What is an Angel Investor?

By QS Contributor Updated Dec 03, 2019

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Introduction
Angel Investing
What is the Difference Between Angel and Venture Capital?
Finding an Angel Investor

If you are considering starting your own business, you've probably wondered about angel investing, and asked yourself the following questions. What is an angel investor? When is angel investing a good option for financing a business? What are the best methods for finding an angel investor? Read on for answers to these questions, as well as an overview of angel funding.

Angel Investing

An angel investor is a wealthy individual who provides who provides startup capital to a business that is in its early stages. Angel funding is usually given in exchange for an ownership stake in the business -- usually in the form of preferred stock or convertible debt. Angel funding can range anywhere between $10,000 and $250,000. Angel investing can often lead to venture capital funding later on.

Historically, angel investors are considered to be one of the earliest sources of startup capital for entrepreneurs. The term "angel investor" dates back to twentieth century Broadway, where wealthy arts patrons would invest their own money to finance new productions. The most famous example of angel investing may very well be the ABC reality series Shark Tank, where entrepreneurs have to convince five wealthy investors that their business will bring back a good return on their investment.

While angel investing is the oldest forms of startup financing, it is not the most common. In fact, very few startups will ever receive money from an angel investor. In 2007, 57,120 startups received angel funding totalling $26 billion according to an article in the Wall Street Journal. The average amount of funding, however, was $450,000 per deal, which means that angel funding could give your small business a big boost. Whether or not you should get angel funding, however, depends on the size of your business, as well as your goals and your own personal management style.

What is the Difference Between Angel and Venture Capital?

The reality of entrepreneurship is that you often have to take your money where you can get it. Since angel funding is so rare, you may have no choice but to get a bank loan, ask friends for money, or work with a venture capital firm. There are cases, however, when an entrepreneur does have a choice. That's why you should know the difference.

Unlike angel investors who use their own money, venture capital firms invest other people's money. Venture capital firms usually seek at least 20 to 30% equity. They also look to join the board and try to steer the company toward going public or being sold.

While angel investors do not join a board, they tend to be more active. As early investors, they stand to gain a big return on their investment if the business becomes successful. Angels usually connect entrepreneurs to other people who can help grow their business, such as venture capitalists.

In his Ask Jay podcast, entrepreneur and CEO Jay Adelson (digg, Revision 3) states that you shouldn't seek out venture capital unless you need more than $1 million. Businesses that need less than $100,000 should seek out angel funding. How do you know how much money your business needs? Look at your goals, and calculate the amount of money you need to achieve them.

The type of funding you choose also depends on what type of business you are in. Angel investors usually look for a scalable business -- a business that has great growth potential and is on the path toward profitability. They usually avoid high risk investments, unless they expect a return. If you company does not have significant plans for expansion, however, you will probably not be able to get any angel investors.

Angel investors also look to invest in certain types of industries. While angels are usually associated with the technology and life sciences sectors, an increasing number of angels are diversifying their portfolio by investing in niche companies. Angel investors tend to avoid "lifestyle companies" (restaurants, retail, consulting services). Angels are looking for a huge return on their equity when your company is sold or goes public, and lifestyle businesses have limited earning potential.

Finding an Angel Investor

The best way to get angel funding is through networking within your local business community. Angel investors tend to invest in businesses close to where they live. This allows them to coach you and monitor the progress of your business. Attend local business events such as investment forums, small business education seminars, and business plan competitions.

You should also network with other successful entrepreneurs. They can tell you how they received their funding, and provide advice.

Another option is to seek out an angel network -- an organized group made up of several angel investors who share information and pool their investment capital. Angel networks are usually located in major cities. New York City, for example has several angel networks. Most angel networks have a particular area of focus, based on factors such as industry or the size of a company. Most angel networks have websites that provide instructions on how to apply for funding. Applying isn't always free, however, since some networks charge an application fee (usually $100-250).

You can also use the Internet to find angel investors. AngelList is an online platform that connects investors with angel funders. LinkedIn has several groups dedicated to angel funding.

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