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Heaven on Earth--Finding an Angel Invest... > Angels Versus Venture Capitalists - Pg. 75

Start-Up Financing 75 Angels Versus Venture Capitalists Before the second half of the twentieth century, American private equity invest- ing was dominated by families and individual placements in emerging-growth opportunities. Wealthy families and individual investors provided start-up capi- tal for companies such as Xerox and Eastern Airlines. The birth of the venture capital industry is generally considered to be the formation in 1946 of the first pooled and professionally managed fund, American Research & Development (ARD). As a limited partnership, ARD and other early funds offered a passive, diversified approach for investors in earlier-stage private companies. Over the last 40 years, the VC fund model has become a centerpiece of the alternative-asset arena. Venture firms have grown larger, with more funds com- ing from large institutions, pension funds (which were permitted to make a limited amount of venture capital investments when the "prudent man" rules were revised in the 1980s), corporations, and endowments. Today only 20 per- cent of institutional venture capital is derived from individuals and families. Paid professionals--general partners of these limited-partnership vehicles-- have taken over responsibility for searching, researching, negotiating, closing, monitoring, and developing exits for these types of investments. Angel investing has grown significantly in recent years as the baby boom- ers near retirement with significant wealth. Angels also include cashed-out entrepreneurs who may have feathered their nests by selling their business or taking it public. Some angels provide capital to entrepreneurs as a type of quasi-philanthropy, a way to give something back to their communities by fos- tering local economic growth. Others are savvy private investors who are also helping entrepreneurs launch new businesses along the way. It is critical for an entrepreneur who is seeking angel investment to understand the angel's needs and motivations, then take steps to meet these needs. Maybe you're the son or daughter that the angel never had; maybe you remind her of herself when she was younger; or perhaps she just wants someone to coach. Maybe the angel has retired and needs to get out of the house and feel useful; maybe she has expertise and relationships that she wants to share; or maybe she's just bullish on your industry and is looking for a way to participate. It's your job to discover the reason and structure your relationship accordingly. The size of the investments that angels make varies depending on the type of investor, but angels typically invest anywhere from as little as $50,000 to more than $1,500,000. Since the recession, the amount invested by venture capital American Management Association