One origin of the dispute around how angel investors “ought” to behave stems from a lack of clarity around what exactly makes one an angel investor. One definition of early stage sources of start-up funding calls out the four “Fs”: the Founders, their Friends, their Family, and other Fools. Thus an angel is someone initially not associated with the business in which they are investing. The “fool” attribute is perhaps not flattering, but as we’ll see it can be all too appropriate and has some historical context. According to tradition, the term “angel” was originally applied to backers of early Broadway shows by their producers, and the sobriquet was more flattering than others considered (“sucker”, “mark”, “rube”, “chump”, etc.). It’s a mistake even today to believe the term applies to any heavenly characteristics or conduct.
The Securities Act of 1933 attempted to corral a lot of bad fundraising behavior by requiring registration of many types of security offerings, with the exception of offerings limited to certain entities and individuals — including accredited investors, which loosely defined are “wealthy and presumably sophisticated suckers, marks, rubes, and so on.” OK, it doesn’t really read that way in Regulation D, but I’m sure it was in an early draft. Either way, this began the modern age of angel investing: if companies restricted their fundraising to certain types of individuals and organizations, they could significantly cut down on their paperwork. Of course, the majority of that “paperwork” was mandated financial and other disclosures, so it essentially put the responsibility back on the investor to ask the right questions and hope for the right answers.
Note: The ’33 Act was followed up the next year with the Securities Exchange Act of 1934, which went on to establish governance over securities trading, corporate reporting, insider trading and one other significant development for we angels: the regulation of transaction agents. More on that later.
In the most general terms, then, angel investors possess a minimum threshold of wealth; are expected to have the ability to sort out business details; are willing to take enormous chances on early-stage businesses; and are pretty much on their own. Thus it’s no surprise that most invest infrequently (if ever repeatedly), and many look for ways to organize in order to minimize their risk. It’s also clear that not every potential angel bothers to be one. A 2007 report by the Angel Capital Education Foundation shows that of the 4.2M millionaires in the US (a good proxy for total accredited investors), only 225K are “active” angels, and 10K are active in formal groups. There’s a lot of opportunity to get more investors involved, if the process can be improved.