What is a Angel Investor?
An angel investor is an individual or group of investors who invest in a business venture. Often, you’ll see angel investments in startup companies with capital provided to either start or expand the business. Angel investors are most concerned with the improvement of the company they invest in. Typically, you’ll see angel investors engage in one lump sum investment to support one stage of development, or through ongoing investments assisting a company in its first few steps.
Angel investors tend to believe in the businesses they invest in. Like venture capitalists, angel investors can make equity finance deals with companies, however angel investors tend to invest more in the growth of the entrepreneur versus the growth of the company. This means that angel investors can acquire ownership in the business they are investing in, but unlike a venture capitalist, they are using their own money, and not pooling the funds of wealthy individuals. For this reason, angel investors have a reputation for being less informal with more favorable terms compared to other lenders.
Most angel investments come from friends, family members, wealthy individuals, groups, firms, or crowd funders. Individual investors who realize an annual income of $200,000 with a net worth of $1 million are considered accredited investors by the Securities Exchange Commission. One great advantage of financing a business with the assistance of an angel investor is that there is far less risk involved for the business owner or company accepting the investment. If the business were to fail, angel investors understand the business and upfront risk, so capital does not typically need to be paid back. On the other hand, businesses that accept angel investments must give up total control, allowing the investor to take part in the operation and profits of the company. Compared to a bank, an angel investor will be much more hands on and passionate about improving a business venture, whereas banks are only interested in the repayment of a loan.
Example of an Angel Investor
At the end of the day an angel investor does offer better terms than most lenders and will come with some expertise in hopes to ultimately propel the business to that next level. For instance, let’s say a close friend can provide $500,000 to your start-up company as an initial investment. For that $500,000 investment, you offer him 25% stake in the company because you know that he believes in the business and is willing to invest his own funds. As time goes on you become acquainted with his network of professionals, and can share in his expertise of how to run a successful business. In the end the company generates revenue, solidifying the foundation of the business.
While angel investors have similar goals to venture capitalists, there are a few key differences that set them apart:
Amount invested: An individual angel investor typically invests anywhere between $25,000 and $100,000, and angel groups tend to fund $750,000 or more. Venture capitalists tend to average about $7 million when investing in a company.
Stage of the Company: Both angel investors and venture capitalists stay away from funding ideas. You are likely to see angel investors enter the picture to assist in a stage of development once a prototype and proof of concept is established. Venture capitalists come in after the company is already successful to assist in its rapid growth and entrance to the public markets.
Strategy and Due Diligence: The extent of an angel investor’s due diligence will be limited, possibly occurring over informal meetings. There will be background checks and research done, however venture capitalists conduct a much heavier background verification procedure. A venture capitalist deal may spend up to $50,000 on verification and background check procedures prior to initiating an investment.
Angel inventors are more concerned with a company’s improvement and first stages of success. They can range from friends and family to wealthy individuals or groups. With presence in assisting start-up companies, angel investors tend to put up their own money in exchange for some percentage of stake in the company. If you have a startup company that is struggling to maintain cash flow, or require funding for the next stage of development, seeking an angel investment may be right for you. It is important that you review the terms and conditions of an angel investor prior to accepting any initial funding. If you want to maintain full control of your company, it may be worth it to keep exploring funding options till you find an investor that meets your goals and vision.