Like investments in private equity, hedge fund, and real estate investments, non-institutional investments in startups – known as “angel investments” – are gaining momentum among the alternative investor crowd. Angel investing is growing in the US, led by a group of successful entrepreneurs, venture capitalists and savvy early investors reaping the benefits of big ticket acquisitions and IPOs over the past decade, and who, in turn, want to contribute both capital and experience to the startup ecosystem.
Reaching nearly $23 billion in 2012, angel investors are not only responsible for funding over 67,000 startup ventures annually, but their capital also contributed to job growth by helping to finance 274,800 new jobs in 2012 according to the Angel Market Analysis by the Center for Venture Research at the University of New Hampshire. On the contrary, venture capital firms only invest in 1,000 new companies per year.
While angel investors contribute about five times less capital to startups than VCs, individual investments in startups grew by 36 percent from 2008-2012, while venture capital investments dropped by 8 percent, according to Dow Jones VentureSource. The average angel investment grew more than 20% from 2011 to 2012, from $70,690 to $85,435, according the Center for Venture Research.
There are two primary reasons for the growth in angel investing. First, the cost of starting a business has plummeted in the past ten years from an average of $2 million to around $5,000.
It is easier for investors to fund businesses during the earlier stages as the amount of required investment capital is much lower and the number of early stage companies is greater. Second, venture capital firms are investing later in the lifecycle of a company after its founders have demonstrated credible metrics of feasibility and scale, leaving an opening for earlier investors.
Angel investing is not without its ups and downs, however. A study by Cambridge Associates found that over 60 percent of high-tech startups did not provide any returns, while 7 percent generated returns in excess of 5 times invested capital. Many angel investors maintain a portfolio of startups in order to balance the risk, typically no more than 10% of their overall investment port- folios. For individuals and family offices, a startup investment port- folio that is diligently managed can produce returns in line with the risk assumed.
With regulatory changes to 80-year-old securities rules originating from the implementation of the JOBS Act, startup investing is now accessible to nearly 8.7 million American households qualified as accredited investors, significantly more than the 268,160 angel investors active in 2012 as members of angel investment groups or who are otherwise well-connected within the community, according to the UNH Center for Venture Re- search. When Title III of the JOBS Act takes effect – likely in early 2014 – any individual will be able to invest in startups, subject to limitations based on income and net worth levels set forth by the SEC.