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Federal Reserve examines angel investors' criteria for investing in start-ups

Case Western Reserve University : 18 January, 2007  (Technical Article)
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, hose 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.
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