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Angel investors, or individuals who invest in private
companies, may be more
important to the growing
economy and the
advancement of
technology than any
other source of capital.
Angel capital is
critical to early stage
companies.
According to an estimate by the Center For Venture Research,
University of New
Hampshire, 50,000
companies received $40
billion dollars of angel
funding for the year
2000 and there are about
three million
individuals in the
United States that have
made an angel
investment.
Since there are
no reporting
requirements for private
investments, these
estimates may be
substantially lower than
reality.
Comparatively,
approximately only 7000
companies received
capital from venture
capital firms in 2000
and of this, only 28%
was invested in early
stage companies.
In addition to the money they invest, angel investors act as
mentors and advisors to
their portfolio
companies providing much
more than just dollars.
Methodology
The angel investor survey information presented here is based
on a survey completed by
Brian Hill and Dee
Power, founders of
Profit Dynamics, Inc.,
in June 2001.
Approximately 500
individuals who have
been known to invest in
private companies were
asked to complete a
survey of 10 questions,
2 of which were essay
questions, and the
remainder multiple
choice or ranking.
The survey also
asked the age, education
level, and the average
amount invested per
company per investment
made.
Fifty individuals completed the survey and resided in various
geographic areas of the
country including
Southern and Northern
California, Pacific
Northwest, Southwest,
Midwest, the South and
the East Coast.
The responses of the angel investors were compared to the
responses to a series of
surveys, also conducted
by Profit Dynamics Inc.
of 250 venture
capitalists and of over
100 entrepreneurs
actively trying to find
capital.
The venture
capital surveys were
conducted each year from
1998 through 2001. The entrepreneur survey was conducted in April and May of
2001.
The entrepreneur results are important to include as they
explain some of the
frustration experienced
by both investors and
entrepreneurs.
The expectations
on both sides of the
entrepreneur - investor
equation are often not
met.
This lack of
communication is even
more important as a
deterrent to investment
with the angel investor
than the venture
capitalists. The
dialogue between the
entrepreneur and the
angel investor is more
often one-on-one and
more likely to take
place on a personal
level, than that between
the entrepreneur and the
venture capitalist.
Questions
asked of the Angel
Investor participants:
What
do you feel is the most
critical mistake
entrepreneurs make in
their business plan?
What
is the average closing
time it takes between
when you receive a
business plan and making
the investment in the
company?
Have
you ever used an on-line
matching service to find
a company to invest in?
What rate of return do you expect for your investments?
What
is the most important
factor when valuing a
company when making an
investment?
Angel
Investor Demographics
The
average amount of
investment
The average amount invested by the individual angel is
$72,000.
The range most
often given was between
$20,000 to $35,000 with
the highest range of
$250,000 to $500,000.
Average
age of an angel
The average age of the respondents was 49.
54% were between
the ages of 46 to 55,
25% were between 36 to
45 years old, 13% were
between 56 to 65 years
old, with 4% between 66
to 75 years old, and 4%
between 25 to 35 years
old. The youngest angel
was 25.
No angel was
older than 75.
Experience
in investing
78% of the angels had more than five years of experience
investing in private
companies, 11% had less
than 1 year, and 11% had
from 3 to 4 years
experience.
Education
level
75% had graduate degrees, an additional 17% had graduated
from college and 4% had
at least attended
college.
What
is the most critical
mistake entrepreneurs
make in their business
plan?
|
Mistake
|
Angel
Investors
|
Entrepreneurs
|
Venture
Capitalist
|
|
Unrealistic projections
|
32%
|
8%
|
21%
|
|
Weak analysis of market/competition
|
32%
|
16%
|
18%
|
|
Not realistic about challenges
|
24%
|
27%
|
|
|
Incorrect valuation and exit strategy
|
12%
|
10%
|
|
|
Lacking clarity
|
|
16%
|
17%
|
|
Incomplete
|
|
15%
|
8%
|
|
Management weak
4%
8%
Mistakes and
errors
10%
Other
4%
18%
|
The
Angel Investor
Perspective
Angel investors view unrealistic financial projections as the
most critical mistake
(32%), and tied for
first place with weak
analysis of
market/competition
Unrealistic
financial projections is
also the most critical
mistake cited by venture
capitalists as well.
Weak analysis of
market/competition rates
a second class ranking
by both entrepreneurs
and venture capitalists
but that percentage is
only half of the angel
investors' 32%.
Angel investors also felt that not only were the financial
projections unrealistic
but that the business
plan as a whole did not
adequately demonstrate
how the management team
could successfully
develop and implement a
successful business
model.
Interestingly,
venture capitalists
didn't feel it necessary
to specify this as a
mistake.
However VCs did
elaborate on several
more categories that
angels didn’t mention.
Since venture
capitalists are
approached by many more
entrepreneurs than
angels, perhaps they
have more exposure to
badly written and
conceived business
plans.
Or it could be
the VCs are harsher
critics of the business
plan they receive.
Valuation, often an area of contention between angels and
entrepreneurs, has about
the same ranking, 4th
or 5th for both.
Selected angel investor comments are in quotes below the
categories
Unrealistic financial projections:
"Overly
optimistic revenue
projections and too low
expense
projections"
"Unrealistic
revenue model"
Marketing issues:
"They
have the solution, but
they don't know what the
problem is"
"Not
understanding their
customer, competition
and ability to
deliver"
"Too
optimistic about timing
of benchmarks"
Unrealistic Business Plans:
"Unrealistic
capital
requirement"
"Unrealistic
pace of adoption"
Valuation:
"Too
greedy a valuation"
From
the Entrepreneur's Point
of View
Entrepreneurs
were asked "What do
you think is the most
critical mistake
entrepreneurs make in
the business plans that
they present to angel
investors?"
The entrepreneurs
who responded to this
survey question had, as
a group, a remarkably
thorough understanding
of what can go wrong
with a business plan.
1. Unrealistic 27%
The
respondents really took
their fellow
entrepreneurs to task
for not presenting a
realistic picture of the
business opportunity to
investors.
They told us that
nearly all parts of the
plan are unrealistic,
except perhaps the table
of contents and the
appendix.
Entrepreneurs said:
"Not
being practical &
pragmatic"
"Underestimate
the time and amount of
money needed to develop
a product"
"Overestimate
potential and
underestimate
competitive pressure's
"Too
much BS and inflated
guesses on the
numbers"
"Inflating
the numbers or
expectations, the--'if I
sold 1 cup of tea to
every person in China
syndrome”.
2.
Lacking in Clarity of
the Presentation 16%
The
best business plans are
those that are concise
and to the point.
The trend these
days is toward shorter
business plans.
The 100-page
magnum opus of the past
has given way to a
sportier, twenty-five
page document.
Entrepreneurs said:
"Unclear
and overoptimistic
projections of the
expected results"
"Too
involved in the details
and forget to sell the
sizzle"
"Too
much useless
information, too many
numbers, not precise
about what is being
offered"
"Not
being able to present
their reason for funding
in a simple and concise
manner"
"Being
clear and concise about
what they are all about
and excess of knowledge
about the idea but many
difficulties
giving a good and easy
explanation about the
real business".
3.
Incomplete 15%
Incompleteness of presentation often stems from a lack of
basic homework into the
market and the
competition. The plan is an ideal venue for the founders of the company to
demonstrate their
thorough knowledge of
the market space they
will be entering.
Unfortunately,
many times the business
plan content
demonstrates just the
opposite.
Entrepreneurs said:
"Not
showing profit
timeline"
"Poor
presentation (business
plan incomplete)"
"A
lack of defined
objectives and poorly
presented executive
summary"
"Insufficient
explanation of marketing
and sales strategy and
approach"
4. Valuation and
Exit Strategy 10%
This is a controversial part of a business plan. Is it better
to be extremely direct
and specific about the
proposed deal
structure—how much
equity can be given up
for how much capital?
Or be flexible
and not state a
projected return on
investment and exit
strategy?
The experts and
the investors disagree.
Entrepreneurs said:
"Exit
strategy is unclear of
overly optimistic"
"Do
not show how they will
generate ROI for
investors nor an exit
strategy for them
"Weak
business plan (i.e. no
clear ROI)"
"Lack
of return on investment
figures"
5. Financial
Projections 8%
With
financial projections,
sometimes less is more.
Only 8%
of entrepreneurs
responded that
unrealistic financial
projections was the most
critical mistake while
both angel investors and
venture capitalists
ranked unrealistic
financial projections as
the number one most
critical mistake.
Entrepreneurs said:
"Too
long and involved in
financial numbers."
"Presenting
vague or ambiguous
assumptions regarding
their projected cash
flow statements"
"Not
understanding their
business start up costs,
possibly due to lack of
research"
5. Market Need 8%
For
an entrepreneur to
succeed in his/her
mission of obtaining
capital, the venture
must be clearly set
apart, and show to be
superior, to both
potential competitors in
the market space, but
also to other deals that
are competing for the
investors’ attention
and dollars.
Entrepreneurs
tend to overlook the
latter type of
competition: other
entrepreneurs are
constantly coming up
with good ideas as well.
Entrepreneurs said:
"Inadequate
presentation of market
need and value
proposition"
"Do
not identify the size of
the market, nor the
particular niche they
will compete in"
"Failing
to explain what is
different about the
'solution' that they
offer"
5. Competition 8%
It
is truly amazing how
many business plans
contain a statement like
the following: “There
is no competitor in our
market space who is
providing the same
service/product that we
are; therefore we do not
see any direct
competitors.”
Entrepreneurs said:
"Not
understanding their
competition"
"Not
thorough enough analysis
of competitive
landscape"
"They
think they have no
competitors"
6. Management Team
4%
It
is interesting that
relatively few
entrepreneurs cited this
as the major weakness of
a business plan, whereas
investors overwhelmingly
view this as the
critical factor in
making the investment
decision.
Entrepreneurs
said:
"Don’t
focus enough on their
management team and what
experience they bring to
the new venture"
"Lack
of information on
management or
inexperience in their
field"
What
is the average closing
time it takes between
receiving a business
plan, and making the
investment in the
company?
Angel
investors say on the
average they take 67
days to close while VCs
say they take 80 days, a
difference of about two
weeks.
Is this because
angel investors don’t
want to take the time to
perform the same careful
due diligence that
venture capitalists do,
or because they realize
they do not have the
experience or resources
to do so?
It also may be
that angel investors
invest at an earlier
stage than VCs and have
less due diligence to
perform.
And of course
angel investors make the
decision themselves and
don't have partners to
share in the decision
making process, which
can be time consuming.
While it takes the angel investor an average of 67 days to
close, forty-five
percent said it takes
them between 31 and 60
days, 30% said between
61 and 90 days.
Eighty-one
percent said they close
in 90 days or less.
Just over 50%
closed in less than 60
days. In contrast, only 19% of the venture capitalists said they
closed in less than 60
days.
Entrepreneurs underestimate the time it takes angels to close
by 9 days; they believe
angels ought to be able
to get the job done in
58 days.
A significant
number of entrepreneurs,
24%, believe a deal
should close in less
than 30 days, whereas
only 6% of the angels
said they usually close
in less than 30 days. Only 1% of VCs said they usually closed in less than 30 days.
Have
you, as an angel
investor, ever used an
on-line matching service
to find a company to
invest in?
Not one angel investor said they had ever used an on-line
entrepreneur-investor
matching service.
Additionally
not one of the angel
investors we interviewed
said that they had ever
used such a service.
Entrepreneurs
didn't think that these
services were a valid
way to find an investor
either; only 2% thought
that angel investors
used them.
What
rate of return do you
expect for your
investments made as an
angel investor?
As can be expected there was a wide range of expectations,
the least being 20%, and
the highest 100%.
The average was
34%.
Several angel
investors said they
wrote off the investment
mentally as soon as it
was made, given the high
risk of this type of
investing.
What
are the most important
factors relied on when
valuing a company prior
to making an investment?
Angel
investors were asked to
rank the following
factors on a scale of 1
through 9, 9 being the
most important factor, 1
being the least
important:
Return
on Investment
Quality
of management
Stage
of development of the
company
Proprietary
product
Size
of market
Growth
potential
Competition
Barriers
to entry
Industry
the company is in
Other
please specify
Entrepreneurs were asked to rank how they thought angels
would rank the factors.
Venture Capitalists were
also asked to rank the
factors in importance
when they make an
investment.
Factors
Angels
Entrepreneurs
Venture
Capitalist
Pts
Rank Pts
Rank
Pts
Rank
Quality of management
7.1
1
5.5
1
5.4
1
Growth potential
4.7 2
5.4
2
2
4
Barriers to competitive entry
4.2
5
5.4
2
4.1
7
ROI
3.9
7
5.3
4
4.2 4
Competition
4.0
6
5.3
4
4.2 4
Proprietary (unique) product
4.4 3
5.1
6
4.4
3
Size of market
4.3
4
5.1
6
4.6 2
Stage of development of the company 3.7
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