Angel Investing
Angel investing refers to the practice where individuals, known as angel investors, provide capital for startup companies or entrepreneurs, usually in exchange for ownership equity or convertible debt. These investments are typically made in the early stages of a business's lifecycle, often when the company is not yet ready or attractive to venture capitalists or larger institutional investors.
History
The term "angel" originally comes from Broadway where it was used to describe wealthy individuals who provided money for theatrical productions. The modern concept of angel investing can be traced back to the early 20th century, but it gained significant attention and structure in the late 1970s and 1980s with the rise of Silicon Valley. Here, private investors began backing tech startups, often providing not only capital but also mentorship and industry connections.
- In the 1990s, the dot-com bubble saw an increase in angel investing, with many investors funding internet-based startups.
- The establishment of formal angel investor networks and groups began to take shape, providing a more organized approach to angel investing.
- The Jumpstart Our Business Startups (JOBS) Act of 2012 in the United States made it easier for startups to raise funds from a broader range of investors through changes in securities regulations.
Context and Characteristics
Angel investors typically look for:
- High Growth Potential: They invest in companies with the potential for high returns, which often means high-risk ventures.
- Personal Involvement: Many angels prefer to be involved in the companies they invest in, offering guidance, contacts, and sometimes taking a role in management.
- Equity or Convertible Notes: Investment can be made for equity stakes or through convertible notes, which later convert into equity at a future financing round.
- Local or Sector Focus: Many angels invest in local startups or those within industries they are familiar with.
- Exit Strategy: Investors typically look for an exit within 5 to 7 years, either through an acquisition, an Initial Public Offering (IPO), or a buyback by the company's founders or other investors.
Angel investing can be risky, with many startups failing to provide a return on investment. However, the potential for outsized returns from a successful venture can be substantial, often compensating for other losses.
Impact and Regulation
Angel investing has had a significant impact on the startup ecosystem:
- Economic Growth: Angel investments foster innovation and job creation by providing seed capital to new businesses.
- Regulation: Governments have introduced regulations to facilitate angel investments while protecting investors. For example, in the U.S., the JOBS Act allows for crowdfunding and general solicitation under certain conditions.
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