Angel Investors Survey
Industry Analysis and Investment Valuations: Prevent
Leaving Money on the Table
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.
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
Fifty individuals completed the survey and resided in
various geographic areas of the US 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.
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?
|Weak analysis of market/competition
|Not realistic about challenges
|Incorrect valuation & exit strategy
|Mistakes and errors
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
Unrealistic financial projections:
- "Overly optimistic revenue projections and too
low expense projections"
- "Unrealistic revenue model"
- "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"
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.
- "Not being practical & pragmatic"
- "Underestimate the time and amount of money needed
to develop a product"
- "Overestimate potential and underestimate competitive
- "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.
- "Unclear and overoptimistic projections of the
- "Too involved in the details and forget to sell
- "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.
- "Not showing profit timeline"
- "Poor presentation (business plan incomplete)"
- "A lack of defined objectives and poorly presented
- "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.
- "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.
- "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.
- "Inadequate presentation of market need and value
- "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.”
- "Not understanding their competition"
- "Not thorough enough analysis of competitive
- "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.
- "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
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
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
- 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
|Quality of management
|Barriers to competitive entry
|Proprietary (unique) product
|Size of market
|Stage of development of the company
|Industry the company is in
Not surprisingly Quality of Management was the number
one factor for angels, entrepreneurs and venture capitalists.
Stage of Development, and Industry are ranked in last
place by all three as well. Growth Potential is ranked
second by angels and entrepreneurs, and ties for fourth
place with Competition and ROI in the VC rankings. Product
is ranked third by both angels and venture capitalists,
but in sixth place by entrepreneurs.
Entrepreneurs had very little variation in rank from
the top factor to the bottom, only six tenths of one point
comprises the difference in the average rank from the
top factor to the last place factor. The range for angels
is 3.3 points. Entrepreneurs considered Quality of Management
the top factor but not by much. With each of the factors,
a significant number of entrepreneurs said it was most
important, and a significant number said it was the least.
Even in the case of Quality of Management, roughly 40%
of the entrepreneurs ranked it 9 or 8, and 30% ranked
it 1 or 2 in importance. Well over half of the Angels
rated management as the most important factor; 60% gave
it a 9 or 8 and only 10% gave it a 1or 2 in importance.
The data showed that many entrepreneurs just aren’t
sure what factors are most important. Many of them gave
all the factors a 6 or 7, for example.
The fact that entrepreneurs, who sometimes are accused
of being too much in love with their product, ranked product
uniqueness lower than other key factors, was a positive
thing to see.
How alike are angels and venture capitalists?
|Quality of management
|Proprietary (unique) product
|Size of market
|Barriers to competitive entry
|Industry the company is in
|Stage of development of the company
The top four factors for angels, Quality of Management,
Growth Potential, Product and Size of the Market are also
the top four factors for venture capitalists. Two of those
factors have the same ranking, Quality of Management and
Product. The last two factors are also ranked the last
two by VCs. VCs ranked Growth potential, Competition and
ROI in fourth place while angels ranked them second, sixth
and seventh respectively. Angels have a variance of 3.3
points while VCs a variance of 1.6. It seems VCs don't
differentiate as much as angels do.
Management is given a higher average point score by angels
than by venture capitalists. Since angels invest earlier
it may be that the management team is even more important
to angels than VCs.
By Dee Power and Brian E. Hill, www.capital-connection.com
Dee Power and Brian E. Hill, are authors of the books
Attracting Capital From Angels: How Their Money and Their
Experience Can Help You Build A Successful Company, (John
Wiley & Sons) 2002 and Inside Secrets To Venture Capital,
(John Wiley & Sons) 2001, and founders of Profit Dynamics