The problem with great ideas is that, well, at least initially, conventional wisdom never sees them as great ideas. For example, it’s likely that mainstream investors would’ve told Larry Page and Sergey Brin: “We’ve already got Yahoo, Magellan, Lycos, and AltaVista; why do we need ANOTHER search engine?” Additionally, in 2002, you could potentially see institutional investors wondering why Elon Musk would start an electric car company when the competition (Ford, Toyota, GM, etc.) would most likely crush him. Unfortunately, in these cases and many others, conventional investment can lack the ability to see a great investment for what it is; however, there are individuals who can, and these angel investors are today’s word.
Without getting into the intricacies and variations, an angel investor is, quite simply, someone with money who wants to invest in a company for a percentage of the company’s ownership. Though angel investors can take the form of family and friends, wealthy individuals, groups, or even crowdfunding, they, by believing in the business idea instead of strictly the ability to maximize profit, provide much-needed capital for business ventures during the start-up phase, when it is often difficult for businesses to obtain funding from more conventional sources, like banks or investment companies.
In usage, the term angel investor, is first seen in the headline of the December 13, 1958 edition of Simpsons’ Daily Leader-Times (Kittanning, PA): “Wealthy Texan enters showbusiness as angel investor.” Indeed, our usage of the term does stem from show business, specifically Broadway, where the funding of an “angel” (i.e. a wealthy individual) could keep a theatrical production afloat, as shown in the May 31, 1885 edition of the Sunday Mercury (New York) describing how: “Actors and authors tempt their ‘angels’ with new plays which are sure to make all concerned Goulds and Vanderbilts.”
Breaking the term down further, the idea of an angel – deriving from the Greek angelos, meaning ‘one that announces’ – being someone who provides aid to another comes from Shakespeare’s Henry IV, Part I (1598), where Prince Henry states: “O, my sweet beef, I must still be good angel to thee: the money is paid back again.” Being the agent noun of the verb invest, an investor, from the Latin investire, meaning ‘to clothe in, cover, or surround’, in the sense of a person who financially invests in a business or undertaking first appears in Morgan Cove’s 1795 An Essay on the Revenues of the Church of England, where he interestingly comments: “The whole of the gross returns or profits does not centre in the pocket of the investor.”
Though angel investors provide a necessary lifeline to struggling start-up businesses, there’s more to it than just believing in a good business idea. Even though they’re not as predatory and profit-driven as other capital sources, angel investors still want a return on their investment (typically 25% or more). Beyond monetary returns, attempting to exercise an ownership stake in what is, essentially, somebody else’s company can lead to a clash of authority, detracting from the business’ goals. Finally, for professional angel investors, actual “angel investment” typically doesn’t exceed 10% of their portfolio, so, needless to say, there’s always a certain degree of competition for a scarce amount of funding.
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