“Angel” by Aerosmith is a wonderful song to introduce the topic of financing entrepreneurial ventures, specifically the issue of angel investment. Given that angel investors are not simply capital investors, but important mentors to small, growth orientated business, this song reinforces that dual concept in the minds of the students. While the band is singing about a romantic partner, the professor should ask the student to view the lyrics it through the lens of angel investing. As such, the lyrics become relevant with lines such as “come and save me tonight” (support me) and “without your love (money and mentorship) – I’m nothing but a beggar”.
After listening to the song in class, here are some key concepts to consider when discussing the theoretical concepts of Business Angels:
What is an angel investor?
- An angel is a high net-worth individual who invests their own money in start-up companies in exchange for an equity share of the businesses.
- Many angels are former entrepreneurs who make investments in order to gain a return on their money, to participate in the entrepreneurial process and to give back to their communities by catalyzing economic growth.
- Angels make a return on their investment when the entrepreneur successfully grows the business and exits it, generally through a sale or merger.
- Angels tend to invest in companies that are located near them regionally (or to co-invest in a wider geography if a local investor they know and trust is involved).
How do angels help small businesses?
In addition to financial capital, top angels mentor and coach their portfolio companies, often leading to more healthy growth. They introduce entrepreneurs to potential customers and investors, see around potential problem areas, and help the start-up firms gain credibility in their fields.
What criteria do angels use to select entrepreneurs?
- A strong management team with experience and proven skills.
- Unique product or service distinguished by an identified competitive advantage and a large market
- An entrepreneur who is willing to invest personal finances in the company.
- A clear picture of the market for the product or service and realistic plan for market penetration.
- An exit strategy for the investor that is reachable within 5 to 7 years.
- The potential for a strong return on investment.
What is the difference between angels and venture capitalists?
While both invest in entrepreneurial firms and take equity (ownership) in those businesses, there are some important differences:
* Funding source – Angels invest their own funds directly in a business, while venture capitalists invest funds from other sources (e.g. pension funds, insurance companies, foundations).
* Stage of entrepreneur – In general, angels invest in seed, start-up and early-stage businesses, while venture capitalists invest in later-stage businesses (although there are exceptions).
* Size of investment – Venture capitalists generally invest $2 million and up in a financing round, while individual angels make much smaller investments ($5,000 to $100,000).