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ABSTRACT
Start-up businesses often need external financing to grow. These new ventures frequently turn to business angel investors for capital. Angels, who are often wealthy individuals, provide early stage financing, called seed capital, for these start-up ventures. This study examines what a group of angel investors in Southern California consider when reviewing an investment opportunity, and how they prioritize their investment criteria. The study utilizes a two-phase approach consisting of a qualitative first phase and a quantitative second phase. The results of this study show that trustworthiness of the entrepreneur, quality of the management team, enthusiasm of the lead entrepreneur, and exit opportunities for the angel are the angels' top criteria.
INTRODUCTION
This study examines what business angel investors consider when reviewing an investment opportunity, and how they prioritize their investment criteria. Angel investors, who are often wealthy individuals with experience building a business, provide early stage financing, called seed capital, for start-up ventures. Venture capitalists (VCs) typically provide later stage financing, after the angels' investment.
Many start-up businesses need external financing to grow (Tyebjee & Bruno, 1984; Hisrich & Jankowicz, 1990). If these new ventures anticipate quick and aggressive growth, they often turn to angel or venture capital investors for capital. Angels invest more funds in more firms than any other source of outside financing (Freear, Sohl, & Wetzel, 1992). Although it is hard to estimate the exact size of angel investment due to its highly fragmented nature, in 2004 it was reported to total $22.5 billion (Sohl, 2005). This estimate puts total angel investments higher than formal venture capital investing for 2004 (Sohl, 2005).
Angel investing has provided seed capital for some famous U.S. businesses such as Bell Telephone in 1874, Ford Motor Company in 1903, and Apple Computer in 1977 (Van Osnabrugge & Robinson, 2000). Entrepreneurial ventures dramatically affect the U.S. economy and are the primary jobcreating engine of our economy, providing three out of four new jobs (Ojala, 2002). To put this in perspective, it is estimated that new business start-ups averaged approximately 550,000 per month between 1996 and 2004 (Kauffman Foundation, 2005). The Small Business Administration estimates that 51 percent of private sector output is from small business (Van Osnabrugge & Robinson, 2000). Between 1995 to 1999, the...