Throughout my 25-year career, I’ve been working with entrepreneurs, with a specific focus on early stage businesses. In that time, the emergence of angel investors as a primary funding source for these companies has changed the landscape for startups. Today, angels serve as more than merely a source of capital, providing advice, guidance, connections, customers, suppliers and sometimes direct management service, in addition to seed capital for early stage businesses.
An angel investor or angel is an affluent individual who provides capital for a business startup, usually in exchange for debt, convertible debt or equity ownership in the business. The term “angel" originally comes from Broadway, where it was used to describe wealthy individuals who provided money for theatrical productions.
In 1978, William Wetzel, then a professor at the University of New Hampshire and founder of its Center for Venture Research, completed a pioneering study on how entrepreneurs raised seed capital in the United States, and he began using the term “angel" to describe the investors who supported them. The term stuck, and today any individual who invests in early stage businesses is referred to as such.
Angel investors are often retired entrepreneurs or executives who may be interested in angel investing for reasons that go beyond pure monetary return. Often they focus on investing in businesses in the same industry within which they made their fortune. This not only allows them to better understand the target business, but allows them to keep abreast of current developments in their arena.
Angels often provide much-needed expertise to help the entrepreneur navigate the initial stages of development for the business. Entrepreneurs often have gaps in the teams, usually because they do not have the funds to be able to bring aboard a full array of management team members. Angels can serve to fill these gaps, or may have professional connections they can tap to get the expert knowledge needed to help the business succeed. Accessing these experts on a consulting, or part-time basis, allows the company to save cash in the early months or years of development, thus allowing more of the seed capital to be spent on other areas of need.
Angels may also bring other investors to the table to help raise necessary funds. A well-respected angel investor with a strong reputation in the industry can make all the difference to other investors contemplating investing in the business. The typical angel investors will invest $50,000 to $500,000 for each company in which they choose to invest, although some may invest much more if they perceive the risk/reward relationship as being highly favorable.
Today, many angel investors organize themselves into angel groups or networks, such as Tech Coast Angels (TCA), which has five chapters in Southern California. TCA is one of the leading sources of funding to early stage companies in Southern California. Since its inception in 1997, TCA’s members have invested in more than 200 companies, have personally invested more than $120 million, and have helped portfolio companies attract more than $1.4 billion in additional capital, mostly from venture capital firms. TCA has more than 300 members in five networks in Santa Barbara/Westlake, Los Angeles, Orange County, San Diego and the Inland Empire. More than 600 companies applied to TCA for funding last year, of which they funded 17.
Angel investors differ from venture capital funds in several key ways. First and foremost, angels invest their own money, whereas venture capital funds invest other people’s money (although some VC managers also include their own money in the funds they manage). Angels make their own decisions, whereas venture capital funds are run by professional money managers. Unlike angels, VCs usually take an active management role in the business. VCs also typically want a controlling ownership stake (although this is not always the case). While VCs certainly want the businesses they invest in to succeed, their sole motivation is to make money for the fund, whereas angels typically have other motivations besides strictly making money.
I am currently serving as interim CFO for a local company, Applied Cavitation Inc. (ACI), which is looking to raise money. ACI has developed a disruptive platform technology that enhances the functionality of nanomaterials by effectively processing and dispersing these materials. This process enables the creation of less costly products with dramatically enhanced performance characteristics. ACI’s proprietary process equipment design is the only medium- to high-pressure dispersion solution available today, and no other company has anything like this technology under development at present. Like most startups, the company needs additional funding to purchase more equipment, hire people, secure its intellectual property, etc.
I had the opportunity to sit down with an angel investor last week to discuss the company. The hour or so I spent with this angel was probably the most informative hour I have spent with anyone throughout my career. There is no substitute for direct industry experience gained over a long period of time. This particular angel built a very successful company and recently sold it for a sizable fortune. He immediately zeroed in on the core issues that will make or break ACI. With his guidance, the management team will not only be able to more easily and quickly raise capital, but will focus our efforts on maximizing the opportunities ahead with a renewed focus.
Angel investors can be the single most helpful addition to any early stage company’s team. With expertise, industry experience and contacts, a deep network of professionals, colleagues and other investors and — yes — capital, angels bring a unique and highly valuable combination of benefits that can make all the difference for an early stage business.