By William H. Payne
Entrepreneur, Angel Investor, and Kauffman Foundation Entrepreneur-in-Residence
Entrepreneurs who start and grow new businesses create a majority of the new jobs in America. To obtain start-up capital for their companies, most entrepreneurs look to friends and family. But this "inside capital" infusion is usually less than $10,000 per company. To grow their businesses, entrepreneurs need more. Angel investors are estimated to provide 90 percent of the seed and start-up capital in this country—usually in amounts of $250,000 to $2,000,000 per investment and for 30,000 to 50,000 companies per year. Angel investors fill a critical niche left void by venture capitalists, who invest less than 2 percent in seed and start-up companies, and instead tend to focus on a much smaller number of later-stage companies—only about 3,000 per year. Although angels have been investing tens of billions of dollars per year in new ventures for decades, they are a little-known and little-understood source of financing for entrepreneurs.
The Angels: Who and Where Are They?
Angel investors tend to be "exited" entrepreneurs and retired businesspersons who invest significant time in their portfolio companies as mentors, advisors, and members of boards of directors. Since most entrepreneurs have never run rapidly growing companies, angels bring invaluable skills and experiences to the enterprise. But entrepreneurs often have difficulty finding angel investors. Because most solo angel investors rely on other angels and experienced service providers for deal flow, they remain "under the radar" for many entrepreneurs seeking funding. However, in the last few years, many angels have abandoned their solo practice and joined organizations of angel investors. Between 1995 and 2004, the number of angel organizations grew in North America from less than ten to nearly two hundred. Through their many members, angel organizations provide a wonderful set of business skills, vertical experiences, customer contacts, and Rolodexes of possible business partners. In addition, individual angels in organizations can more easily invest with other angels, leading to larger investments in entrepreneurial firms. By publicizing their application processes and encouraging entrepreneurs to seek their funding, angel organizations have substantially reduced the disconnect between angels and those entrepreneurs seeking funding.
Expanding Angel Investing in America The emergence of organizations of angel investors defines a critical crossroads for this class of investment and offers an opportunity to make great strides in advancing the field. To help catalyze the industry and ultimately expand the total funding available for U.S. start-up entrepreneurs, the Kauffman Foundation is focusing its efforts on: .
- increasing the awareness of angel investing in the United States, thereby increasing the number of wealthy individuals who choose to become angels;
- providing a better fundamental understanding of the contribution made by angels to entrepreneurs and the U.S. economy through research; .
- providing education for those accredited investors interested in becoming angel investors; and
- defining public policy in the United States to increase angel investment in entrepreneurs capable of starting and growing scalable ventures.
Kauffman’s angel investing initiative has several components. The cornerstone of its program is the recently established Angel Capital Association (ACA), funded by the Foundation and represented by the most experienced leaders of angel organizations in North America dedicated to assembling best practices for starting and operating angel organizations. While many communities are interested in angel organizations, they don’t know how to get started, what kind of organization would best fit their community, or what processes and best practices to adopt for their new angel organization. With the ACA, the Foundation can help assemble the information and develop dissemination vehicles to assist communities in the establishment of angel organizations. For example, Kauffman is developing a guidebook on starting angel organizations, and ACA is assembling numerous best-practice documents written by leading angels around the nation. These resources will be disseminated to interested parties through the developing Kauffman Web portal.
Additionally, for the past three years, the Foundation has delivered The Power of Angel Investing, a full-day introductory seminar on angel investing, to accredited investors all over the nation. The demand for this seminar is growing rapidly, and it will be delivered in two dozen communities in 2004. Working with angel practitioners, Kauffman is developing advanced training tools that can be delivered by angel organizations to their members. The Foundation also is considering assembling a scalable information kit for entrepreneurs seeking funding from angel investors (and other sources of capital), which will likely be delivered via the Web in future years.
Angels invest $15 to $30 billion per year in U.S. start-up companies. Yet there is no robust database that accurately validates this level of investment. We cannot quantify angel investments by region of the country or industry segment. We have only anecdotal information of the invested companies or the angel investors themselves. Because this data is not available, we cannot quantify the very substantial impact that angel investments and the entrepreneurs they fund have on our economy. The Foundation’s research team, with advice from the leaders of ACA, is undertaking a substantial project to create an angel investing database for U.S.-funded companies to better understand the total private investment in entrepreneurial ventures in the United States. In parallel, ACA is beginning to quantify the organization and operations of angel groups in this country.
Angels have been investing time and money in companies for centuries. But only recently have organizations of angel investors emerged and visibly begun to formalize this critical segment of private equity funding for entrepreneurs. The Kauffman Foundation is providing the seed capital for initiating this "organization of organizations" and for the R&D necessary to measure the importance of angel funding. Angels organizations are, indeed, a new frontier in entrepreneurship— one that can make a huge difference in improving start-up entrepreneurs’ ability to access capital, start and grow their businesses, and keep our economy alive and well.