices and investigate co-investment opportunities. Many angel groups are members of The Angel Capital Association which brings together angel organizations in the United States and Canada to share best practices and collaboration opportunities. www.angelcapitalassociation.org

Importance of Angel Investing

Numerous studies show that startup companies are the primary source of job and wealth creation in the U.S. Angel investment is the most critical funding for startups. The Center for Venture Research indicates that angels invested $17.6 billion in 57,225 deals in the U.S. in 2009, nearly equal to $17.7 billion invested by venture capital firms in 2,795 deals during the same period. Angels tend to invest in earlier stage companies than VC's do and often provide the initial funding (after friends and family) that allows companies to grow and become “VC ready.”

Are you a potential Angel?

The WNYVA and the Buffalo Angel Network welcome participation by those interested in angel investing. If you meet the definition of an Accredited Investor, have a sufficient tolerance for risk vs. potential financial return, and enjoy learning about, and evaluating, up and coming new business opportunities, then angel investing might be right for you. Buffalo Angel Group members also enjoy interacting with other highly-qualified angel investors and the chance to help the growth of our region. Insyte Consulting provides administrative support to WNYVA. Contact Jack McGowan at 716.636.3626 or info@wnyventure.com for more information.