CEOs with Angel Wings

As if they are not stretched enough, a small but growing number of active CEOs routinely take a few hours each month to invest in startup businesses. As angel investors, these CEOs use their own money to take an equity stake in early-stage businesses with the expectation that eventually the investment will reap significant returns when the business is sold or has an exit.

The term “angel” comes from the Broadway theater scene where wealthy patrons (“theater angels”) invest in theatrical productions and make a return if the show does well. Today, there are about 250,000 angel investors active in the U.S., according to the Center for Venture Research, who contribute over $19 billion to roughly 55,000 new startups every year.

For this story, Chief Executive interviewed a dozen CEOs about their angel investing (about half were willing to share as long as they weren’t identified). To qualify, the CEOs had to be active executives of an enterprise with at least $25 million in annual revenues and 150 employees—with a personal portfolio of at least three angel investments. The CEOs had to put their own wealth at risk.

Based on our admittedly unscientific sample, the average angel CEO is male, 43 years old, invests in one or two startups a year, manages an angel portfolio of four startups at any one time and invests $25,000-$75,000 in the average transaction. The typical valuation of startups is $1-2 million. Most CEO angels prefer high-tech startups. With nine years being the average time between early-stage investment and exit, only a few have actually broken even, much less made real money.

All CEO angels interviewed for this story qualify as accredited investors, according to SEC regulations. An accredited angel investor must meet at least one of three criteria: assets of at least $1 million (not including the value of the primary residence), annual income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of at least the same income level in the current year. While fewer than two percent of Americans can meet these requirements, Chief Executive subscribers almost universally qualify.

While a few CEO angels treat their angel investments as an integral part of their investment portfolio, a majority say they do it for reasons that can’t easily be captured on a straight P&L basis. A commonality among CEOs in this category is that they were entrepreneurs themselves and had a major liquidity event. A frequent theme among these CEOs is that they want to stay in the startup game by giving back. They get a buzz from mentoring younger entrepreneurs, being the first to learn about disruptive products and services; and if they make money down the road, well, that’s even better.

Unspoken is the remote possibility that the angel CEOs might land on the ground floor of the next Google, Facebook or PayPal, when the multiples can be life-changing—even for high-wealth investors. Brian Cohen, chairman of the New York Angels, is the first investor in Pinterest—currently the brightest star in the startup constellation. Cohen may well multiply his initial investment by a factor of 1,000 when Pinterest goes public or is acquired. Of course, it’s now four years post-investment and Cohen has yet to see a dime. Uncertainty is the nature of angel investing. (Full disclosure: Brian Cohen and I are the authors of the forthcoming book What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Million Dollar Idea.)