Review of a Germinal Book
on Angel Investing
Angel capital is a common source of funding for budding ventures. An example lies in the United States, where the level of financial support from business angels is comparable to the sum from venture capitalists.
Moreover, the practice of venture capital is still in its infancy in many other countries. For this reason, the business angel tends to play a larger role in the sponsorship of fledgling firms.
Despite its crucial function, though, the field of angel capital is obscured by a mantle of rumor and anecdote rather than fact and data. An exemplar lies in the U.S., where concrete data on angel capital is hard to come by. Not surprisingly, the scrappy state of affairs is even worse in the rest of the world.
On the upside, though, the dearth of knowledge has become less acute in recent years. A good example is found in an incisive program of research pursued in America. The probing has shown, for instance, that business angels have a penchant for investing in stable firms as well as newborn ventures. Moreover, the usual preference is to invest in a company that has attained a positive cash flow rather than a venture on the verge of bankruptcy.
As a group, business angels invest in a broad spectrum of industries in addition to the pacesetters in the technology sector. At the level of the individual, a cherub is apt to favor the industry they know best from their previous experience in the field.
The angels resemble other sources of informal capital in a number of ways. In particular, the cherubim usually have no more experience, expertise or capital than the friends and relatives of the entrepreneurs.
On the downside, the financial payoff for the cherubs is wont to be far from spectacular. A telling example involves the top tier of business angels. The players of this caliber boast a net worth of $10.9 million on average, participate in angel clubs, have founded an average of 2.7 companies, and are prepared to talk about their experiences. These heavyweights earn just 19.2% per year after taking into account the opportunity cost of the time they spend on their projects. Put another way, the archangels could have earned higher returns by entrusting their money to the leading funds in the field of venture capital.
The stunted payoff from angel investing is an indication of the scarcity of worthwhile projects rather than a deficit of funding on tap. In other words, too much money is chasing too few deals. In that sense, at least, angel capital happens to resemble venture capital as well as other niches in the financial arena.
In some cases, business angels flock together on a regular basis. The cherubs join clubs in order to share their trove of know-how and know-what. An example of the former lies in a technique for evaluating a project. Meanwhile, an instance of the latter is the legwork put into the due diligence prior to investing in a candidate firm. Given the advantages of collaboration, the members of angel groups tend to outperform their lonesome peers who work as lone rangers.
Read more on Real Story behind Angel Investing.
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