Fool's Gold?: The Truth Behind Angel Investing in America

289 Pages·2008·2.65 MB·English

by  Scott Shane

fool’s gold?
This page intentionally left blank
scott a. shane
FOOL’S GOLD?
The Truth Behind Angel Investing
in America
1
2009
1
Oxford University Press, Inc., publishes works that further
Oxford University’s objective of excellence
in research, scholarship, and education.
Oxford New York
Auckland Cape Town Dar es Salaam Hong Kong Karachi
Kuala Lumpur Madrid Melbourne Mexico City Nairobi
New Delhi Shanghai Taipei Toronto
With offi ces in
Argentina Austria Brazil Chile Czech Republic France Greece
Guatemala Hungary Italy Japan Poland Portugal Singapore
South Korea Switzerland Thailand Turkey Ukraine Vietnam
Copyright © 2009 by Oxford University Press, Inc.
Published by Oxford University Press, Inc.
198 Madison Avenue, New York, NY 10016
www.oup.com
Oxford is a registered trademark of Oxford University Press
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise,
without the prior permission of Oxford University Press.
Library of Congress Cataloging-in-Publication Data
Shane, Scott Andrew, 1964–
Fool’s gold? : the truth behind angel investing in America
/ Scott A. Shane.
p. cm.
Includes index.
ISBN 978-0-19-533108-0
1. Venture capital—United States.
2. Small business—United States—Finance.
3. Investments—United States. I. Title.
HG4963.S52 2009
332.60973—dc22
2008012706
1 3 5 7 9 8 6 4 2
Printed in the United States of America
on acid-free paper
to lynne, ryan, and hannah
This page intentionally left blank
Contents
Acknowledgments ix
Introduction 3
one What Is Angel Investing and Why Do
People Do It? 13
two How Big Is the Angel Capital Market? 30
three Who Are Angel Investors? 43
four How Many Companies Need Angels? 54
fi ve What Do Angel Investments Look Like? 78
six Who Gets Angel Money? 102
seven How Does the Angel Investment
Process Work? 126
eight How Well Do Angel Investments
Perform? 144
nine What Are Angel Groups? 163
ten How Do the Best Angels Invest? 186
eleven What Makes a Place Good for
Angel Investing? 201
twelve Conclusions 220
Notes 233
Index 271
This page intentionally left blank
Acknowledgments
Idecided to write this book because I had trouble fi nding accurate
data on angel investing. I had become interested in angel invest-
ing, having joined the North Coast Angel Fund, an angel group in
Northeast Ohio, and having conducted a series of focus groups with
leading angel investors in Atlanta, Cleveland, Denver, and Philadelphia
on behalf of fi ve of the Federal Reserve regional banks. As my interest
in angel investing grew, I began to read everything I could about the
topic and began a series of conversations with entrepreneurs, angels,
and government offi cials. I attended the Angel Capital Association’s
annual and regional meetings and their Power of Angel Investing
Seminars.
Unfortunately, the more people I talked to and the more things
I read, the more confused I became, and the less I thought I understood
angel investing. The problem was not that the sources of information
were unclear—invariably I understood exactly what people were say-
ing. Rather, the problem was that all the sources I consulted were long
on opinion and short on data. While each opinion alone seemed to
make sense, I had made the typical academic’s mistake of examining a
lot of sources and looking for patterns in the answers. As a result, I was
left with a jumble of opinions that contradicted each other and little
data to fi gure out which one was right.
Moreover, when a source provided data to back up its point of view,
those data often had two troubling weaknesses. First, the data were not
internally consistent. For instance, one source said that 50,000 U.S.
businesses per year receive angel investments, but that 10 percent of