Debunking the myths of angel investing.
Written by Filed under Business
Amazon. Apple. Google. eBay. Just a few of the well-known companies funded by angel investors. With success stories like these, one might be tempted to think that angel investors typically do quite well for themselves. But contrary to the impression one might get from reading Success magazine, an angel rarely reaps outsized rewards. In fact, failure is the norm.
In “Fool’s Gold: The Truth About Angel Investing in America” (Oxford University Press), Dr. Scott A. Shane, professor of entrepreneurial studies at Case Western Reserve University, dispenses a healthy dose of reality by defining the five W’s—who, what, where, when and why—of angel investing. In the process, Shane paints what might be described as a group portrait of angel investors, and answers the big question he posits at the beginning of the book: “Is angel investing gold for investors or worthless iron-pyrite?”
After reading “Fool’s Gold,” Failure magazine asked Shane a few questions of our own.
In the book you write: “Most people have gross misperceptions about what most business angels in America look like and do.” Why are they ill-informed?
It has to do with the way people think about entrepreneurship-related activity. People focus their attention on fabulously successful entrepreneurs, but don’t realize that these success stories are incredibly rare. Only a small number of entrepreneurs are really, really successful. The same thing is true for investing in these companies. The typical or average angel investor doesn’t do very well.
The media contributes to this perception problem. It’s easy to tell the story about the angel who invested in Google or The Body Shop. But it’s very difficult to write an article about the average angel because it doesn’t grab attention. The typical person invests a small amount of money in a business and the outcome isn’t particularly good. How is that newsworthy?
What is the definition of an angel investor?
An angel investor is a person who provides capital—their own money—to a private business that is owned and operated by someone who is not a friend or family member. That distinction of not being a friend or family member is that if you add friends and family to angels you get this broader category of informal investors. Angels are one subset of informal investors. Friends and family are another.