They find and finance companies such as Amazon.com, The Body Shop and Google before they become, well, Amazon.com, The Body Shop and Google. And they have a knack for turning a spare $100,000 into millions come IPO time.
Turns out we don’t know angel investors at all, says Scott Shane. The Case Western Reserve University entrepreneurship professor peeked beneath their wings for his recent book,Fools Gold?: The Truth Behind Angel Investing in America.
An angel himself through the Mayfield Heights-based North Coast Angel Fund, Shane says there are fewer angel investors out there than you might think, and the majority of their investments don’t rake in huge returns.
“What’s probably going on is that we want to believe that there are a lot of angels and that there’s a lot of activity,” he says. “And we don’t like the idea that they aren’t performing well. What we do is create a myth.”
Definition, please?
The first frustrating obstacle Shane encountered while writing his book was that no two definitions of the term “angel investors” seemed to match. Do they have to be accredited through the SEC? Does their capital have to be equity, or can they offer a debt option? Shane settled on only one conclusion: no investing in companies owned by friends or family. Others think angels belong in a much narrower category. “I was comfortable with the choice,” he says, “but frustrated that it was going to mean that I was inconsistent with things that people had found before.”
Just who do they think they are?
You might as well rip up that photo of the charitable older gentleman — the most common angel investors tend to be between 45 and 54, working, college-educated, making $200,000 or less each year and with a net worth of less than $1 million.
Reality check?
Shane also discovered the cash distributed by angels was much less than he expected. Of the $162 billion in informal investments made in an average year, only $23 billion came from angels. Half of the individual angel investments were $10,000 or less, and the average was $77,000. “I didn’t expect the typical investment made by an angel to look so much like the typical investment made by a friend or a family member,” he says.
The big payoff?
Well, don’t hold your breath, Shane says. At most, 0.2 percent of companies in which angels have invested end up in an IPO. The percentage of angel-invested companies that eventually get sold tops off at 1.3 percent.Book by Case Western Reserve professor peers into the reality of angel investingThey are all kindly, retired executives with fat checkbooks who descend upon young companies with good ideas and a cash-flow problem, right?