What Is an Angel Investor?

4 min read · 2 weeks ago

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Entrepreneurs and small business owners seeking funding will come across many different avenues to pursue. One will be to work with an angel investor. That sounds odd on the surface. How are you going to make a pitch in heaven? Do they even have PowerPoint decks up there in the clouds? But, once we’ve answered what an angel investor is, you’ll have a better idea if this option could meet your needs.

Just as Hollywood offers us many different views of what the angels up there behind the pearly gates are like, there are various types of people who become angel investors. Angel investors can include:

  • Business professionals such as lawyers, accountants, financial advisors, or doctors
  • C-suite executives who know firsthand what running a business involves
  • Small business owners who want to help launch other successful companies
  • Investors who focus their portfolio on financing small business objectives
  • Crowdfunding platforms that pool the small investments of many together to have a greater impact

One commonality they will all have? They have funds to invest, and they want to put them in promising startup companies in the hopes of making even more money. 

In fact, the number of angel investors is growing. According to the Center for Venture Research at the University of New Hampshire, angel investors were the number one source of seed money in 2020. Further, “total angel investments in 2020 were $25.3 billion, an increase of 6% over 2019.”

Beyond knowing what an angel investor is, you’ll also need to understand how it works and the pros and cons. We’ll cover that next in our discussion of:

  • What angel investing entails
  • The advantages of angel investors
  • Some pitfalls with angel investing

 

What Angel Investing Entails

Angel investors typically get involved in the early stages of bringing a business idea to fruition—the Seed or the Series A round. Lost already? The seed round is when the business venture is first looking for outside funding. This seed funding will help grow the business idea so that it can reach the next stages of funding. Next up is Series A, when businesses with a more established track record seek funding.

Angel investors don’t contribute as much as venture capitalists (VCs) do. But they are there at the outset getting the business to the point where it could garner the attention of the VCs.

Many angel investors will have certain areas of interest. They may be passionate about sustainability or education, healthcare, or smart building tech. They may group themselves together by these interests. Or you might find an Angel Investing group that brings together those in the legal or medical professions who want to pool their resources.

Through networking, personal introductions, pitch night events, and participating in incubator events, you can find angel investors. Or review the Angel Capital Association’s online directory.

Once you’ve found an interested angel investor or group, you’ll apply to that group with an executive summary of your business plan. You may go through a pre-screening and then a screening step before getting invited to an investment meeting (think Shark Tank)

If there’s interest, the investor will conduct due diligence to find out more about your business, the industry, and your plans. You’ll reach a verbal agreement and then sign up a term sheet or contract to have a legal agreement between you both.

 

The Advantages of Angel Investors

Often angel investors are successful individuals who have already seen great success with their own business ideas. This means they can provide an injection of capital and also offer fantastic advice. In a Harvard study, angel-funded start-ups showed much greater chances of survival. 

Angel investors are also using their own money, so they only have to answer to their own conscience. They don’t have to get a team of people to agree. Additionally, they don’t have the same expectations as a bank might. For example, you’re not going to be signing over your home as collateral.

Plus, they are in this investing arena because they have private equity to spare and are used to taking risks. In fact, American angel investors “lose some or all of their money in 52 percent of their investment deals because the companies go out of business.” The typical angel investor will make a number of investments each year, hoping to make a return on investment that makes up for the other losses.

Having an angel investor can also help your business to expand its network. They may have contacts with others in the industry that can help you to grow. Or suggest partnerships that could really propel your idea forward. Plus, you gain the credibility of having someone investing in your idea, which shows it’s not just Grandma and Uncle Jim who believe in your idea.

 

Some Pitfalls With Angel Investing

Getting an angel investor doesn’t guarantee your idea will be a success. Plus, the pressure can be intense. These are wealthy people with experience making money; their expectations can be high. You’re also giving up part of your company. Angel investors often want a percentage of equity in the company, which means they’ll get some part of your future earnings if you’re a success.

Angel investors also invest much smaller amounts than do venture capitalists. The VCs typically work with funding from sources such as insurance companies, foundations, or pension funds. They’re looking to invest millions at a time. The angel investor could be in the $5,000 to $100,000 range. This can mean you have to do a lot more legwork to get the funding you need. However, when you’ve exhausted family and friends, they can provide the funding jolt you need.

One more potential drawback? Angel investors in the early stages of the process are unlikely to sign a non-disclosure agreement. So, you end up having to submit your great idea to other individuals without assurances. It’s a good idea in the introductory stages to focus on your business model and why it works rather than outlining the nitty-gritty of how your unique idea works.

 

Getting Your Business Idea Noticed

Angel investing is only one way for entrepreneurs to get noticed by investors. The next article in this series will suggest others. Plus, look for an article on suggestions on how to make your best pitch to investors.