November 27, 2017

The New Angel Investor

Do you ever wish you could have invested in Apple Computer when it was still operating out of Steve Jobs’s parents’ garage? Or bought a piece Facebook when its headquarters were in Mark Zuckerberg’s college dorm room? Few opportunities in life can generate personal wealth as profoundly as being a founder or early investor in a startup that achieves grand success.

Mike Markkula was the first angel investor in Apple. He met the founding Steves—Jobs and Wozniak—in late 1976, after they developed the Apple II prototype and just before they moved their headquarters from the garage in Los Altos, California, to an office in Cupertino. Markkula, who had recently retired from Intel at age 32, helped Jobs and Wozniak write their business plan, and then invested $80,000 in the company in return for one-third of the equity (he also loaned Apple $170,000). That transaction valued the company at far less than $1 million. When Apple went public three years later, the company’s value soared to $1.778 billion, and Markkula’s share was worth about $200 million. That’s way more than a 2,000-times increase in his original investment in the company.

Reid Hoffman was one of Facebook’s first two outside investors. As an entrepreneur himself, Hoffman had been a founding board member of PayPal and then founded LinkedIn in 2003. He staked $37,500 on Facebook in 2005, when the social network had just moved out of a Harvard dormitory to its new headquarters in Silicon Valley, and was valued at $5 million. When Facebook filed its initial public offering (IPO) seven years later, and the company’s value topped $100 billion, Hoffman’s piece of it was worth something like $75 million, giving him roughly a 2,000-times gain over his initial stake.

These are two high-profile examples of spectacularly successful angel investments. The overwhelming majority of angel investments are not so successful; some of them are moderately to very successful, and—this is the sad part—most of them are losses. As you know, the possibility of meteoric growth in the value of startups is accompanied by commensurate risk of sluggish growth or outright failure. That’s why successful angel investors typically buy equity stakes in several startups and, by doing so, diversify the risk and increase the chances of a hitting one out of the park.

The potential rewards of angel investing are not just financial, though. There are also strategic benefits, which may include:

  • Close association with talented developers and inventors, brilliant entrepreneurs, and well-connected directors of the companies.
  • Participation in company management or governance based on professional expertise, possibly as a board member, paid consultant, or strategic partner.
  • An up-close, insider look at innovative business models, new products, cutting-edge technology, and proprietary research.
  • The opportunity to invest in future rounds of later-stage angel, venture, and pre-IPO financing.

In the process of seeking financial returns and strategic benefits, angel investors can also derive social rewards: boosting community development (especially when the investors and issuers represent the same metropolitan area or region), creating new jobs, supporting favorite products and brands, and helping good people make their dreams come true. The rewards and benefits from successful ventures reach far indeed.

In 2012, a peak year for angel investment, more than 268,000 angels funded roughly 67,000 seed-stage, startup, early-stage, and growing small businesses in the United States. The total amount invested in those deals was almost $23 billion. That does not include venture capital investments, which involve funds (or pools of capital), rather than individuals, typically investing at later stages of business development (but still pre-IPO).

The most popular sectors among individual angel investors in 2012 were software and healthcare. Trailing these two leading sectors, in order of popularity, were retail, biotech, industrial/energy, and media.1

That gives you an idea of the volume of angel activity in America—before the rules changed.

Jeffrey Sohl, “The Angel Investor Market in 2012,” Center for Venture Research, University of New Hampshire, April 25, 2013. Among angel clubs (comprising accredited investors only), the sectors that attracted the most capital in 2012, ranked by the Angel Capital Association, were: healthcare, Internet, software, mobile/telecom, business products/services, energy/utilities, computers, consumer products/services, electronics, industrial, environmental services/equipment, media, and financial services.


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About: Sarah quinn

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