What Is an Angel Investor?

So, you’ve got a fantastic business idea. Now what?

Starting a business from scratch is challenging to say the least. Not only do we need to develop your inspiration into a product or service, but there are also many other areas that we have to manage as entrepreneurs.

To start, we’ll need money to fund our venture. Unless we’re wealthy, we’ll require outside financial assistance. As a start-up, getting funding from banks and other institutions is difficult. They have strict lending policies and typically approve companies that are already profitable. 

At such an early stage, it’s unlikely we can meet this criterion or provide sufficient collateral to qualify for a loan.

One option would be to ask family and friends for funding. An excellent group of people to seek capital is angel investors because they typically want to help entrepreneurs get their start-ups off the ground.

This article will explore who these financiers are and how they can help our idea come to fruition.

Who Are Angel Investors?

Angel investors are people who provide entrepreneurs with capital to start their businesses or help speed up the growth of a newly-founded company. They’re individuals with deep pockets who want to earn a higher rate of return than what traditional investment vehicles would offer them. A friend or family member can also fall under this definition.

These wealthy financiers usually pump cash into new enterprises in exchange for partial ownership of the company. They take on the risks with the intent of profiting from future investments or IPO.

Although angel investors are generally individuals acting on their own, some can be part of a group. Unlike venture capitalists, monetary rewards are not their primary focus. What motivates these backers is the spirit and persistence of young entrepreneurs pursuing their dreams. they provide support with the hope that financial gain will follow.

Nowadays, businesses can raise capital from a massive group of angel investors instead of only a few individuals. The process is called crowdfunding.

A key point to note is that these “angels” use their own money to fund start-ups, so they have more to lose than other groups of investors.

Why Are They Called Angel Investors?

In the past, people referred to wealthy individuals in the Broadway Theater community, who financed theatrical productions so they wouldn’t close down, as angels. They’re similar to the sympathetic patrons who support artists and their works.

In 1978, William Wetzel, a professor at the University of New Hampshire, coined the phrase after studying how entrepreneurs raised money for their businesses. The founder of the Center for Venture Research used the term “angel investor” when describing investors who back start-ups with seed capital. 

Who Can Become an Angel Investor?

The short answer is anyone who has enough money to invest in a new venture. Contrary to what you may expect, most angel investors aren’t millionaires. Many of them have incomes that total less than $100,000. 

There are no rigid qualifications or requirements to become an angel investor. These supporters of start-ups can come from a diversified group of people, which include former and current business owners. Even professionals such as bankers, lawyers, and doctors are putting their money into investing in new companies to earn a high ROI.

Knowledge of business and finance is a huge plus, but not an absolute must. A lot depends on the level of involvement the individual wants to have in the venture.

Some financiers will put up capital but remain passive supporters, leaving the management and other operations of the company to the entrepreneur. Their primary concern is to watch their investment grow with time.

However, many individuals choose to play an active role in managing the company to protect their equity and help the owner in an advisory position. In this situation, they must possess business experience.

To summarize, these are people who can become angel investors:

  • Family and friends who want to support the start-up.
  • Professionals, such as bankers, doctors, and lawyers.
  • Business executives and managers who have experience running corporations.
  • Other successful entrepreneurs.
  • Professional angel investors who invest in new ventures for a living.
  • Angel syndicates, which are groups of financial backers.
  • Crowdfunders. These are individuals who contribute small sums to online fundraisers. 

An Angel Investor’s Criteria for Investing

There are numerous uncertainties in any business investment. It’s riskier when it comes to start-ups because there’s a probability that they may fail. 

When an angel investor puts money into a new venture, and it doesn’t take off, they stand to lose all the funds they’ve invested.

To minimize the risk, a start-up owner usually has to meet strict requirements when asking for funding. These criteria are qualitative and quantitative.

Here are some factors most angel investors primarily focus on:

Passion

A critical criterion is the entrepreneur must display passion and commitment. Passionate and enthusiastic individuals typically receive more attention from investors than those who had a better model but lack these qualities.

The general perception is that owners without this drive may not have what it takes to sustain the challenges a start-up faces and turn it into a success. 

Trustworthiness

Whether an entrepreneur is trustworthy is also essential to an angel investor’s criteria. They assess this quality during the initial meeting between the two parties. If, at any point, the former displays signs of a lack of credibility, that would signal the end of any potential business relationship.

Expertise

Investors also look at the experience and track record of the entrepreneur in the field. As it’s unreasonable to expect the individual to do everything, they must have a team in mind, which will provide the necessary expertise in the future. 

Exit Strategy

The primary goal of angel investors is a return on their investment when they liquidate their stake in the business. Since IPOs are rare, they want to know what other liquidation strategies the entrepreneur has planned. For instance, who are there potential acquirers of the company at a later stage? 

Backers typically avoid investing in owners who have no clear idea of what they’re offering in exchange for the capital they receive.

Other Criteria

Secondary considerations might include:

  • Product quality. Is there a prototype?
  • Sales and market growth potential. 
  • Expected rate of return. 
  • Nature of competition. Is there a niche market?
  • Size of the expected investment.
  • Product’s overall competitive protection such as patents.

How Much Money Will an Angel Investor Put Up?

The amount of money that an angel investor provides depends on what a start-up needs in its initial stages. The other criterion is how much equity the individual wants in the company. The more attractive the venture is, the greater the capital investors will contribute.

Most individuals invest between $5,000 and $150,000, but this depends on the investor. It’s rare but possible to get as much as $1 million from angel syndicates.

Today, through crowdfunding, people can support a start-up with as low as $25, but the entrepreneur can still raise enough funds due to the massive number of contributors.

How to Find Angel Investors

Now that we’ve established who angel investors are and how they can benefit entrepreneurs in the initial stages of their business, let’s look at ways to find them.

We can seek them out by reaching out to local professionals such as accountants, business lawyers, and bankers. These are parties that would likely know of angel investors in the area and can arrange an introduction. Local Business Development Centers or trade organizations are also excellent sources of information.

Meeting these potential backers in person is more advantageous than sending them an email. 

The other way to find them is to conduct an internet search. We can research the information ourselves or use online services that connect entrepreneurs with potential investors for a fee. There are angel websites where investment seekers can learn more about potential investors interested in their venture before contacting them to request funding.

While the process appears simple, finding financial backers for a start-up is incredibly difficult. However, that doesn’t mean you shouldn’t try. Here’s our quick guide to improving your chances of success:

Know the Profile of a Typical Angel Investor

The following are some general characteristics of suitable angel investors:

  • They earn more than $100,000.
  • They’re between 40 and 60 years of age.
  • Their net worth exceeds $1 million.
  • They’re successful entrepreneurs.
  • They expect to keep their investment in the company for at least five to seven years. 
  • They enjoy being part of the action and offering advice.
  • They’ll invest personally and are willing to participate in syndicates of other angel investors to increase the amount.

Search for Local Angel Investors

Most investors want to be an active part of the company they invest in. As a result, they’re more likely to choose a start-up that’s close to where they live. It’s easier for them to drive over for meetings and check on what’s going on.

Network

Angel investors are busy people who receive a large amount of pitches from strangers for their money. Being able to get a referral is critical to improving the odds of getting their attention. 

It’s vital to be active in the local community to find the right person who’ll make the introduction. Joining business organizations and attending trade fairs and events are some suggested activities. 

Participating in social affairs is also an excellent way to meet people who might end up investing or may know someone who would be interested. 

Check Out Angel Websites

As we mentioned earlier, there are online sites that match investment seekers with potential investors. These portals provide entrepreneurs the opportunity to present their business plan to a massive audience and increase their chances of partnering with one or more financial backers.

Here’s a list of web services to check out. Note that these portals don’t provide funding. They offer avenues for companies to connect with angel investors that may be interested in what they’re offering.

  • Angel Capital Association: The ACA is the largest professional development organization for angels in the world. The site lists more than 14,000 accredited angel investors and over 250 groups throughout the US, Canada, South America, and the Middle East.
  • Gust: Formerly known as Angelsoft, this portal claims to be the world’s largest start-up organization and boasts raising over $1 billion of funding through its extensive angel network. Applicants can access hundreds of groups globally with only one registration.
  • Canadian Investment Network: This service that connects companies with angel investors allows entrepreneurs to post their business proposals for free. There’s a one-time “first contact” fee when an investor intends to pursue the venture.
  • Angel Forum: This website offers a unique service where pre-screened business owners and potential investors can “meet” for a live presentation.

Conclusion

Securing funds from angel investors is highly challenging. With so many start-ups vying for their attention and investment, the probability of success is slim.

However, it doesn’t mean that entrepreneurs should give up trying to find the money they need after a few failed attempts. Every presentation is a learning opportunity. An unsuccessful approach is also an excellent chance to connect with an angel investor who might provide a referral or be a backer in future projects.

Never give up because persistence and a determination to find backers for a start-up are also qualities angels look for when deciding whether to invest in a company.

Mateus Oliveira

Mateus Oliveira

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