What Are Angel Investors and What Do They Do? A Complete Guide
By Vladana Donevski
June 19, 2023
Do you have a great business idea but don’t have the money to get it off the ground? If so, you should look for an angel investor.
So what are angel investors? How does angel investing work, and what are the advantages and potential pitfalls to look out for? We’ll answer all of these questions in the following blog post. We’ll even take the time to compare angel investors to venture capitalists to help you make the best decision for your business.
Angel Investor Definition
An angel investor is someone who funds a startup company, usually in exchange for convertible debt or ownership equity. Some team up with other investors to form small angel investor groups operating under the umbrella of the Angel Capital Association or ACA. Those who prefer to avoid the commitment of traditional investor groups can join online syndicates instead.
Who Can Be an Angel Investor?
While anyone who has the money to back a business can be an angel investor, most angels are either accredited investors or sophisticated investors.
According to the Securities and Exchange Commission or SEC, an accredited investor is an individual with a net worth of over $1 million in assets, excluding any residences. The other metric used to discern accredited angel investors is that they have to have an annual income of over $200,000 (or $300,000 for couples) for the previous two years.
Angel investors do not necessarily come from a financing or business background. They can be lawyers, doctors, accountants, c-level executives, or small business owners who have successfully helped kickstart other companies.
How Does Angel Investing Work?
When it comes to angel investments, there are a few different ways for the investment process to play out.
One of the most common methods is for the angel investor to provide seed money to a business that needs help in the early stages in exchange for convertible debt or ownership equity. In short, angel investors expect sizable returns in the long run.
Another angel investing method involves the purchase of equity-backed securities. Investors provide capital to a business in exchange for stock ownership. This type of angel funding is more common with larger businesses that are looking for a more hands-off approach from their investors.
Once the angel investor provides the capital, they typically take a back seat in terms of day-to-day operations.
Of course, there are always exceptions to this rule, and some angel investors do take an active role in the businesses they invest in. However, most angel investors simply provide the initial funding and let the business owner(s) take it from there.
The Pros and Cons of Angel Investors
Just like any other type of investment, you need to weigh the pros and cons of angel investments.
Let’s start with the pros:
One of the biggest advantages of working with an angel investor is that they can provide the capital you need to get your business off the ground. This is especially helpful if you don’t have sufficient personal funds or you don’t qualify for a traditional bank loan.
Another advantage is that angel investors are typically more flexible than other types of investors, such as venture capitalists. Some angel investors raise the money through their syndicates or crowdfunding sites. Furthermore, angel investors for startups understand that these are risky investments and often have a long-term approach.
Lastly, if you manage to land an angel investor who is an accomplished entrepreneur and willing to actively participate in the growth of your business, you can make use of their network and expertise.
Now, let’s take a look at some of the cons:
The biggest downside to working with an angel investor is that it may require you to surrender a larger portion of your company than you would if you went with another type of investor. This is because angel investing is risky, and the funds are typically provided early on.
The return on investment for angels depends on the investment opportunity, but it’s not unusual to see some angel investors expect a 30% ROI.
Another downside to working with angel investors is the fact that you’re losing your decision-making powers. This is because some angels will want a seat on the board, or they may want to be involved in major decisions.
That’s why an angel investment from someone with expertise in your field is an ideal option. It is not uncommon for angel investors to try to implement unrealistic business decisions, creating a struggle within the company.
Where to Find an Angel Investor?
There are a few different ways for business startups to find angel investors.
One way is to search online directories, such as the Angel Investment Network or Gust.
Another way is to attend startup events or pitch your business ideas at the appropriate forums, which can be a great way to meet potential investors.
Lastly, you can try going through a business accelerator program, as they typically have a network of angel investors that they work with.
All in All
There are a lot of things to consider when it comes to angel investments. While they are a great option for startups and small businesses that are struggling with financing, giving up a part of your business in exchange for the funds is not necessarily the wisest decision.
Do your research and take your time to find an investor who is a good fit for your company and your business goals. And remember, the most important thing is to have a clear understanding of the terms of the agreement before you accept any funding.