The Evolution of Angel Investing
An Insightful Journey Through Time
The world of angel investing is rich with history, nuances, and complexities. In this article, we will delve into the intriguing evolution of angel investing, offering valuable insights into the pivotal research and developments that have shaped this vibrant financial landscape.
The Birth of the ‘Angel’ Concept
The term ‘angel’ has theatrical roots; it was coined to describe individuals who financed theater productions on Broadway. These 'theater angels' were often drawn to the glamour and risk of investing in shows, a passion that could lead to both significant profits and spectacular losses.
The Emergence of Business Angels
A new era was ushered in when Professor William Wetzel Jr. from the University of New Hampshire extended the term ‘business angels’ to those investing in entrepreneurial ventures. The groundbreaking work by Wetzel made the market more visible, revealing its importance and characteristics.
The Early Research: 1950s to 1980s
Interest in the business angel (BA) market started growing in the late 1950s. The Federal Reserve in the USA identified BAs as crucial sources of finance for technology-based ventures. Studies followed, including a seminal PhD thesis by Hoffman in 1972.
The pioneering work of Wetzel led to the replication of his studies in various regions. The first generation of BA studies tackled questions about the size of the BA market and the characteristics of the investors, painting a picture of a middle-aged male with a reasonable net worth, motivated by both financial and non-financial incentives.
International Perspectives: 1980s Onward
The pioneering works in the USA ignited interest globally. Studies were conducted in Canada, the UK, Sweden, Finland, Australia, Japan, Norway, and Germany, uncovering many similarities in the attitudes, behavior, and characteristics of BAs across geographical contexts. Despite commonalities, the market was found to be highly heterogeneous.
Second Generation Studies: Focus on Decision Making
The 1990s saw a shift towards understanding the investment decision-making process of BAs. Research identified that the process was multi-stage, with a high degree of selectiveness and critical emphasis on the trustworthiness of the entrepreneur.
Policymakers began to realize the importance of BAs in providing small investments, leading to interventions like Business Angel Networks (BANs) to enhance market efficiency.
Theoretical Explorations
Researchers also began applying theoretical frameworks like decision theory, agency theory, social capital theory, and signaling theory to explain BA activities. These theories provided partial insights into the behavior and characteristics of the market.
A Third Generation: Eclectic Insights
During the following 10-15 years, research took on an eclectic flavor, with specific focus areas emerging. These areas included studies on founder angels, super angels, women angels, and trends following the global financial crisis. Additionally, new horizons such as the negotiation, contracting, and exit stages of investment started being explored.
The State of Angel Investing Today
Angel investing has been growing in recent years, with the Small Business Administration estimating that there are now over 250,000 active angel investors in the US, and that they provide funding for about 30,000 companies per year. The US continues to be the leading market for angel investment, and this investment is a potential advantage for both entrepreneurs and investors. It is important to mention that angel investments are quite risky, as most start-ups and early stage companies fail..
The state of angel investing today is characterized by several trends, including:
Increased diversity: There is a positive shift towards more diversity in angel investing, with an increased emphasis on funding.
Focus on seed-stage deals: Angels continued to focus on investing in seed-stage deals in 2021, reducing investments in later rounds.
Positive returns: Angels have made positive returns on their investments, with the median return for companies still operating at the time of exit being 2.7X in 2021.
High-risk, high-reward: Angel investing is inherently a high-risk, high-reward activity, offering an opportunity for investors to get in on the ground floor and claim a sizable stake before the company strikes it rich.
Angel investors typically look to invest during a startup’s early stages, before it has received significant funding from other investors. The ventures are by nature extremely risky, and only 11% of such ventures end with a positive result. The investments in each venture are relatively modest, averaging about $42,000, and most angels keep their involvement in startups to no more than 10% of their portfolios.
While startups at any stage can have angel investors vying for a spot on their cap tables, their focus tends to be on early-stage startups, as the check sizes are smaller. Experience also comes in handy when sourcing deals, as building a good reputation within the startup and investing communities can lead to more opportunities.
Furthermore, technology acts as the backbone of modern angel investing, not only streamlining processes but also opening up new avenues for investment. It is essential to consider how different technologies are redefining the angel investing process.
Conclusion: A Dynamic and Complex Landscape
The journey of angel investing, from the theater halls of Broadway to the dynamic world of technology and entrepreneurial ventures, is a remarkable tale of transformation and growth.
The field continues to be a source of intrigue, with scholars and practitioners alike seeking to unravel its many layers. It offers a fascinating blend of risk, reward, passion, and pragmatism that resonates across cultures and time.
The evolution of angel investing is not merely a historical account but a living narrative, shaping and redefining the entrepreneurial ecosystem. Its story continues to unfold, offering endless possibilities and challenges that are bound to stimulate further research, debate, and innovation in the years to come.
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