Thursday, February 16, 2012

Angel Investors Rise

With many banks still hesitant to loan capital choosing instead to hoard it, and with venture capital firms targeting less risky companies that are in the later stages of growth, start-up businesses have had to look to new funding sources to launch. The trending wave: “Angel Investors.” These investors are wealthy investors who provide the capital to start-up firms with the potential for immediate growth.

A recent study by the Organization of Economic Cooperation and Development found that “[w]ith banks reining in all but the safest loans since the recession, and venture capital firms now targeting less risky late-stage business startups, angel investors are nearly alone in backing young, fast-growth companies.” Angel investors look at a “wider range” of companies to finance, and can be more creative in what they do, including not only giving money, but also advising the start-up business owners. In wake of the mortgage crisis and the need for a recovery, the OECD recommends providing tax breaks for angel investors. While banks might rally to revive their start-up funding in order to receive new tax breaks, the banks will likely not provide the same type of “service”—personalized attention and networking—that angel investors provide.

“Of the $8.9 billion in total investments by angels in the first half of 2011, 39% went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period in 2010 . . . . Many fast-growth, entrepreneurial ventures that attract angels are the same start-ups that create jobs. Led by start-ups, small firms have generated 65% of net new jobs over the past 17 years, according to the Small Business Administration.”

7 comments:

  1. It seems that providing capital for new businesses via angel investors, as opposed to banks or other lending houses, may be a more sound way to increase businesses in America. Capital can only take a business so far, whereas, as we have here, providing business advice and networking opportunities can help assure that a new business will succeed (although this is no guarantee, it is a good step).

    One thing angel investors may want to consider is how much they are involved in the start-up business. It seems to me that if they become too hands-on with the new business, they may open themselves up to liability if something goes wrong. I would assume that general advice and networking opportunities would not give rise to liability, and such help should be enough to ensure the business has the information its needs to succeed out the gate.

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  2. A particularly good function of angel investors, in my opinion, is that they are more likely to put money into a startup business for non-financial reasons than say, a bank. Investing a small amount of capital and a large amount of network access in a smaller business to, say, improve tech research in a particular area is something that should be encouraged.

    At a glance, Businessweek states that the top 25 angel investors "helped fund 740 new companies, create 328,698 jobs, and raise $15.2 billion," including Google and Twitter. (http://www.businessweek.com/magazine/content/10_10/b4169039642419.htm) This seems to be a far more useful way to generate personal wealth while helping the national economy than manipulating housing markets or aggressively day trading.

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  3. Although these investors may appear as “angel” to struggling start-up companies, I wonder what the true motives of these investors may be. Since these start-up companies cannot get funding from banks, these “angel investors” are their only options. That gives these investors a lot of power. These “angel investors” can easily demand larger percentages of the business, more power in the company, or anything else they want. Although these investments are a saving grace to the small companies, it is also beneficial to the investors. Rich investors are going to make even more money when/if these companies take off. The wealthy investors can afford to lose their investment if the businesses do not become profitable so the investors stand to make a lot of money for a relatively low risk. I am also skeptical about the “advice” that these investors are giving the companies. Since the investors are the last hope for these companies, the CEOs have no bargaining power and they have no choice but to accept suggestions from the investors if that is a condition of getting the money. I think there is a large risk of these investors turning these start-ups into the business that the investors want- not necessarily what the CEO or board envisioned when the company was started. Plus, the investors may end up getting tax breaks out of this. I hate to be so cynical but I am just stating that philanthropy is probably not the driving reason these “angel investors” are helping small companies—the investors are going to benefit as well.

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  4. Angel investors have the capacity to fill the venture capital gap; however, these lenders must conduct careful inquiries into businesses before investing. Angel investors should conduct an investigation into start-up owners to determine if they would make good "business men."

    Investors should consider the following factors:(1) whether the start-up owners are excessively controlling and agreesive, (2)whether they have accepted nominal amounts of money from several investors, (3) whether they have invested their own money in the venture, (4) whether they are already in debt, and (5)whether they have taken out loans from their family members. Any of these things could lead to a conflict of loyalties, conflicting business ideas, and a failed business venture.

    Additional, investor inquiries are articled in http://www.go4funding.com/Articles/Angel-Investors/Due-Diligence-Red-Flags.aspx

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  5. Angel Investors appears to be a great fit for a start-up small business. By advising start-up businesses, Angel is helping the company while helping itself. A small company can learn a lot from a financial institute about their own financial goals and methods of achieving those goals. By advising the company, Angel has increased its likelihood of success. If the company is successful, Angel is more likely to receive payments on its loans timely and in full.

    Also, by offering these additional services there may be a sense of gratitude from these companies. Small companies could feel a sense of duty and loyalty to Angel over the banks that deal strictly with financing. This could increase Angel's goodwill and lead to prompt payment of loans.

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  6. Even in this risky economy, these Angel Investors seem like a step in the right direction. Not only do these investors provide financial capital which would otherwise not be obtained through other investors, such as banks, but they provide networking and financial advice for these young companies. Like the article states, new business means new jobs for the American people. Even without a tax break, big banks should follow the Angel Investors' lead and begin helping business start up in order to try to jumpstart the economy. With these great rewards comes great risk, not only in this economy. Most small businesses fail; it is just a fact of life. However, if these small businesses are able to stay afloat, then it only means good things for the economy and the people who are currently looking for work.

    Jennifer Wolfe

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  7. I think Angel Investors are a great idea for small businesses as long as they are monitored and some restrictions are placed on them. These “angels” are allowing business’s and people who otherwise would not be able to follow their dreams to start new businesses in a rough economy. For the United States to get out of the drought in the economy, we need to start taking chances again; and I believe that these Angel Investors are a step in the right direction.

    Josie brought up several good points regarding the power and control these investors will have over the small start up businesses. They should be monitored so that individuals are not using their money and power to dominate and control small business owners. There should provisions set up within a contract of some sort to define how the company is able to get out from the angel investor’s control. Because these are individual investors that are only going to be looking for companies that exhibit high-growth prospects, most likely in an industry in which the angel investor has succeeded. Below I have posted from a website to exhibit the enormous amount of control these investors can have over the small business. In some circumstances the investor can take up to 50 percent of a stat up business’s revenue. Again, as long as these angel investors are monitored I believe that it is a step in the right direction and may help to boost the economy.

    http://www.entrepreneur.com/article/52742

    Cost: Expensive. Capital from angel investors is likely to cost no less than 10 percent of a company's equity and, for early-stage companies, perhaps more than 50 percent. In addition, many angel investors charge a management fee in the form of a monthly retainer.

    Ashley Joseph

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