What is an Angel Investor?
Angel investors are generally wealthy individuals who invest in a business by providing capital and advice to entrepreneurs. How do angel investors work? They usually invest in early-stage businesses or startups that have potential for growth.
Angel investors provide capital to startups. But business angels can be especially beneficial when they provide more than just money. They often provide mentorship, advice, contacts and support throughout the life of the company.
This article will tell you the different types of investors, how angel investors work, and how to find them. It will also share about the pros and cons of using them, the difference between angel investors and venture capitalists, and how to raise funding from them.
5 Types of Angel Investors
Angel investors come in various forms. Here are five different types of angel investors.
1. Private Individual
Private individual angel investors are the most common type. They can be former entrepreneurs, high-net-worth individuals, or even friends and family of an entrepreneur.
2. Corporate Angels
Corporate angels are large companies that invest money into early-stage companies either directly or through venture capital funds they manage.
3. Angel Investor Groups
Angel investor groups are typically made up of multiple angels who pool their money together and make joint investments.
4. Accelerators
Accelerators are organizations that provide early-stage companies with mentorship, education, training and other resources in exchange for a small equity stake in the company. For examples of accelerators, visit our 5 Best Sports Accelerators and Incubators, 14 Best Fintech Accelerators and Incubators, and 10 Best Blockchain Accelerators and Incubators.
5. Strategic Angels
There are also strategic angel investors who are looking for a specific return from their investments. They may be looking to partner with the company in some way, or gain access to its technology and expertise. For example, a large retail chain may invest in an e-commerce start-up to gain insight into the industry and benefit from any improvements the start-up makes.
How Do Angel Investors Work?
When selecting which companies to invest in, angel investors typically look at a variety of factors including the business’s potential for growth, it’s current and projected financial performance, its competitive position in the market and its management team. Angel investors often request to see a startup’s business plan. (Read more on business plans at How to Create Your First Clothing Line Business Plan.)
Angel investors also evaluate how likely the company is to receive additional investor funding down the line. They also consider how much equity they will be able to get from their angel investment.
Once they decides to invest in a company, they typically provide funds in exchange for ownership equity.
How much equity an angel investor gets depends on several factors including how much capital the company needs and what kinds of resources the angels can bring to help grow it.
Angel investors enter into agreements with startups, giving them the capital they need in exchange for equity (a portion of ownership) in the business.
This agreement is often made through a private placement memorandum (PPM) which outlines the terms of the investment including when/if it can be liquidated, as well as any other legal or contractual obligations between both parties.
Read more about 5 Ways to Get More B2B Sales Fast.
How to Find Angel Investors
You may be wondering how to find angel investors who are right for your start-up. There are many different ways to go about connecting with potential angels.
Angel Investing Networks
Angel, or investor networks are groups that connect entrepreneurs with relevant investors. Examples of these types of groups include Golden Seeds, Robin Hood Ventures and Tech Coast Angels.
The Angel Capital Association
You can research various angel groups through the Angel Capital Association (ACA) which is a trade association for angel investor groups. The ACA also offers resources to help entrepreneurs find and connect with relevant angel investors, such as their list of accredited angel investor networks.
Local Angels
You can look for local, or geographically-focused angel investing groups in your area. Examples of these type of angel investing groups are VentureSouth, Atlantic Angels and Alamo Angels.
Angel Investor Clubs
You can also look for angel investors at angel investor clubs. These clubs are comprised of a group of angel investors who meet regularly to discuss various investment opportunities. During meetings, they discuss the details of potential projects and decide whether or not to invest in them.
Angel investor clubs also frequently host workshops and seminars that provide an opportunity for entrepreneurs to learn more about how angel investing works and network with potential investors. This can be an invaluable resource for any entrepreneur interested in pitching their business for funding from angel investors.
Networking Events or Industry Conferences
You may want to consider attending networking events or industry conferences where you can meet and talk with potential angel investors. These events are great opportunities to make connections with investors who may be interested in your start-up and what it has to offer.
5 Pros of Using Angel Investors to Fund Your Business
1. Access to Capital
The main benefit of angel investing is that it gives companies access to large sums of capital without having to go through a lengthy fundraising process or take on debt.
Additionally, angel investments often have extensive experience in the industry and can provide valuable mentorship and advice as well as connections to other potential investors or customers.
2. Mentorship and Advice
Most angel investors have been entrepreneurs themselves and can provide valuable advice, mentorship, and guidance for startups. They often help businesses navigate the tumultuous waters of the early stages of development and help them become more successful in the long run.
3. Connections
Many angel investors are well-connected individuals and often have a network of other angel investors who can provide additional capital and resources. This can be helpful for startups that are looking to expand or scale-up quickly, as they can access more funds and have access to new markets and customers.
4. Monthly Payments are Not Required
Angel investors are not like banks, that require that you pay back the initial investment with interest over a certain period of time. With angel investing, there is no repayment schedule or monthly payments required. You will only have to repay them when the company grows and makes a profit or is sold for a higher amount than was originally invested.
5. Long-Term Perspective
Angel investors often have a long-term perspective on the success of the business. This means that they are more likely to stay in the business for the long haul and provide ongoing financial and strategic support.
5 Cons of Using Angel Investors to Fund Your Business
There can be some drawbacks to working with angel investors as well, such as:
1. Loss of Ownership
One of the biggest drawbacks to using angel investors is that they may require equity in exchange for their investment. This means that entrepreneurs will need to give up some ownership stake in their company in order to receive financing from an angel investor.
2. High Expectations
Another downside of working with angel investors is that they usually have high expectations for returns on their investments. They expect companies to be successful and grow quickly, so they can quickly recoup their investments. This can be detrimental to companies who are not ready to scale up at a fast pace and may need more time to establish themselves in the market.
3. Lack of Control
Angel investors often come with strings attached, meaning that they may have some control over how the company is managed or run. This lack of control can be difficult for entrepreneurs who are used to having full autonomy over their businesses.
4. Not Suitable for All Businesses
Angel investors typically invest in startups that offer high potential growth opportunities, so if your business does not provide this type of opportunity then it might not be suitable for angel investing. Additionally, some angel investors are only interested in certain industries or sectors so you might not be able to find a suitable investor for your business.
5. Difficult to Find the Right One for your Business
Angel investors can be hard to access, as they are often part of closed networks or organizations that require entrepreneurs to have a certain level of experience or success before being accepted into these circles. Furthermore, it may not always offer the best terms or conditions in comparison to other sources of financing.
Overall, while they can provide much-needed capital and resources for startups, there are some potential cons that need to be taken into consideration before entering into an agreement with one. It is important to weigh all options carefully and thoroughly evaluate any potential risks before making a decision. That way you can make sure that you make the best possible choice for your company when it comes to choosing a source of financing.
Angel Investors vs. Venture Capitalists: What’s the Difference?
Angel investors and venture capitalists both provide capital to businesses in exchange for equity. The primary difference between them is the type of business they invest in and the size of their investments.
Venture capitalists typically invest in high-growth companies that are established, have a solid management team, and offer potential for exponential returns with medium to long-term investments. They usually require a portion of equity ownership, which could range from 10-50%, depending on the amount they are investing. These investments tend to be larger scale than those made by angel investors, ranging from $1 million up to tens of millions of dollars.
More recently, a handful of venture capital firms specializing in writing smaller checks to early stage startups have developed. For examples of these more recent pre-seed funds, visit our 15 Pre-Seed Venture Capital Firms who Invest in Early Stage Startups.
On the other hand, angel investors focus on smaller companies that may not yet be able to attract venture capitalist funding. They often provide smaller investments of $25,000 to $1 million. Angel investors are usually looking for a higher rate of return than venture capitalists and will generally require more equity (up to 50% ownership) in exchange for their investment.
Angel investors tend to be more involved than venture capitalists, providing not only capital but also mentorship, networking opportunities, strategic advice, and other forms of support. This hands-on approach can be critical for startups as they navigate the early stages of growth.
The right combination of angel investor and venture capitalist funding can help businesses grow quickly while minimizing risk and maximizing returns. With the right strategy in place, both types of investors can benefit significantly from their investments.
How to Raise Funding from Angel Investors
The first step in raising funds from an angel investor is having a well-thought-out business plan and pitch deck that outlines your goals, objectives, budgets, timeline and projected returns. You should also have an understanding of what type of equity stake you are willing to give up for the money that you receive. A good presentation style and a strong understanding of the business and industry are key in convincing an angel investor to invest.
Once you have presented your business plan, it is important to demonstrate that you have a solid team in place who can execute on the objectives outlined in the plan. Having a successful track record of previous investments or entrepreneurships can be helpful in setting yourself apart from other applicants.
It is also important to develop good relationships with other investors and investors groups, as they may be more likely to recommend you to an angel investor if they already know about your project. Furthermore, having a network of contacts within the industry will help provide credibility for your venture and give you access to potential strategic partners or customers.
Finally, if all goes well, you will eventually be presented with a term sheet detailing the terms of the investment. It is important to review this document carefully and negotiate any points that may not be mutually satisfactory before signing it. Once the agreement has been finalized, funds can then be released and the investor will become part of your team, offering advice and assistance as needed.
Raising money from this requires dedication and hard work but it can also create new opportunities for entrepreneurs who are eager to grow their business. By following these steps, you can increase your chances of success when seeking funding from an angel investor. Good luck!
Other Sources of Funding
- Other ways that startups can secure funding are
- Personal Savings
- Credit Cards
- Crowdfunding
- Incubators and Accelerators
- Business lines of credit
- Bank loans
- Micro-lenders
- Business installment loans
- Grants
- Friends and Family
- SBA loan
- Venture capitalists
- Equipment loans
- Bootstrapping
Read What is startup funding and how do you get it?
Conclusion:
Angel investors can be a great source of funding for start-up businesses in need of capital. Not only do angel investors provide financial capital, but they also offer mentorship, guidance and industry connections that can help early stage companies grow and succeed. Before seeking the assistance of angel investors, it is important to understand the advantages and disadvantages associated with working with them. By doing so, entrepreneurs can make an informed decision about the best source of funding for their particular business.
Do you want individual help for your startup? Contact Diane Prince for startup founder coaching or Lisa Tsou for help crafting your pitch.
