Windfalls, Pitfalls and Angels

By Gianluca Sonda


Angel investing is a micro-finance practice which involves affluent individuals providing capital for business start-ups typically in exchange for convertible debt or ownership equity. The term “angel” was actually coined during the 70s describing the investors who financed the Broadway shows and other theatre productions back in the day. Angel investors offer seed funding, which fills the financing gap between friends and family and more formal venture capital backing, during the lifecycle of a start-up.

Despite sharing certain features, angel investors differ substantially from venture capital funds. Firstly, it should be made explicit that angel investment is high-risk; as stated by Robert Wiltbank (Wiltbank, 2012), “it is a ‘homerun’ game like formal venture capital investing”. Ticket size is significantly lower than that in VC however. Furthermore, it is important to highlight that angels are often non-proficient. According to the SEC, they are defined as ‘high net worth’ individuals, either with a net worth of $1M in assets or more (excluding personal residences), or $200k in income over the previous 2 years, or a combined income of $300k for married couples. This general feature distinguishes them from VC, where the structure, as well as the governance, is more standardized.

Angel investors are very important for SMEs and start-ups, as they provide more than merely funding capital. Angel investors, despite neither necessarily being structured nor professionals, are hands-on investors and contribute with their expertise, knowledge and network in the businesses in which they invest. One of the typical characteristics of angel investors is that they prefer to remain anonymous. Due to this attribute, it is difficult for angels to source investments and for investees to source angels. To eliminate chasing shadows, many countries establish angel investor syndicates (groups) and networks. These syndicates and networks facilitate the process of matching entrepreneurs with angel investors. According to historical data and the Angel Capital Association, the number of angel groups multiplied from a humble 10 in 1996 to over 330 in 2013. The consolidation in the industry made the investment practice more systematic and standardized, and allowed for analysis on its trends and movements.


In order to better navigate the role and domain where angel investors operate, it is essential to understand the general lifecycle of a start-up investment. According to Preston, along their development, SMEs pass through several stages:

1) Seed stage: The entrepreneur has an idea or concept for a potentially profitable business which needs to be developed and proven. In this stage, founders, family and friends (also called as 3F Money) are drawn from as the primary sources of funding.

2) Start-up stage: The idea has already been developed and commercialized. This stage is usually when angel investors enter. It is a short period, lasting approximately 6 months to 2 years, where the company requires new capital to harness economies of scale.

3) Early stage: In this stage, production and distribution of a specific product or service takes place. This stage lasts up to five years from foundation, while businesses can be still unprofitable. Usually, within this phase, formal venture capital can be used as financing sources.

4) Later stage: The enterprise is already mature and profitable. Initial public offering is an ideal opportunity to generate additional funds and to allow VC to realize their initial investment.

From this scheme it is clear how angel investors represent an earlier form of funding for start-ups. Given this, it is simpler to understand why the ticket size of investments is typically smaller than that of VC. Out of a total of 3,617 deals in 2017 from “Angel investment database”, 3,388 deals were less than $4M in round size.

Reaching a total of nearly $24 billion annually, angel investments are responsible for funding over 67,000 start-up ventures per year. In order to provide a relative perspective of the size of this market, venture capital only invests in about 1,000 new companies per year; this difference, as previously mentioned, is tied to the average ticket size. Data collected by the Kauffman Foundation shows that the best estimate for angel investor returns is 2.5 times their investment, although the odds of a positive return are less than 50%, yet absolutely competitive with venture capital returns.

Also, given the inherent risk of early stage start-ups, the typical deal is structured via traditional convertible notes, which composes 33.8% of deals, or as preferred stock (62.3%), with only 3.9% of all deals structured as SAFE notes, KISS documents, non-mandatory convertible debt.


Movers and shakers are identified when analyzing 2017 data. As one might expect, the software industry continues to be the most popular sector for placements, with 26.75% of global angel-deal number totals, however this is down from 34.3% in 2016. Healthcare also represents a large proportion of deals, but also decreasing slightly from 17.3% to 15.45%. 2017 also experienced a considerable reduction in investments in internet and mobile, tumbling from 11.2% to only 4.48% of deals. The delta is clearly captured by the consumer products and services sectors. In fact, activity in the sector reportedly doubled from 10.3% to 20.86% thereby edging out healthcare for the runner-up spot for activity in 2017. These early stage trends are useful to analyze and predict the direction of global markets in future. Relative stagnation in investment in technology, software and mobile technology may represent a slight saturation in this market, or an overpopulation of these firms in VC and investment angels’ portfolios.

According to data incorporating deals reported to ARI, locations of angel investment span the globe. Most of this investment activity was closed by North America-based angels, rather than in-country investors: William R. Kerr and Josh Lerner of HBS found a strong correlation between angel location and venture capital friendly countries. This study is in line with ARI data for geographical spread of deals, which suggests Canada, Australia, Israel, and the UK as areas of great interest. What causes this is not only robust correlations of high levels of academic backgrounds for these areas, but also by “venture friendliness” – VC often represent the most seamless and cost efficient exits for angel investors, who therefore tend to operate where early-stage private equities are already established.


When it comes to returns, there is a great deal of information available on venture capital funds, but very little regarding angel returns. Fortunately, however, thanks to the work of Ewing Marion (from Kauffman Foundation) and the Angel Capital Education Foundation on angel investment returns (Ortmans, J., 2016), analytics are made available. Data from 539 individual angel group investors, with a combined track record of more than 1,130 exits, showed that the average exit generated 2.6x the invested capital in 3.5 years from investment to exit. This translates into an average 27% internal rate of return on their investments – strong results.

Josh Lerner, chair of entrepreneurship unit at HBU, together with William R. Kerr and Antoinette Schoar of MIT, tried to address many crucial questions, mainly related to quantifying the positive impact that angel investors have on the companies they fund. To run their regression, they compared firms which benefit from angel capital, but also those hovering around the decision cut-off point as a control. This measure was taken to avoid a binary sample made of recognizable winners and losers. The sample selection in this way considered more comparable firms that have very similar ex ante characteristics. The regression proved that firms backed by angel investments were significantly more likely to survive an additional five years and to raise financing outside the angel group. Moreover, Angel financing shows a significant correlation with subsequent developments in terms of IPOs and M&A activity, regardless of the “venture friendliness” of the home country.


Keep in mind that while angels are oftentimes invisible forces, they remain forces nonetheless. Google itself, fresh off its founding in 1998 by Brin and Page, was assisted with a $100,000 ticket by self-made investor billionaire Andy Bechtolsheim, who believed in the company even before the founders’ families did. Such accounts demonstrate that angels do not only provide SMEs with capital, but also act as liaisons and offer knowledge that expedites and fosters their growth. Angel investments therefore represent an interesting niche to monitor as their impacts can create waves in the broader market.


Editor: Eric Peghini

Author: Gianluca Sonda




HALO Report, ARI foundation, 2017 available at:

Ortmans, J., 2016 The rise of angel investing, available at:

Rockies Venture club, 2016, Angel Investors Should Focus on IRR vs. ROI Multiples  available at:

Wiltbank R., 2012, Angel Investors Do Make Money available at:

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