Angel Investors: How The Rich Invest

Tanya Prive Contributor
culled from:http://www.forbes.com

There are currently between 5-7.2 million people in the United States who are accepted as accredited investors. This group of people, which represents as little as 1% of the U.S. population, is made up of wealthy individuals that make $200,000 or more in base salary every year, or maintain a net worth of over $1,000,000.

A common investing trend where the rich commit part of their portfolio in startups is called angel investing. According to the recent Reynolds survey, there are currently 756,000 angel investors in the U.S. who have made an angel investment or participated in a friends and family round of financing.

Defining angel investors
The term angel investor originally comes from Broadway, where it was used when describing the people that provided financing for theatrical productions.
Angel investors invest their own money, where the typical amount raised ranges from $150,000 to $2,000,000. Since angel investors are very often individuals that have held executive positions at large corporations, they can often provide fantastic advice and introductions to the entrepreneur, in addition to the funds. A Harvard report provided information on how angel funded startups had a higher chance of survival.
Angel investments are high-risk, which is why this strategy normally doesn’t represent over 10% of the investment portfolio of any given individual. What angel investors look for is a great team with a good market that could potentially return 10 times their initial investment in a period of 5 years. The exits, or liquidity events, are for the most part via an initial public offering or an acquisition.
According to the Halo Report, angel investors particularly like startups operating in the following industries: internet (37.4%), healthcare (23.5%), mobile & telecom (10.4%), energy & utilities (4.3%), electronics (4.3%), consumer products & Svcs (3.5%), and other industries (16.5%).
The dominating geographic area, in terms of number of angel investments, is Silicon Valley, however, Silicon Alley is catching up very quickly now that New York’s Mayor, Michael Bloomberg is pushing entrepreneurship via university campuses for technology and other interesting initiatives.
Angel investment returns
Data collected by the Kauffman Foundation shows that the best estimate for angel investor returns is 2.5 times their investment even though the odds of a positive return are less than 50%, which is absolutely competitive with the venture capital returns.
The secret recipe for getting a good ROI is to diversify your investments into multiple startups and hedge your bet. Angel investors should look to position themselves as investors in at least 10 startups in order to play the startup game right. However, carefully selecting your picks and knowing who you are getting into bed with, so to speak, is very important. The due diligence process should be taken very seriously before making any type of decisions.
Angel groups
During the last 15 years, angel investors have joined different angel groups in order to get access to quality deals. If you are not a Reid Hoffman, a Ron Conway, or connected somehow to one of the founding members of the startup, it was certainly very hard to gain access and participate unless you were affiliated to one of the angel groups.
According to the Angel Capital Association, there are over 330 groups in the United States and Canada that are active within the startup community.
One disadvantage of joining an angel group is the time commitment of having to go to their events and networking with the group. In addition, most of the angel groups require member attendance to the screening process, which takes hours out of your schedule. Another requirement is that members need to invest a certain amount every year. For example, the New York Angels require every member to invest at least $50,000 during a 12-month period.
Investment crowdfunding
Times are changing, and the new way to access deals is via investment crowdfunding. With investment crowdfunding, angel investors are able to navigate quality deals from home without any limitations and requirements, being able to invest lower minimums, allowing angels to hedge their bets with more startups.
Angel groups on average review around 80 deals per month. On RockThePost for example, the investment platform I co-founded, we review over 500 deals per week, which increases the quality of the deals that are presented to the angel investor. Another positive ingredient that investment crowdfunding platforms provide is the fact that they’ve done most of the due diligence process for you. For example, before a startup is posted on our platform, the venture needs to pass the following process:

1)    The entrepreneur uploads all the business information (business plan, executive summary, financial information, investor presentation, etc). The application is submitted after all the materials are successfully uploaded.

2)    The application is reviewed and the business analyst team decides whether or not it makes sense to move forward. This step is all about the compelling story, the uniqueness, and the traction that the business has been able to accomplish.

3)    The deals that pass the above filters are forwarded to our investment committee comprised of 4 individuals with over 28 years of experience each and over $2.5 billion in acquisitions. All of them are active angel investors. The main focus during this process is to review the financials, legal structure, and deal terms.
4)    If the company passes the investment committee’s due diligence process, then the investment committee would schedule a conference call with the entrepreneur for additional questions and a full walkthrough of the pitch.
5)    If the call and additional background checks are passed the deal is posted on the platform and the interaction with our registered accredited investors begins.
Conclusion
One of the positive factors about investing in startups is not only the potential of getting a return, but also being able to be a part of something great. As opposed to investing in the public markets, investing in startup companies gives the investor the chance to be in communication with the team and opens the opportunity to be part of the growth.

Without a doubt, startup investing is positive all around. Not only because it could provide interesting gains if you are lucky, but also because every single investment contributes to the US economy thanks to the jobs that these ventures create. It is important to note that during the past 17 years, startups were accountable for creating 65% of the net new jobs. Providing them with access to capital is without a doubt something that is much needed in this country.

Angel investing is becoming the new venture capital. 50,000 companies were started by seed capital last year while venture capital firms financed only 600.

•