A big chunk of the typical angels is going to invest at the seed or start-up stage. That's true, but it's not true to the extent that people talk about it. The typical angel is actually later stage. The typical angel might wait until a business has positive cash flow to make an investment. The sophisticated angels are much more likely to be making those early-stage investments.
How can a business make itself more likely to get money from angels?
If you want to get money from a sophisticated angel investor, you would need to have a technology-oriented person to appeal to those kinds of groups. Another thing is that the return expectations of the typical angel are not that high. The typical person out there is not expecting particularly high multiples on their investments, but angel groups are. You would need to have a business where the return on the capital you got is very high. Other kinds of things are the ability to grow and scale the business. The typical angel is less concerned with the high growth and high performance of business. The sophisticated investors are very interested in businesses that have the potential to grow very large.
How will the current financial crisis change things? Could angel investing become more important because of lack of capital elsewhere?
There are two ways it will have a substantive impact. One is that people are investing their money out of their own capital. Take the average person and they've lost a third to 40 percent of what they've invested—that means they're less likely to give money to other investments. The other impact is on angel groups. To be part of an angel group, you have to be an accredited investor. That means you have to be making $200,000 a year as a single person, $300,000 as a married couple, or have a million-dollar net worth. A lot of these angels are so wealthy that they could lose 30 to 40 percent of their net worth and still be accredited. But some people were accredited investors before, and they are not now. The ability to draw people into these groups has become more difficult. If the groups can't grow, they have less capital and thus make smaller investments.
Corrected on 10/29/08: An earlier version of this article incorrectly reported what Dr. Shane meant by the term “common angel.” He was referring to a specific angel group called Common Angels. Also, less than 1 percent of adult Americans have made an angel investment in the last three years, not the last 20.
@ Jan 19, 2009 06:50:43 AM