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Only high net worth determines wealth. Earlier, we discussed how some en-
trepreneurs mistakenly judge investors solely on their income, forgetting that
income alone has little to do with the investment potential that counts in
these early-stage, high-risk transactions. By focusing on income, the uniniti-
ated can forget how quickly it can become outstripped by expenses.
Income alone, then, does not signal a potential investor. Entrepreneurs
should not rely on brokers™ lists of investors for two reasons: Brokers™ lists



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116 UNDERSTANDING THE ANGEL INVESTOR


are based on income, not wealth; and, in many cases, these lists are based on
information publicly available. These lists will not lead entrepreneurs to the
investors who make high-risk investments, however much entrepreneurs and
their brokers wish it were so.
However, an investor™s net worth is much more difficult to plumb than
income, particularly net worth exclusive of house and car. A person™s net
worth is attainable only through interviews, which accounts for the reason
that research-based databases become so valuable. By combining net worth
with income data, a helpful database, such as the one operated by ICR, turns
up those individuals who meet the standards for such transactions. Private
discretionary capital of high-net-worth individuals accounts for a sizable re-
source for investment. As we have mentioned in our e-book, written with Bill
Bradley, as high-net-worth individuals, angels have not been an easy target
for entrepreneurs. Successful angels are known for their ability to remain
“plugged in,” while comfortably holding their ground behind the scenes.
The popularity of angel investing has made angels more accessible than ever
to the entrepreneurial public.
In the days before venture forums, angel clubs, or venture networks, an-
gels were much more difficult to locate. Angel investors have typically been
viewed as individuals capable of not only financial contribution to an emerg-
ing venture, but perhaps as important is their managerial and strategic con-
tribution. The popularity of angel investing in the greater media has led to a
significant increase in the number of high-net-worth individuals seeking pri-
vate market investment opportunities. As such, a new group of inexperi-
enced angel investors has emerged.
In many cases, today™s inexperienced new angel seeks the upside associ-
ated with traditional angel investing, but often has little desire to contribute
to the development of the venture beyond the original capital contribution.
Enter the “passive” angel investor. While the general purpose remains the
same”to seed emerging companies”the risk increases to both the entrepre-
neur and investor as the passive angel contributes little beyond money to the
success of the venture.
The angel marketplace is being forced to evolve as more and more di-
verse high-net-worth individuals participate. The structure of the market is
changing to adapt to both the new passive nature of inexperienced angels, as
well as to the increased demand of the more seasoned investor. Nonetheless,
the angel investor remains a staple in the emergence of start-up companies.
We have noted that only a specific segment of the high-net-worth mar-
ket is worth targeting for high-risk deals, a market composed of a diverse
pool of investors. The principal group for investing in high-risk deals has a
net worth of $1 million to $10 million. Net worth of less than $1 million or
greater than $10 million will not be a target for high-risk investments. People
with a net worth of less than $1 million do not meet the legal qualifications
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What Do Private Investors Look for in a Deal?


for being involved in this type of investment and can trigger litigation. Such
investments are simply too risky for them. Even if the prospective investor
meets mandated income levels for accredited status, the investor may not be
able to absorb losses that can occur with higher-risk, early-stage investments.
This could lead to legal action, particularly with less experienced angels. For
those with a net worth of more than $10 million”the approximately 0.5
percent or one out of every 200 U.S. families who own more than 45 percent
of the nation™s privately held net wealth in stocks, bonds, and trusts”invest-
ing is most often accomplished through family offices that bear fiduciary re-
sponsibility, the representatives of which are less inclined toward these types
of high-risk investments. However, there are exceptions! As any experienced
money manager will tell you, “always leave a little high-risk play money” for
the client to place on his or her own. So entrepreneurs can target this group
if they can reach them directly.
Total U.S. net worth in 2001 was measured by Arthur Kennick in his
study “A Rolling Tide: Changes in Wealth in the U.S. 1989“2001” at $42.3
trillion. The top 10 percent of households held 69 percent of the wealth. The
bottom 90 percent held about 30 percent. The top tiers are where you will
find nonrelated angels for your deal.
Accredited investors make up the group of incomes ranging between
$100,000 and $300,000 or more per year. This is the group typically con-
sidered affluent. Again, they are affluent, but they are not wealthy. Someone
with an income of $100,000 might have no net worth or discretionary net
worth available. However, if only income data are available, entrepreneurs
should look for those with a gross income of $200,000 to $1 million. This
income level offers far better prospects of those having the necessary discre-
tionary funds to make these types of investments.
There are affluent market segments that provide unique asset garnering.
The inheritance boom and the unprecedented assets of a mature market
combine to make the most tantalizing accumulation of wealth in the history
of the world. According to the 1995 Affluent Market Consumer Survey, af-
fluent market segments exist that provide unique asset-garnering opportuni-
ties for individuals seeking to raise capital. The thing to realize is that the
high-net-worth market is highly segmented; it is not a monolithic market,
just as the angel market is not monolithic, but rather a series of types.
In studying this affluent or high-net-worth market, we discover the fol-
lowing segments: the young affluent and low-end affluent (people with a net
worth of $100,000, excluding their primary residence); the retired affluent
and career affluent (those with a net worth of more than $500,000); estab-
lished wealth and senior corporate executives (those with a net worth of $1.4
million to $5 million); business owners (whose net worth ranges across other
segments, from a low of $500,000 to a high of $5 million); and active wealth
(those whose net worth tops $5 million).
118 UNDERSTANDING THE ANGEL INVESTOR


Obviously, segments of this market are more inclined than others to
early-stage investing. Because of their age, need for income and security, and
time remaining to garner capital appreciation, early-stage investing”with
its longer-term horizons, lack of dividends, and higher risk”are much less
attractive to the retired affluent than to other affluent market segments.
Clearly, then, the retired affluent are less of a target for early-stage invest-
ing. The young affluent are in the earlier stages of acquiring homes and ma-
terial things and therefore probably are less inclined to engage in early-stage
investing. In addition, the young affluent, more concerned with the time
investment of family and career, become much less available to provide
the time-intensive dimension of added value that these early-stage compa-
nies require. Nor are the young affluent readily available to devote the nec-
essary time to hedge the downside risk associated with this type of
investment. So an economic element and a time element make it less ap-
pealing. The low-end affluent will not yet have the discretionary net worth.
So the entrepreneur™s camera lens naturally narrows on established wealth
(those looking for socially responsible deals) and on active wealth (those ac-
tively placing money back into the economy). Likewise, senior corporate ex-
ecutives are investing in their industries because they understand the
opportunity, just as business owners are looking to invest and diversify and
grow beyond their businesses. Finally, the career affluent are seeking to
broaden their retirement portfolio through capital accumulation over time.
Obviously, it is these latter segments that deserve the early-stage entrepre-
neur™s store of energy.
In examining statistics quantifying the optimal market segments of the
high-net-worth individuals to target, we have concluded that there are ap-
proximately 2,000,000 U.S. households that meet the minimum net worth
requirements for direct, private investment. These segments constitute the
underlying structure of what is called “the angel market”; that is, the pre-
IPO market, providing money to young, rapidly growing companies that
hold the potential to develop into significant and sustainable contributors to
the country™s economy. This capital is the main source of financing for start-
ups and fast-growing small businesses, and supplements cradle equity pro-
vided by family, friends, and founders. This capital also serves as the
precursor to more traditional and institutional capital from venture capital-
ists and banks.


THE INFORMAL, HIGH-RISK INVESTOR PROFILE
Just who are these investors? What profile fits the hard-to-find, affluent, pri-
vate, early-stage investor? In Chapter 7 we profile specific types of angel in-
119
What Do Private Investors Look for in a Deal?


vestors. In Exhibit 6.1, using the results of survey questionnaires and fol-
low-up interviews, we sketch the generic informal, high-risk investor from
ICR™s early study of more than 600 private investors.
These individuals are typically males around 46 to 65 years of age. Age,
in fact, influences investment. We see in the age range of 46 to 55 an inclina-
tion to redeploy some of their income, particularly toward growth potential.
In the 56 to 65 bracket, we see a much more active portfolio management,
in which these investors trust their own judgment, not that of brokers, par-
ticularly in investments into private business ventures.
Returning to our profile in Exhibit 6.1, these investors typically have
postgraduate professional degrees and extensive management experience. In
fact, they have been executives in established companies or owned and sold
their own companies. And because they can aggressively negotiate strong
discounts in valuation, they are interested in earlier-stage deals. Having had
to raise money for their own businesses, they are experienced in dealing with
investors and understand the potential in these transactions for high returns
through capital appreciation.
Based on five-year investment patterns, we showed in our study reported
in Chapter 5 the size of investment per transaction, transactions that ranged
from less than $25,000 to more than $1,000,000 per transaction: Seven per-

EXHIBIT 6.1 Informal, High Net Worth Investor Profile

• 46“65 years of age, male
• Postgraduate degree, often technical
• Previous management experience; started up, operates, or sold a successful busi-
ness
• Invests between $25,000 and $1,000,000 per transaction
• Prefers participation with other financially sophisticated individuals
• Strong preference for transactions that match with technical expertise
• 23% prefer to invest "close to home"
• Maintains an "active" professional relationship with portfolio investments
• Invests in 1“4 transactions per year
• Diversification and tax shelter income are not the most important objectives;
however, ROI is rarely the only objective
• Term for holding investment is 8 years
• Looks for rates of return from 22.5% to 50%; minimum portfolio return 20%
• Learns of investment opportunities primarily from friends and trusted associates;
however, majority would like to look at more investment opportunities than pres-
ent informal referral system permits
• Income is $100,000/year minimum
• Self-made millionaire

Source: International Capital Resources
120 UNDERSTANDING THE ANGEL INVESTOR


cent invested up to $25,000; 12 percent invested $25,000 to $50,000; 17
percent invested $50,000 to $100,000; 8 percent invested $100,000 to
$250,000; 12 percent invested $250,000 to $500,000; only 3 percent in-
vested $500,000 to $1,000,000; and 17 percent invested $1,000,000 or
more per deal. We concluded that professional venture capital and corporate
investors made up the majority of funds invested, investing $1,000,000 or
more, but some angels were also identified in this segment. In summary, the
majority of individual investments in ICR™s investor network are most likely
under $500,000 (56 percent). Also, as we reported, these investors are typi-
cally willing to pool their money, or they invest with a syndicate of co-in-
vestors who ponder hedging strategies and managing risk.
These investors possess preferences for an eclectic mix of industries, with
interest in communications, software, education, energy, financial services,
manufacturing, medical and health care, recreation, retail, services, whole-
sale trade, transportation, biotech and life sciences, and high technology, in-
cluding information technology, optical, telecom/wireless, and Internet
ventures.
In addition, entrepreneurs must expand their search for investors geo-
graphically. While it is true that 23 percent prefer to invest close to home, 65
percent will invest statewide and 12 percent will invest nationwide. Many of
those who will invest statewide are willing to entertain deals out of state if a
trusted co-investor is geographically proximate to monitor the deal.
We will see in the composite sketches of types of private investors fea-
tured in the next chapter that despite their diversity, much unites them.
Investors are like DNA molecules: Although everyone™s DNA is assembled
from the same nucleotides, everyone™s DNA is different. Individual in-
vestors, too, are different, reflecting a market of splintered segments com-
posed of distinct individuals. Therefore, no monolithic overture to them will
suffice. Entrepreneurs must approach investors individually, in terms not
only of personal demography, but also of idiosyncrasy. Thus, a careful
measure”something beyond an array of mere market statistics”illumi-
nates the informal, high-net-worth investor as both individual and member
of a select group.
In conclusion, angel investors are private, high-net-worth individuals
who invest their own money. They focus on fast growth, early-stage ventures
for the potential returns these ventures offer. They seek equity with the goal
of capital appreciation. They are long-term investors with an average hold
time of eight years to liquidity. They are not part of a monolithic group.
They invest in a range of industries, but individually stay close to what they
know. They can be actively involved or passive, but most of all, they are in-
terested in building sustainable companies as the best hedge against risks of
this asset class.
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What Do Private Investors Look for in a Deal?


ADVANTAGES AND DISADVANTAGES OF DIRECT
VENTURE INVESTING

For entrepreneurs planning to court high-net-worth investors for their ven-
ture, it is worthwhile to take a moment, step back from the search, and ac-
knowledge both the advantages of early-stage investing that attracts
investors and the disadvantages that create barriers to and bottlenecks for in-
vestor involvement.
So the question arises: Why do sophisticated investors get involved in the
alternative asset market in the first place, especially with the reported up to
33 percent chance of loss of capital? (See Exhibit 6.2.)
They get involved because this type of investing”direct, early-stage, pri-
vate equity investing”offers them some unique advantages. One of the ad-
vantages is no middleman. This type of transaction is based on their own due
diligence, their own assessment, their own intuition, and their own intelli-
gence and analytical skills to identify a winner. One very attractive advantage
is the possibility of hitting a home run in this arena.
And because you can hit a home run, the upside potential through cap-
ital appreciation on these investments is unlimited. It™s not like a loan that
will return your capital plus a little percentage in interest. Even in today™s
down IPO market conditions, companies that are sold or merged at values
between $100 million and $300 million are providing substantial multiples
to investors involved in the venture early. So beneath the surface bubbles the
incentive to hit it big. Another aspect involves many executives late in their
career who are bored with the businesses they own or are no longer chal-

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