What is an angel investment?
An angel investment may be considered an injection of capital by individuals into start-ups or companies at early stages of development in their life-cycle in exchange for shareholding. Equity ownership interest is usually low and these businesses generally seek funding for amounts between USD 30.000 and USD 250.000, although in some specific cases their needs may exceed that amount. These are high risk investments with a return on investment that may reach 30%. In order to mitigate this risk in some way, many entrepreneurs participate in several rounds of investment, where they gradually request the capital they need and they show the results they have attained at each stage.
What are angel investors?
They are individuals who finance companies in early stages of development. Their main characteristic is that they provide what is referred to as “intelligent capital”. It is not only about contributing financial capital to these businesses, they also support the project with their experience, professional know-how, network and contacts.
Angel investors may have different needs and interests for the projects in which they invest and they may invest in different manners. They may be simply seeking a return on investment over a certain period of time, they may get involved and become active participants in the company in which they invest or they may be strategists seeking to eventually acquire 100% of the company’s shares.
The angel investor and seed capital phases are those with the highest returns within the risk capital industry and this is due to the high risk resulting from the degree of uncertainty during these initial stages. It is therefore recommended to invest in several businesses in order to obtain optimal diversification.
What is the origin of angel investments?
Angel investments originated during the 19th century in New York City, as a way of financing theatrical productions in Broadway. After more than a century of very low-profile activity, 30 years ago the angel investment industry began developing significantly. At the beginning of the ‘80s, investors began to coalesce into formal groups which then derived in co-investments allowing access to projects that required larger capital investments, higher diversification as well as the possibility of sharing opinions on potential investment projects.
These investors focus on stages of funding that cannot be covered by initial sources of capital such as family and friends. At the same time the amounts required are not very attractive for venture capital investors. Normally banks do not cover these stages due to the high level of risk involved, the lack of collateral and the short life of the projects involved. In Latin America private equity industry has recently begun developing through the emergence of different groups of angel investors who invest between USD 50.000 and USD 500.000 in different projects. These investments may even reach USD 1 million in consecutive rounds of investment.