Believing in angels

The current economic climate has put increased pressure on young firms trying to raise money and develop their businesses. Banks remain reluctant to provide loans to start-ups and venture capital firms prefer to invest in later stage companies. Now, a growing class of experienced entrepreneurs and business people–known as “angel investors”–is stepping in to fill this funding gap. Could this be encouraged further?

Angel investing is not a new phenomenon. In fact, it can be traced back in time to great historical adventures, such as Christopher Columbus’ westward voyage which Ferdinand and Isabella of Spain financed. Over the centuries, individual “angel investors” have played a key role in funding many important innovations, projects and firms, including household technology names such as Apple, Google and Skype.

Unlike venture capitalists, angel investors invest their own money and therefore have more of their own “skin in the game”. As a result, they tend to be more committed to the long-term success of the businesses in which they invest. Furthermore, angel investors not only provide funding but also leverage their expertise and personal networks to mentor new entrepreneurs. More than just providers of financial capital, angel investors can be a source of valuable social capital and play a key role in providing strategic and operational expertise for promising new ventures.

While angel investment has existed in practice for centuries, the concept of angel investors as a powerful source of financing for high growth companies has only grabbed attention in the past couple of decades, primarily in the US and Europe. Findings from over a hundred interviews with entrepreneurs, policymakers and academics from 32 countries show that financing by angel investors is rapidly increasing around the world. The sector is not only expanding but becoming more formalised and organised through the creation of angel networks, which enable angel investors to invest larger amounts together to meet the financing needs of young innovative firms.

Angel investors support a much wider range of innovation than venture capital firms as they traditionally invest locally and in a wider range of sectors. Since angels live everywhere–not only in those few technology or science hubs where venture capitalists have offices–they encourage broader investment coverage both in terms of industry sectors and geography.

While venture capital tends to attract significant attention from policymakers, the primary source of external seed and early stage equity financing in many countries is angel financing. Data from the US and Europe show that angel investment has been consistently larger than seed and early stage venture capital investment, and in a number of countries, larger than total venture capital investment (including the later stages). Angel investors are thus playing an increasingly important role in the economy around the world. Policymakers are starting to take notice too.

Yet relatively little is known about the phenomenon. Individual angel investors have traditionally preferred to keep information about their investments private, despite the formation of groups and networks. Accurate data collection has remained a major challenge, and there has been limited academic literature to date on angel investing.

It is only with a recent OECD book, Financing High-Growth Firms: The Role of Angel Investors, that angel investing has even been analysed on a global basis.

Government policies to boost angel investment can make a difference, though any government intervention should aim to provide incentives for greater private sector involvement. As the book describes, some options include tax incentive schemes such as the ones in the UK and France, and co-investment funds like those in the Netherlands, Scotland and New Zealand. In addition, a number of countries, particularly those in Europe, have supported national angel associations, groups and networks.

There is no homogeneous national angel market. The level, sophistication and dynamics of angel investment can vary greatly across regions within countries and policymakers must take this into account, since policies that have worked in one country may not work the same way or be as successful in another. In fact, in Canada and the US, for instance, angel policies are implemented at the regional rather than the national level. While policies targeting angel investment are being put in place in a growing number of countries, there have been few formal evaluations of these programmes to date. More research into the angel market is needed.

Policymakers and others tend to focus on the venture capital market, which is more visible than the angel market, but data indicates that angel investors will continue to be critical in overcoming the financial and growth challenges facing entrepreneurs. These angel investors will, in turn, contribute to job creation and economic growth–greatly needed today around the world. By facilitating their action, policymakers may well help unleash the next great discoveries.

OECD (2011), Financing High-Growth Firms: The Role of Angel Investors, OECD Publishing.


Sahlman, W. and E. Richardson (2010), The Changing Face of Angel Investing, Harvard Business School Publishing, Boston.

The Worlds Greatest Angel Investment: Google” 2012.

©OECD Observer No 292, Q3 2012

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