Not Everyone Wants to Be an Angel – Especially in the Heartland

Yee-Lin Lai - Heartland Forward Fellow


Angel investment is an important element for many early-stage startups to grow.

In an earlier blog entry with my collaborators at Heartland Forward, we noted the uneven playing field in terms of startup investment capital between the Heartland and non-Heartland states. We also observed a worrying trend of startup investment capital skewing toward later-stage companies, particularly during the COVID-19 pandemic which has seen fewer deals but increased investment dollars. As the economy gradually recovers from the impacts of COVID-19, it is crucial we continue to fuel entrepreneurship and support firms in their infancy – when they are at their riskiest – to ensure a sustained pipeline of later-stage, more established enterprises that are much sought after by venture capitalists.

One type of investors that have archetypally played a key role in financing seed and early-stage enterprises are “Angel investors.” Angel investors are typically characterized as high net-worth individuals who invest their personal assets in seed and early-stage enterprises. They are differentiated from institutional funds of high-risk capital which often have legal obligations of cautiousness, and therefore angel investors have more flexibility and appetite for riskier endeavors in the form of seed and early-stage enterprises. Many angel investors are also hands-on investors who can contribute their wealth of experience, knowledge and networks to the businesses they invest in.   

According to PitchBook data, there were over 6,000 individual angel investors who had invested in about 19,000 deals in the United States between 2016 and 2020. Unsurprisingly, there is a significant difference in the number of individual angel investors between the Heartland and non-Heartland states – with non-Heartland states having at least four times more individual angels than a Heartland state on average (170 versus 39, respectively).

To be eligible as an angel investor (or to participate in an angel group), one needs to be an accredited investor – i.e., have more than $200,000 in annual income in the two most recent years, or joint income with a spouse of more than $300,000 in two most recent years, or at least $1 million in investable assets (excluding the primary residence). [Note: Under Title III of the JOBS Act, nonaccredited investors or individuals whose income or assets fall below those limits can participate in angel investing through crowdfunding platforms.] Even though there is a significant difference in the number of individual angel investors between the Heartland and non-Heartland states, an analysis of income levels demonstrated no significant difference in number of “potential angel investors” who have annual income of $200,000 between the Heartland and non-Heartland states. In other words, there are similar numbers of individuals who qualify to be angel investors based upon income in both regions.

Having a sizable population of individuals who earn more than $200K per annum does not translate evenly to the outcomes of actual individual angel investors across the Heartland and non-Heartland states. It is estimated that one angel investor in non-Heartland states would emerge from a population of about 1,500 “potentials;” in Heartland states, it takes approximately 5,000 “potentials” to yield one angel investor. The chart below shows, by state, the estimated proportion of angel investors among the pool of potentials as the ratio of angel investors to the number of individuals who earn more than $200,000 annually.

Chart 1: Ratio of Angel Investors to the Number of Individuals Who Earned more than $200K Annually By State

One observation of the above graph is that the proportion of qualifying individuals who are angels is exceptionally small – less than half of one percent in every state. This may be understandable since startups are high-risk investments which may not be an ideal vehicle for anyone with an average risk appetite. Still, the question remains on whether a larger fraction of this population could be educated on startups as an asset class and become a viable source of funding for seed and early-stage enterprises.

It may also be worth noting that the top ten states with the highest the ratio of angel investors to the number of individuals who earn more than $200,000 annually are all non-Heartland states, with California and New York leading the pack. Proximity to innovation and startup hubs, such as Silicon Valley and Boston, and the success stories of startup investment in the local media may have helped enable the residents in these states to be more interested in and familiar with startup investment opportunities and activity.

As mentioned earlier, having a higher number of individuals earning more than $200K per annum does not translate uniformly to a higher number of angel investors across Heartland and non-Heartland states. That said, if a state has a significant number of individuals earning more than $200K per annum, there is an opportunity within the region to educate and familiarize these individuals on startups as an asset class. As one can observe from Chart 1, more than 50% of the Heartland states (in orange) are below the median ratio of angels to individuals earning more than $200,000 in annual income. There is potential for these states to work on educating their population of well-endowed individuals and help cultivate more angel investing activity from this group, compared to 35% of the non-Heartland states. With research demonstrating that angel investors tend to invest locally (within 50-100 miles), this may be problematic for the Heartland’s young firms who have less angel capital available for the seed/early-stage-funding relative to their non-Heartland counterparts.

 Angel investment is an important element for many early-stage startups to grow, enabling them to overcome the capital gap between seed or early-stage investment to growth-stage investment. In addition, the angel investors sometimes provide non-financial assistance such as mentorship or management consulting services, in addition to financial support. According to the Angel Capital Association, angel investors support up to 90% of outside equity raised by startups (after friends and family) and have invested an estimated $25B in 70,000 companies each year. It is hence imperative for the Heartland to be intentional in developing initiatives to bridge this chasm and help facilitate access to capital required by young firms. Proposed initiatives may include (i) Identification of accredited investors and development of a program to educate them about the startup investing asset; and/or (ii) Development of coordinated angel investing organizations which can enable accredited investors to be significantly more successful in this asset class. These may be tiny steps to take toward leveling the playing field for the Heartland’s entrepreneurs, but they are steps in the right direction. As the Chinese Proverb goes, “Be not afraid of going slowly, be afraid only of standing still.”

This blog is written by Yee-Lin Lai, Heartland Forward Fellow and Home Region Program Officer at Walton Family Foundation.