What Are Angel Investors?
Definition and Examples of Angel Investors
Angel investors are wealthy individuals or groups who fund startups, typically in the form of equity financing. These deep-pocketed investors can help finance the founding of a new company, or they can help expedite the growth of a recently founded business.
Keep reading to learn more about what angel investors are, how they differ from venture capitalists, and how a business can start its search for one.
What Are Angel Investors?
Angel investors are defined by their wealth and willingness to invest in startup businesses. These angels take risks on new businesses because they want to earn a high return on their investment, so they won't be content with slow and steady growth—they want to see meteoric growth in the equity they acquire.
Beyond that, the definition is fairly loose, and it can apply to a wide range of people. Angel investors are not a homogeneous group.
Some angels are part of angel investing groups. Some act on their own. Some angels are quite knowledgeable about investing in private companies. Others fly by the seat of their pants. Some angels don't just want to invest in a company, they want to be deeply involved in the daily operations. Others don't want to play any role in the company other than watching their investments grow.
There are certain types of small businesses that angel investors often prefer. They are typically hot, high-growth industries with a lot of media buzz. Of course, these preferences change as often as the trends do, and broader economic events may impact angel investing attitudes, as well.
Angel investors may or may not be designated as accredited investors by the Securities and Exchange Commission (SEC). The SEC defines accredited investors as those with an annual income of at least $200,000 or a net worth of $1 million (not including the value of a primary residence). Businesses are allowed to sell shares to accredited investors without taking the same regulatory steps that they would have to take to sell shares to non-accredited investors.
How Does Angel Funding Work?
When an angel investor finds a business in which they're interested (or vice versa), they begin negotiating how much money will be invested and how large of a stake in the business that buys them.
Angel investment is risky, and as such, it typically represents a relatively small portion of an angel investor's overall portfolio. If an angel investor's investment portfolio totals $1 million, they might only put $100,000 toward angel investments—if that.
Most angel investors think carefully before investing. They'll conduct their due diligence, asking businesses for detailed, air-tight business plans. They'll perform a competitive analysis to familiarize themselves with the industry. They may require multiple meetings and several rounds of presentations from the businesses before they break out the checkbook.
Finding Angel Investors
Businesses seeking angel investors can start their search in person or online. For a fee, online services like Gust offer to connect startup businesses with potential investors. You can also reach out to local attorneys, accountants, and bank branches to see if they know of any angel investors in the area. Being able to meet with a potential investor in person may start you off on a better foot than simply sending an email to someone's inbox.
Whether online or in-person, securing funding from angel investors is a difficult process. The odds of success are long. However, even if you don't land an angel investor, you may make valuable contacts or receive thoughtful advice. An investor may not have liked your current business plan, but maybe you'll be able to come back to them with a new idea in a few years. You should view every presentation as an opportunity to learn and gain experience, rather than a do-or-die moment for your entire professional career.
Angel Investors vs. Venture Capitalists
|Angel Investors vs. Venture Capitalists|
|Angel Investors||Venture Capitalists|
|Usually an individual||Usually an employee of a firm|
|Invests with own money||Invests with the money of clients|
Angel investors share some similarities with venture capitalists. They both take risks on new businesses. They both seek out companies with the potential for rapid growth, and they want their sizable investments to grow exponentially.
However, unlike angel investors, venture capitalists aren't acting individually. Angel investors may sometimes pool their money together and make decisions as a group, but venture capitalists are usually employees at a venture capital firm. Employees at the firm use clients' money to find investment opportunities.
Venture capital firms can have massive sums of money at their disposal. Therefore, funding from venture capitalists may be much larger than that of an angel investor.
- Angel investors are wealthy individuals that invest in business startups.
- Angel investors may take a hands-on role in the company, offering advice and guiding decision-making, but they don't always.
- Angel investors are distinct from venture capitalists, which are typically employees for a large venture capital firm.
Office of Investor Education and Advocacy. "Updated Investor Bulletin: Accredited Investors." Accessed July 1.