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What is an angel investor and what do they do?

An angel investor is typically a high net-worth individual who provides financial backing to entrepreneurs and early-stage companies in exchange for a minority stake in the business. Angel investors are often successful entrepreneurs or business owners, and sometimes family members or friends, who want to invest their resources and expertise to businesses and individuals in which they see potential.

Let’s discuss how angel investment works, the benefits it can offer growing businesses, and the challenges it may present.

Understanding angel investors and how they operate

Angel investors look for a combination of key characteristics in the businesses they choose to invest in. First and foremost, they are seeking a value proposition in which they see potential for future growth. This will likely include an important market opportunity and a unique or innovative approach to it. Other factors they will assess include the quality of leadership of the venture and a coherent business plan.

What is the role of an angel investor?

Angel investors differ from venture capitalists in that they invest their own wealth into a business, generally in return for a minority stake. They also often invest their personal time in the business, offering mentorship and guidance to business owners. This makes angel investors particularly useful to startups or companies in the early stages of their funding journey as they gain the insights of experienced entrepreneurs and business leaders.

How do angel investors make money?

Like venture capitalists and other investors, angel investors usually seek to earn a return on their investment when they exit the company by selling their stake. This typically happens when new investors come in, either in later funding rounds or a public offering, or when the business is acquired.

Angel investors vs other funding sources

Angel investors differ from other sources of business funding. Let’s now look in detail at how angel investors compare to venture capitalists, as well as the difference between crowdfunding and angel investors.

  • Angel investors are individuals, while venture capitalists are generally representatives of a fund or company. Crowdfunding, meanwhile, can be sourced from either a few or many small investors.
  • Angel investors usually invest between $10,000 and $500,000 of their own money1. Investments from venture capital, usually at later stages of development, can be much larger. Crowdfunding is usually characterized by smaller amounts of individual contributions but in larger volumes.
  • Like other investors, angels are looking to profit from their investment, but sometimes also have personal reasons for getting involved with a business. Venture capitalists will almost always make investments based solely on financial considerations.
  • Angel investors and crowdfunders usually get on board at the beginning of the funding journey, while venture capitalists tend to join later in the process.
  • The risk tolerance of the alternate sources varies in accordance with the size of the investment. Larger investments, such as those made by venture capitalists, invariably carry more risk.

Pros and cons of angel investors for startups

As with any kind of funding, there are pros and cons to working with an angel investor.

Benefits of angel investors for startups

There are multiple benefits to working with angel investors as a source of funding, especially for startups. These include:

  • Access to capital and funding flexibility
  • Expertise, mentorship, and industry connections
  • Potential for accelerated growth and scalability
  • Validation and credibility for attracting further investment
  • Control of business direction

Risks and challenges

Angel investing is not always straightforward, however. There are risks and challenges presented by the angel investment process. The disadvantages of angel investors can include:

  • Loss of equity: Although investors often make it possible to get businesses up and running, this is for a share of the business usually totaling between 10% and 50%.
  • Loss of autonomy: Investors may want to take a more hands-on approach or have a pre-determined exit strategy they are working towards.
  • Lack of assurance: There is no guarantee of growth even when angel investors are onboard.
  • Increased pressure: Investors may expect a substantial return on their investment, which is why setting realistic initial goals is so important.

It can be difficult to find angel investors that are the right fit for the business. Having the funds is only one of the key considerations of choosing an investor.

Where to find angel investors

There are certain established pathways for businesses to find the right investors.

These include:

  • Attending local networking and startup events
  • Browsing dedicated online angel investment platforms and networks such as Angel Investment Network and Leapfunder 
  • Applying for incubators, accelerators, and pitch competitions
  • Approaching high-net worth individuals within the entrepreneur's personal and professional circle

The angel investment process

There are several key steps in the process that typically include, but are not limited to:

  • Initial contact and pitch submission
  • Due diligence and assessment
  • Negotiating terms and agreements
  • Closing the deal and funding

Angel investors empower innovation

Angel investors can play an important role in fostering innovation and entrepreneurship, as well as funding, guidance, and advice. The reduced time constraints and hands-on approach of angel investing may help a company survive the difficult start up and growth phases. While other sources of funding exist, such as crowdfunding and venture capital, there is a unique level of care, attention, and opportunity that angel investors might offer. Ultimately, as a business owner, you have the power to decide if an investment is right for you and the best type of investor for your business.

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