From their philanthropic Broadway roots to nanny qualities, angel investors are start-up guardians
　　
　　Angels are no longer just higher beings of religion or fairy tales(2¥Œ). Behind the success of many renowned enterprises lie the helping hands of angel investors. With the rise of global entrepreneurship, angel investors have attracted wide attention through their support of start-up enterprises.
　　In China, angel investors are still hard to find. Some private “angels” are testing the water on their own, but there is a lack of angels operating in concert, and so far there has been no scaling of their strengths.
　　Small and medium-sized enterprises continue to pursue angel investors on the lookout for potential partners. This article aims to provide you with a complete picture of the angel investor landscape, to help you locate your prospective “angel,” who may be lot closer than you think.
　　Broadway roots
　　People have always loved telling stories of “angels” and “fairy tales.” Many well-known global enterprises such as Dell, Apple, Google and Sohu have boomed after having been nurtured in their infancy by angel investors. Many extraordinary ideas and concepts have led to stories of great wealth, purely because they materialized under the wings of “angels.”
　　The concept of angel investors traces back to Broadway in the 19th century New York, where musical and play organizers needed capital to cover pre-performance expenses and were unable to secure loans from the banks due to their loan policies and the high risks involved. The organizers would borrow from wealthy business people, doctors, lawyers, or long-term supporters of the arts. These loans would be settled, with added interest, upon completion of the performance. Many people described these generous investors as “angels.”
　　This concept evolved over the years and eventually the term “angel investor” became widely used in reference to independent investors or institutions who invest in small or start-up enterprises, providing support for their initial growth.
　　Statistics show that there are over 3 million people in China with assets of more than 100 million yuan, with over 900 billion yuan in private funds seeking investment channels in Zhejiang Province alone. Wealthy entrepreneurs in Zhejiang, Jiangsu and Guangdong are all possible angel investors, but we were unable to obtain the actual statistics regarding available angel investor capital.
　　Sun Wenhai, Executive Director of Eplanet Ventures, described angel investors as wealthy, forward-thinking and bold-three characteristics that distinguish an “angel” from average investors. Most of them have experience in starting up a new company and/or are directors of foreign-owned companies, CEOs of large enterprises, sports stars, doctors, lawyers, or overseas-returned scholars.
　　According to Lin Fuyuan, a well-known investor from Silicon Valley in the United States and co-founder of Acom Campus, angel investors are not usually professional investors, but are passionate and persistent private investors, who, just like the professionals, choose their target companies based on financial statements and data provided by banks. Lin is a highly experienced angel investor who has invested in 50 enterprises and has successfully exited from 20 of them. His areas of investment include real estate, software and electronics firms, 80 percent of which are located in China.
　　
　　‘Angels’ work like nannies
　　
　　In contrast to venture capital (VC), angel investments tend to be smaller and focus primarily on the initial stage of the company. “Venture capital is largely dependent on the positioning of capital, sometimes investing in the initial stages, sometimes in the mid-term and sometimes in later periods,” said Fang Xingdong, President of Chinalabs. Fang believes that most of the capital from angel investments belongs to individuals who are, therefore, only responsible for themselves. VCs, on the other hand, involve far greater responsibility being placed on the fund manager. “The ‘a(chǎn)ngels’ work like nannies, while VC managers perform more of a coaching role. For VC managers, even though they work directly with company management, success depends on the independent growth of the company.”
　　Due to the small amount of capital involved, angel investors generally finance companies only in their initial stages. When companies develop to the point of requiring a second round of financing, VCs with larger capital usually step in. In this situation, however, VCs normally demand that angel investors give up their “l(fā)iquidation preference” (liquidation preference shareholders are entitled to receive their investment back plus any accrued and unpaid dividends). Angel investors are then faced with two choices: one is to make an additional investment; the other is to give up their liquidation preference. Both choices can lead to the loss of their entire investment.
　　Consequently, dealing with VCs becomes the key to ensuring returns for angel investors. According to Ni Zhengdong, Chairman and CEO of Zero2ipo Group, in an emerging market, a win-win situation is far more preferable, so angel investors prefer to partner with VCs.
　　“This leads to a win-win situation between the founders and investors,” Ni said. “A single-sided win often means failure. We do not compete with VCs, we prefer to seek cooperation. Our investment taking place prior to that of the VCs does not mean we are competing with them. We prefer to partner with VCs and proceed under their leadership.”
　　As potentially profitable as they are, angel investments frequently end in tears. If VCs have a 20 percent chance of success, then angel investments only have around a 5 percent chance. Angel investors bear great risk as their investments only become profitable if the company achieves a return of 10 to 20 times their investment. In an attempt to minimize risks, angel investors often choose to invest with a partner rather than investing on their own.
　　
　　IPO--the primary exit method
　　
　　Even though due diligence and procedures for angel investments are simpler than those of VCs, it still takes many significant steps to complete the process of project selection.
　　The first stage is the search for projects. Similar to the information sources that VCs utilize, angel investors use direct contact with company founders; introductions by “angel teams” and business partners; recommendations by venture capitalists; and background records from lawyers, accountants, consultants and investment banks.
　　After having identified satisfactory investment projects, angel investors carry out due diligence and project evaluation, including team capabilities, business prospects and profit modeling.
　　If the angel investor and his counterpart agree on the macro direction, the two parties begin negotiating the clauses of the investment agreement. This is the key to completing the deal, which not only ensures maximum profit for both parties, but also guarantees the rights of investors and protects them from any ethical risks. The two parties must agree on all clauses in the agreement to avoid any future disputes. The major clauses include:
　　-- Securities type arrangement. The following three securities are normally applied to the seed stage: common stock, convertible securities and preferred stock to which many rights can be attached;
　　-- Anti-dilution clauses and protective clauses. Anti-dilution clauses are normally standardized, with the aim of protecting the angel investor in the case of a stock split, stock distribution or capital reorganization;
　　-- Ownership percentage and control;
　　-- Key personnel and incentive clauses;
　　-- Exit mechanism or liquidation agreement.
　　“Angels” are not philanthropists. In order to seek maximum returns, they generally play a role in operation management of the enterprise in its initial stage.
　　Angel investors are constantly pursuing the best exit strategy by discussing enterprise development planning with entrepreneurs and finding experienced venture capitalists to partner with through networking. Exiting is the last stage of angel investment operations and exit methods include IPO, acquisition, management buyout and liquidation, of which IPO and acquisition are the most popular. Compared to developed countries, the acquisition system in China is far from mature, and as a result, IPO has become the primary method of exiting for angel investments.
　　
　　The early stages
　　
　　Angel investment in China has a long way to go before it reaches a large scale.
　　“Due to the shortage of angel investment, many venture capitalists are somehow acting as angel investors,” Sun of Eplanet Ventures said. In the first half of 2006, VCs invested in 58 initial-stage enterprises, marking the first time that this number has surpassed that of expansion-stage enterprises.
　　“Angels” are now found throughout China, with some private meetings being held, taking the shape of small angel investor associations. For example, various meetings are held in Zhejiang aimed at accumulating capital through relatives and friends.
　　Chinalabs, founded in 1999 by Fang Xingdong, was an incubator of global Internet companies and startups. It acted as an angel investor for the Internet industry and has successfully nurtured a number of projects including the blog hosting site chinablog (http://www.省略). Lin Fuyuan, a venture capitalist and angel investor, successfully introduced the $30 million Acorn Campus incubator fund to China in collaboration with the Shanghai Government, making it the exclusive fund for Chinese entrepreneurs wishing to develop projects in China. In addition, some private angel associations, including the investment promotion bureau’s “angel investors’ club,” are popping up throughout the country.
　　
　　A shortage of regulations
　　
　　Angel investing in China faces a shortage of rules and regulations due to its infancy. It is not uncommon to find companies using their angel invested funds to buy into the stock market, or for real estate purchases, instead of their intended purpose-the development of the company. In developed countries, there are strict legal procedures and operational regulations for both VCs and angel investors. How can Chinese angel investors avoid investment risks?
　　Ni of Zero2ipo Group believes that it is not necessary for angel investors to become involved in company management, but they should definitely keep in close contact with the entrepreneurs. “We attend board meetings where we help enterprises to create development strategies, discuss company budgets and seek partners. We meet with the entrepreneurs at least once a month.”
　　Ni pointed out that the earlier the stage that the enterprise is in, the higher the risk. As an angel investor, Zero2ipo makes its own judgments and project selection based on due diligence.
　　“You can’t avoid risk 100 percent of the time, so to help minimize the risk we extend our partnerships throughout the initial growth period of the enterprise, and help them with strategic decision-making along the way,” Ni said. “Every company has its advantages, and through cooperation we can help to reduce their risks as well as ours.”
　　In addition, angel investors should carefully examine business proposals in order to fully understand the specific profit model.省略-an Internet information and advertising services provider-pointed out that currently, angel investors are facing an environment with no rules or regulations. “The current market might be rapidly expanding, but if we do not create regulations and establish sound systems in a timely manner, today’s boom might turn into dispute-filled chaos in the future.”
　　

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