If you’re a startup founder, then you know that raising money is one of the most important things you need to do. And if you’re looking for investment capital, then angel investors are a great place to start. But what are angel investors, and why are they so important? And what are the advantages and disadvantages of angel investors?
In this blog post, we will discuss everything you need to know about angel investors: what they are, how and why they invest, angel investors advantages and disadvantages, and why they’re important to startups.
We’ll also take a look at the pros and cons of working with potential angel investors so that you can make an informed decision about angel investment and whether or not it’s right for your business.
What Really Is an Angel Investor?
An angel investor is an individual who provides capital for a startup, usually in exchange for an ownership stake in the company. Angel investors are wealthy individuals with high net worths who are looking to invest their own money into promising startups.
Many angel investors are also experienced entrepreneurs themselves or more experienced executives from established businesses. In either case, they can provide valuable advice and guidance to early stage startups.
In addition to providing angel funding, most angel investors enjoy sharing what they have learned over their careers, as well as staying current.
Angel funding is an important bridge in funding startups and helping them grow. Angel investments often provide much-needed funds to early stage startups that are not yet ready for venture capital funds as well as advice and guidance. In return, they hope to see the business succeed and generate a substantial return on their investment.
What Does It Mean to Be An “Accredited Investor”?
In order to be an angel investor, you must be an “accredited investor.” The Securities and Exchange Commission (SEC) defines an accredited investor as someone who has a net worth of $1 million or more, or an annual income of $200,000 or more.
This designation is important because as accredited investors, angel investors are allowed to invest in early stage companies that have not yet registered their securities with the SEC. (In other words, if someone is not an “accredited investor,” they should not be angel investing!)
Why Do Angel Investors Invest in Startups?
Angels can and do invest in a startup business for a variety of reasons. Some angels are simply looking to make a financial return on their investment, while others are passionate about supporting a business venture that they believe in. Most angels are also motivated by the opportunity to be a part of something new and exciting, and to help a new business grow and succeed.
How Do Angels Invest?
Angels invest their own money into early stage startups that are usually seeking pre-seed funding. They may also pool their resources with other angels to form angel groups that can invest as an angel investor syndicate.
What is an Angel Investor Syndicate?
An angel investor syndicate is a group of angel investors who work together to invest in startups. Members of an angel syndicate are invited to make a one-time investment in deals on a deal-by-deal basis, and are not committed to investing.
How Does Angel Investor Funding Work?
Angel funding typically works by an angel investing a certain amount of money into the start up in exchange for an ownership stake in the company.
In many cases, that initial investment may take the form of convertible debt. As the start up continues receiving funding, that convertible debt eventually converts to equity.
The amount of money that an angel investor invests can vary, but it is typically between $25,000 and $100,000.
What Are the Pros and Cons of Angel Investors?
Angels are important to startups for a number of reasons, but there are angel investors advantages and disadvantages.
What Are the Advantages of Angel Investors?
There are a lot of advantages to working with angel investors.
Angel Investors Can Provide Capital to an Early Stage Business When Others Can’t
First, angel investment provides much-needed capital to early stage businesses. Because angel investors are typically high net worth individuals making investment decisions with their own money (instead of someone else’s like a venture capital firm or a bank), they can afford to take risks on an early stage start up that financial institutions can’t. In thinking about angel investors advantages and disadvantages, that’s huge!
Angel Investors Give Valuable Guidance to New Business Owners
Second, in addition to financial backing, they can offer valuable advice and guidance to new business owners. Since many angel investors are successful business people, they can often give valuable advice on issues important to new businesses such as business operations, putting together solid financial projections and a comprehensive business plan, preparing for substantial growth, when to take a business public, and exit strategy.
Angel Investors Can Make Valuable Connections in a Particular Industry
And third, they can help startups connect with other important people in a particular industry, such as potential customers, partners, and additional investors, as well as good suppliers. This is especially important to a start up in the early stages as it continues growing and seeking funding.
What Are the Disadvantages of Angel Investors?
There are also a few disadvantages to working with angel investors. Both the advantages and disadvantages of working with angels come from the very nature of what they are: typically individuals who are wealthy and have generally been very successful business people, and as such, often have strong personalities and very strong view of what gets a company to substantial growth and success quickly.
Angels Will Want Some Control Over the Business
First, the primary disadvantage of taking angel investment is that angels will likely want some level of control over the company and its business decisions in return for their investment. They may have conflicting ideas on the direction of the business, and this can be tricky for new business owners who are used to having complete control over their company.
Angel Investments Tend To Be Smaller than Venture Capital Investments
Second, angel investors typically invest smaller amounts of money than venture capitalists, so you may need to raise additional funds down the road. Remember, angel investors are individuals (albeit wealthy ones!), and typically individuals can’t write checks as large as those of a VC fund.
Angel Investors May Ask for Too Much Equity in Your Company
Finally, since angel investors typically invest at a very early stage of the company and take on such significant risk, you may be asked to give up much more equity your company than you want for their investment.
What’s the Difference Between an Angel Investor and a Venture Capitalist?
Angel investors and venture capitalists are both types of private investors who provide capital to early stage businesses. However, there are a few key differences between the two.
Venture Capital Firms Invest Other People’s Money
First, angel investors typically invest their own money, while VCs raise money from large groups of limited partners, such as pension funds or endowments, to invest in businesses. In other words, VC firms are investing other people’s money, and so have a responsibility to their investors, and are accountable to them. Angels, on the other hand, are investing money from their own bank accounts, and so can be more flexible in making a decision to invest in a company.
(For examples of venture capital firms, visit our 15 Pre-Seed Venture Capital Firms who Invest in Early Stage Startups).
Venture Capital Checks Can Be Much Larger
Second, angel investors typically invest smaller amounts of money than VCs. Third, angel investors are often more hands-on than VCs and may provide advice and guidance to an early stage business owner. Finally, VCs typically have a business model which is solely focused on businesses with high growth potential, while an angel may be willing to consider other businesses. For examples of companies funded by venture capitalists, check out 25 Essential SaaS Pitch Decks for Startups and 25 Best eCommerce Pitch Deck Examples from Funded Startups.
Read about the Advantages and Disadvantages of Venture Capital.
Why Are Angel Investors Important to Startups?
The Bottom Line: Angel investors are important to startups for a number of reasons. First, they provide much-needed capital to early stage businesses, and so are a key element of startup funding. Second, they can offer valuable advice and guidance to startup founders. And third, they can help startups connect with other important people in the entrepreneurial ecosystem, such as customers, partners, mentors, suppliers and other investors like venture capitalists.
How Do You Find Angel Investors and Get Funded?
If you’re interested in finding and getting funded by an angel investor, there are a few things you can do to increase your chances of success.
How to Find Angel Investors
Finding angels, and specifically finding the RIGHT angels for you and your business are usually the first big hurdle for a company. After all, angels are exactly listed in the phone book!
The first place to look are usually angel groups. These are generally large groups of angels who come together to meet new founders, discuss new companies, and will sometimes form syndicates to invest together. Many of these groups also put on educational events on business issues and have forums to give new businesses advice and feedback.
Another good place to look for likely angels is at accelerators. Accelerators are programs that offer startups mentorship, capital, and connections to investors and business partners.
And finally, angels can also often be found at entrepreneurial educational and networking events.
Don’t be discouraged if it takes a while. Meeting angels is often a case of meeting one person who may know another person who knows an angel investing your industry. Networking can take a while, but can lead to real funding.
Getting Funded by an Angel Investor
Once you find an angel investing in your industry, now it’s a matter of getting the actual angel investor funding. But what does that take?
The Business Plan and Pitch Deck
First, make sure you have a strong business plan and pitch deck. If you have connected with an active angel investor in your space, you want to be prepared to show them your pitch deck which is an overview of your business and business plan, as well as your actual business plan and financials which show your thinking in greater detail. (See our article on How to Create a Startup Pitch and How to Create a Pitch Deck).
Set-Up the Meeting!
Finally, meet with your potential angel. Be prepared to discuss your business, your thinking about your business, and your vision, as well as who you are and your story. If it’s going well, the angel will ask lots of questions before finally writing a check!
What if Angel Investors Aren’t Right for My Business?
If you’ve considered angel investors advantages and disadvantages, and angels aren’t the right answer for funding your business, all is not lost!
There are a number of other options for pre-seed funding, such as:
A Small Business Loan: SBA loans are loans that are backed by the U.S. Small Business Administration that can a small business cover things like startup costs, working capital and more. Although small business loans can be subject to tight lending standards, their flexible terms and low interest rates can be a critical help to early stage small businesses. (See our article on SBA Loans: The Pros and Cons).
A Startup Business Line of Credit (BLOC): If what you’re seeking is funds for things like operating expenses and managing cash flow, a Startup Business Line of Credit which you can draw down as needed may be a good solution for you.
Read more about How to start a business with no money and bad credit scores.
Crowdfunding: Crowdfunding has become a popular way to raise money recently. Essentially, crowdfunding is raising money from a large number of people over the internet, and it can come in two flavors: Equity Crowdfunding and Non-Equity Crowdfunding.
Pre-seed Venture Capital: Some venture capital firms have an arm that specialize in writing smaller checks to very early stage companies, and a few even specialize in pre-seed funding. Read more about How to Raise Venture Capital.
Further Reading:
For more on ways to fund your startup, check out:
The Art of Startup Fundraising by Alejandro Cremades
Startup Seed Funding for the Rest of Us by Mike Belsito
Learn more about how angel investors work.
