Financing is a critical issue for the survival and development of small and medium-sized enterprises. Business angels play a key role in financing these enterprises, especially innovative ones with high growth potential.
Business angels fill the gap between founders, family, and friends on one side, and institutional venture capital funds on the other side, as a financing source.
Business angels invest a large amount of money in seed, start-up, and early-stage enterprises.
Profile and attributes of business angels
The term ‘business angels’ comes from Broadway. At the end of the 19th century, rich investors began providing funds for directors to finance production of new musicals and plays. Besides financial benefits, their motivations came from their love for the theatre and the opportunity to meet and socialise with famous actors, writers, and producers.
These investors secured high-risk capital and were motivated by something larger than money. Even today, writers, actors, producers, and musicians often depend on the altruism of others to promote their projects and careers.
Business angels became a critical source of financing risky but promising ideas and projects beyond Broadway.
Just to illustrate:
- in 1874, Alexander Graham Bell used funds from business angels to found Bell Telephone;
- in 1903, five business angels helped Henry Ford, with $40,000;
- in 1977, a business angel invested $91,000 in Apple Computers;
- in 1978, a business angel provided initial funding for the Body Shop chain.
Companies such as Amazon, the Mining Company, Go2Net and Firefly owe their survival to business angels, to their funds and their expertise and experience1.
There are several definitions for business angels that do not differ from each other drastically. According to one author2, business angels are individuals who have available financial means and are ready to invest in entrepreneurship ideas.
They include retired managers who were awarded large payments or compensation as well as entrepreneurs and managers who became rich from their business.
Other authors3 define the business angel as 'an individual, acting alone or in a formal or informal syndicate, who invests his own money directly in an unquoted business in which there is no family connection and who, after making the investment, takes an active involvement in the business, for example, as an advisor or member of the board of directors'.
Business angels represent private investors who, during their active work, have gained wealth and experience and are ready to invest in new enterprises in order to help young entrepreneurs and profit simultaneously.
Business angels have usually had a successful career, but because of age or some other reason they cannot devote themselves to their business anymore. In their thoughts, there is always one motto present: ‘there is still more
to be earned’. This attitude can always lead to the possibility of losing a lot of money, but that does not prevent them from accepting the challenge.
Characteristics of business angels
Although the population of business angels is quite diverse, their profile is not difficult to describe. In almost all research on business angels, the same or similar demographic features emerge:
Gender: Studies conducted in various countries confirm that most business angels are male. For example, in the USA, 95% are; in Great Britain, 99%; in Germany, 97%, in Hungary, 100% are male4.
This may be because such a small number of women have created successful enterprises, or have held executive positions in large companies.
Age: Business angels are generally from 40 to 65 years old. It is assumed that by this age entrepreneurs have gained enough experience and gathered enough money, and all that is left for them is to choose whether to be ‘relieved of their duties’ or to become business angels who are economically active.
These authors5 have concluded in their research: ‘The average age of the subjects is 49 years. To be specific, 54% were between 46 and 55 years old; 25% were between 36 and 45 years old; 13% were between 56 and 65 years old; 4% were between 66 and 75 years old and 4% were between 25 and 35 years old. None of the subjects claimed that they are older than 75 years old.
Education: Business angels are typically people with a university and/or professional qualifications, but angels with masters and doctorates are rare. According to many researches, about 75% of business angels have a university degree and about 20% enrolled in university but never finished their studies.
Occupation: Business angels come from various professional fields. According to some research6, 25% have worked in finance as financial directors, accountants, etc.; 20% have worked in the
machines and equipment sector; the remaining 55% come from areas such as medicine, production, construction, biotechnology, etc.
Wealth: This is one of the main preconditions of becoming a business angel. Business angels invest an average of $10,000 per deal and generally have a portfolio of two to five investments. In the USA, one in every three angels has a net worth of at least $1m, whereas in Great Britain 19% of business angels are millionaires7.
Investing personal assets: The fact that business angels invest personal assets distinguishes them from institutional investors of high-risk capital, whose funds come from sources such as pension funds, banks, university endowments, and insurance companies that have legal obligations to exercise caution and invest in less risky ventures.
They make risky decisions: Most business angels have extensive and often successful experience in managing companies. They are ready to make different decisions, which often carry a large dose of risk. Even though they were once successful entrepreneurs, or were executives of large companies, business angels do not always possess the required knowledge and skills for successful management of the companies they invest in.
They invest locally: Business angels prefer to invest in enterprises near their homes, usually within a 50–100 kms radius or 1–2 hours of driving time. Just to illustrate, in Great Britain, 67% of business angels invest in enterprises that are 100 kms or less from their home or work place. In Norway, it is 48%8. Business angels prefer to invest locally so they can visit the firm in which they have invested and see how things are going.
Investing in unlisted companies: Business angels invest in companies that are not listed on the stock market. Because of the high risk, they invest only 5–15% of their assets in such companies. If the investments fail, which they often do, the losses will not affect their lifestyle drastically.
Business angels are private investors, who, during their active working lifetime, have gained wealth and experience. They are ready to invest in small and medium enterprises in order to help young entrepreneurs and to make profits for themselves.
They are especially important during the seed stage and start-up stage of development. As patient investors, they direct the entrepreneur toward the right path in developing the enterprise while providing venture capital and knowledge for the enterprise. Business angels are playing a more and more important role in fi nancing many new businesses.