The Organisation for Economic Co-operation and Development’s (OECD), recently released a report on the financing of high-growth firms. It highlighted the importance of angel investors, or business angels. According to some, the term business angel originated in New York’s Broadway musical theatre. Producers looking to start a new show would be able to get investment funding from wealthy patrons in the theatre. Angels would also come down-town to help them.
Today, business angels are a significant source of venture capital financing. They help to fill the gap between the seed capital and start-up stages typically less than $25,000. And the point at formal venture capital funds may take an interest. Typically, between $3 million and $5 million. The following diagram illustrates this.
A second OECD report on emerging trends in financing small to medium-sized enterprises (SMEs). And entrepreneurial ventures was published this year. It found that the Global Financial Crisis (GFC), had severely impacted. The bankruptcy rates have risen significantly, and bank funding has suffered a significant contraction. Large firms could access financing through bond markets but SMEs were limited to banks. Some countries, such as Portugal, South Korea, and Hungary, had SMEs that accounted for between 60% and 81% in total bank business loan portfolios.
The report also found a sharp decrease in venture capital financing growth from 2008 to 2010, which is much lower than the period before the GFC. In an earlier article, I noted that venture capital financing has not performed well since its peak at the end 1990s during the Dot.com boom. The OECD points out that business angels can be very important but there is not much data on them. This is partly due to their informal investment practices and because they prefer to keep their investing activities secret.
What Are Business Angels And Who Are They?
The amount of research into business angels remains very limited. It is not clear what business angel means. The terms informal investor, business angel, and informal Venture Capital are all interchangeable. Veland Ramadani, a 2009 journal contributor, wrote an interesting paper about business angels. He noted that many companies like Amazon, Bell Telephone, Ford Motor Corporation and Apple Computers all received funding from business angels in their early years.
A business angel is typically a middle-aged male with a high school education and a background in business or professional work. Many have either experience in managing or running businesses. A high net worth is also a common characteristic.
Business angels in the United Kingdom have been shown to invest between two and five investments per deal on average. Australian research suggests that this profile is similar. An average Australian business angel is a middle-aged male with a net worth of approximately $2 million and an income of more than $180,000. They invest between $200,000 and $14,000 in new ventures, while holding 10% to 14% of their capital.
Business Angels Economic
One of the things that sets business angels apart from other venture capital investors is their personal investment style. Venture capital fund managers are not able to take the same risks as business angels, who invest their own money. They are more likely to invest economic in local ventures, which is typically less than 1 to 2 hours driving distance from their home.
Privately held businesses are preferred by business angels, as they do not have to be publicly traded on the stock exchange. Their investing is high-risk and can lead to failure. They prefer to keep their investments private. They invest 5% to 15% of their assets in new businesses, and they seek returns between 20% and 30%.