Author: Jeff Ebel Date: 11/20/2019

Should I Become an Angel Investor?

Investopedia defines an angel investor as “a high net worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur's family and friends.1 The funds that angel investors provide may be a one-time investment to help the business get off the ground. The funds that angel investors provide may be a one-time injection to support the company through its difficult early stages." 

Angel investing is alive, well, and growing in Portage County, the state of Wisconsin, and throughout the country. The Angel Capital Association (ACA) estimates the number of angel investors in the US at about 300,000, investing $25 billion in 70,000 startups annually. If you’re interested in angel investing, now might be the best time to get started. Currently, there are about 4 million professionals in the US who meet the $1,000,000 net worth requirement to be an accredited angel investor.

While it offers high reward, financially and emotionally, angel investing can be high risk. Seraf-investor.com estimates that 60% of startups will fail after the first 6 years. Yet angel investors serve a critical need in financing for startup companies. Because of the risks, most sources of capital such as banks and venture capitalists are reluctant to provide seed or pre-seed funding, leaving a gap in funding. This gap in funding leads to what Osawa and Miyazaki call the “Valley of Death,2 where startups struggle to access capital.

In spite of the risks, angel investing can be attractive for good reasons and can help promising startups escape the Valley of Death. Well-funded startups are essential to our national and local economies. Most angel investors have been successful in their own ventures and find fulfillment partnering with entrepreneurs. Though some angels will invest in an angel fund or go with what their angel group decides, many enjoy the active participation in their investments by serving as mentors, coaches, or company board members.

Mentoring is an important and valuable component of angel investing. We call it “smart money”. Providing strong guidance also pays dividends. The Angel Capital Education Foundation finds that returns on investment improve with mentorship and support as shown in the chart below.3

Typical internal rate of return (IRR) for angel investors is between 20% to 25%. To accomplish this rate of return, a few “big winners” (5X and above) compensate for the “losers.” Of course, as with any type of investment, one must be a savvy investor to realize these return rates.4

Angel investors can work on their own, researching start-ups and making investments based on their own insights, but more and more angels are benefiting from joining angel groups. In Wisconsin, there are about 16 angel investor groups located throughout the state. Belonging to an angel group can provide many advantages to an investor.

If you have ever considered becoming an angel investor, you can learn more about angel investors and angel investing by attending one of the many events held each year in Wisconsin. The Wisconsin Tech Council is a strong promoter of entrepreneurship and angel investing in Wisconsin. Sit in on the panel discussions to meet both investors and entrepreneurs at their Early Stage Symposium. Visit an angel group meeting, talk to an experienced angel, or an entrepreneur who has benefited from angel investing. In Central Wisconsin, attend the Hatch pitch contest in Stevens Point. Visit an angel group meeting, or talk to an experienced angel or an entrepreneur who has benefited from angel investing.

Wisconsin has a robust and growing network of angel investors and angel funds to help entrepreneurs access much-needed early stage capital where most other capital sources are limited or not available. Here in Central Wisconsin, the Wisconsin River Business Angels is focused on bringing our local financial resources to fund our own start-ups.

Angels know that real economic growth comes from new companies, and the ROI from angel investing is secondary to the emotional fulfillment of knowing you were instrumental in an entrepreneur's success.  

For more information on angel investing, visit www.midwestwealthventures.com.

 

Benefits of Community Business Bank

 

Resources (Courtesy of the Kauffman Foundation)


Ladder of Finance

1. Ladder of Finance


Valley of Death


2. "Valley of Death"

 

Impact of Participation

3. The Impact of Angel Participation

 

Overall Multiple


4. Overall Multiple by Angel Investor

 

 

Topics: Financing, Business Growth, General Business

 

Written by Jeff Ebel

Jeff is President of Midwest Wealth Ventures (MWV), based out of Plover, WI, and serves Central Wisconsin and the Upper Midwest. MWV provides mentoring and coaching to small young businesses and works to fund these businesses through their angel investing group, the Wisconsin River Business Angels. Jeff is active in his community, currently serving as a member of the Stevens Point Area School Board and volunteering as a SCORE member, presenting free monthly workshops in Central Wisconsin for beginning entrepreneurs. As an adjunct instructor for the UW Stevens Point, he conducts two eight-week Entrepreneurship Training Program (ETP) classes annually for the Small Business Development Center/Continuing Education.

 

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