What Are Angel Investors?

Can angel investors help your small business?

Businessmen having informal project discussion
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Angel investors are wealthy individuals or groups of individuals who invest money or equity financing in start-up or early-stage small businesses. They are investors who usually provide private equity or second-round funding for growing, profitable small businesses who need money to continue to grow. After family and friends, as well as the small business owner, provide the seed money for start-up companies, the companies then have to turn to either debt or equity financing in order to survive and move forward. If debt financing is not available due to tight credit markets or the perceived risk of the venture, then investors and private equity financing would be the next logical source of financing, if available.

What Qualifies an Investor to Be an Angel?

Who are angel investors? They do not have to be accredited investors as designated by the Securities and Exchange Commission (SEC). However, most of the money coming from angel investors comes from accredited investors. Accredited investors, as defined by the SEC, have to make at least $200,000 in income and have at least $1 million in assets.

Some angels are part of angel investing groups. Some are on their own. Some angels are quite knowledgeable about investing in private companies. Others fly by the seat of their pants. Some angels want to be involved in the companies in which they invest. Others don't care about any or much involvement. Angel investors are not a homogeneous group. Angel investors all have one thing in common, however. They will only invest in small businesses in which they think they can earn a high return on their investment—perhaps as high as 20% - 40%.

How Does Angel Funding Work?

Angel investors often invest amounts ranging from $25,000 to $50,000 in small businesses. For the second round of small business funding, this is much more rational than going the venture capital route. Venture capitalists prefer to make very large investments - in the millions of dollars. Due to the very high failure rate of small businesses, angel investors and venture capitalists require an exceedingly high return on their investments; often, they require as much as 10 times to 30 times the amount they invest. Three of the most famous companies that got their starts with angel investing are Amazon.com, Starbucks, Inc., and Apple.

It is a reasonably complicated and time-consuming process to secure angel funding. Angel investors are taking a huge risk on a relatively unproven venture. Angels require air-tight business plans. They conduct due diligence, perform competitive analysis, and eventually dismiss up to 90% of the applications they get. Small business owners may have to make several rounds of presentations to the angel investor or group to possibly secure their equity investment.

Where Do You Find Angel Funding?

You can find your angel online or close to home. If you want to start your research online, you can take a look at an Angelsoft, an angel investor network. For a fee, you can make a pitch online. It's also a good site just to look through and find out what you need to do to make a pitch.

Many financial analysts, however, recommend that you try to find angel funding close to home. Try your local Chamber of Commerce. Local attorneys, accountants, and banks may know of angels in your area. Some angel investors like to be involved in the company in which they invest. They may, for example, want a seat on the Board of Directors. As a small business owner, you could use the expertise on your board and the access to another potential round of funding. One way to find local angel funding is to start at the website for the Angel Capital Association, which lists angel investors by state.

Securing funding from angel investors is a difficult process. The odds are long that you will be successful. However, you may make excellent contacts for getting funding in the future. You may meet people who can give you valuable business advice. Even going through the process of giving multiple presentations is invaluable for the future. You may just secure that angel funding that you need.

There are certain types of small businesses that angel investors prefer to invest in. They are typically the hot, high growth industries of the moment and change from time to time as the economy and economic needs change.