Angel Investing and All That Money Stuff

Notes from the McCombs Alumni Network’s 8th Annual Alumni Business Conference on February 8, 2012.

Laura KilcreaseLaura Kilcrease, Entrepreneur in Residence, Herb Kelleher Center for Entrepreneurship, McCombs School of Business

“Every angel brings value to the table.”

Laura Kilcrease reminds attendees that most of the new jobs created in the past five years in America were created by small businesses with less than five employees, much of it funded by the angel network.

“About $20 billion a year is invested by angel investors,” she says. “There were over 55,000 deals in 2008, mostly early stage investing, with some of it by so-called Super Angels who are comfortable investing larger amounts in startups.”

Typical levels of startup business funding are:

  • Sweat equity
  • Friends, Fools and Families
  • The Angel Network
  • Seed Funds
  • Venture Capitalists

“Texas is clearly on the map,” she explains, But even though Texas, California, Washington, Massachusetts and Pennsylvania are among top states attracting angel investment, the dominant player is the San Francisco Bay Area and Silicon Valley, which captures about 38 percent of total angel investment.

Kilcrease Describes the Angel Investor

“Many of these are wealthy individuals who have retired and feel that they still have something to contribute,” she explains. “In some cases they were helped by someone early in their career and they want to pass the favor along to others.”

She says that even though angel investors may not have business experience (many have inherited their wealth) they often have incredible networks. “Every angel brings value to the table,” she tells attendees.

“A great angel helps an entrepreneur see around the corner, gain a sober second opinion, network with people who can help build the business by being an ambassador, while gaining credibility in a field.”

There are 4.2 million millionaires in the U.S., and about 12,000 investors currently provide angel business funding in the U.S. Kilcrease sees potential in these numbers.

“There is a big bandwidth of opportunity as more potential investors learn about angel network opportunities.”

Psychology of the Angel Business Investor

Angels will generally invest in any type of company, but there are some commonalities in how they typically invest, including having a preference for investments close to home or within their region. Kilcrease sees this changing as angel network syndicates begin forming across regions of the country.

Angel investing isn’t for everyone.

“This is very risky, and investments typically don’t return within the first three years,” she warns. “If they do pay off it is usually about 6-to-7 years after the investment.”

The Angel Network is Not for Every Entrepreneur

“Of every hundred business plans that enter the process 1-to-4 will make it through to funding,” she says. “It comes down to two major issues, belief in the quality of the management team, and the size of the opportunity.”

Kilcrease says angels are generally looking for $30 million in revenue in five years, although she sees some variation in this. She emphasizes that the entrepreneur needs to fully understand the terms of the angel rounds, talk to advisors and consult with experienced entrepreneurs.

“Stay flexible on the terms, especially valuation, and understand the common practices of the angel network in your region and business vertical,” she says.

Laura Kilcrease is the Entrepreneur-in-Residence for 2012-2013 at McCombs School of Business. She sponsors the Entrepreneur-in-Residence Speaker Series, with past speakers available for viewing online.

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