May 24, 2006

Study from Weatherhead School, Federal Reserve examines angel investors' criteria for investing in start-ups

Angel investors want to invest their money in companies with a sustainable competitive advantage, run by strong, experienced management teams, and are located in a region with a relevant industrial base and strong universities.

These are among the findings to emerge from a recent study of angel investors—those who invest their personal capital in start-up companies—carried out by Scott Shane, the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University's Weatherhead School of Management.

Shane, in conjunction with research departments of the Federal Reserve Banks of Atlanta, Cleveland, Denver and Philadelphia, conducted focus groups of angel investors designed to find out more about who they are, what motivates them to invest, what they look for in a potential investment company, and how their investment decisions are affected by policy issues.

Among the significant findings of the study are:

  • Angels invest for a wide variety of reasons, not all having to do with making money. Some do it as a way of helping their community, or help others create and grow a company, or to learn about new markets and technologies, or for the sheer fun of it.
  • Focus group participants believed the key factors for successful investing in a region include the presence of seasoned entrepreneurs and managers, first-generation wealth, a relevant industrial base, strong universities, a relevant industrial base, and an entrepreneurial culture.
  • Angels use a variety of different models for organizing their investments, with the primary difference being whether they invest as individuals or through groups.
  • The focus group participants define good prospects for investment as companies that have recurring revenues and a defined competitive advantage, are scalable, located in a large market, offer a solution to an important customer problem, and do not involve commodity products or personal services.
  • The participants felt angel investing could be further stimulated through the use of tax credits for investors who put money into angel investment funds or deductions for investments in start-up companies, as well as tax incentives for the start-up companies themselves.

Shane noted that the findings of the study, while useful, are based on a non-representative sample of angel investors and cannot be used to draw definitive conclusions about angel investing in the overall economy. "Our hope is to generate enough interest to obtain funding for a larger-scale, more representative sampling," he said.

Shane has been presenting results of the study in various locations around the country. He will speak in Kansas City on May 30 and Denver on May 31.

The Case Western Reserve University Weatherhead School of Management is an international center of management scholarship, committed to preparing and enhancing organizational leadership. The Weatherhead School is dedicated to making discoveries of enduring consequence, developing innovative educational programs, fostering strategic partnerships with students and organizations, and providing services to multiple communities.

For more information: Jeff Bendix 216-368-6070.

Posted by: Heidi Cool, May 24, 2006 10:48 AM | News Topics: HeadlinesMain, Research

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