What Is an Angel Investor?
An angel investor is an individual who provides initial seed money to startup businesses in exchange for ownership equity in the company.
These investors can be professionals involved in multiple projects or may be friends and family of the entrepreneur. They can provide a one-time investment or ongoing funding to help bring a product to market.
Angel investors differ from traditional lenders as they invest in ideas they believe in, expecting a return only if the business succeeds.
Understanding Angel Investors
Angel investors are typically wealthy individuals seeking higher returns than traditional investment opportunities. They invest in startups with promising ideas, using their own money to further develop these ventures.
Investing in startups is highly risky, with only about 11% of such ventures resulting in success. Despite this, angels invest modest sums, averaging around $42,000 per venture.
Most angels limit their involvement in startups to no more than 10% of their portfolios.
Reasons to Seek an Angel Investor
Entrepreneurs may choose angel investors over conventional financing due to more favorable terms. Angels often seek an equity stake and a board seat, focusing on helping startups take their first steps rather than just seeking a return on a loan.
Angel investors are also known as informal investors, seed investors, or business angels. They find prospects through crowdfunding platforms or investment networks.
Origins of Angel Investors
The term "angel investor" originated in the Broadway theatrical world, where wealthy individuals financed plays. The term was first used by William Wetzel of the University of New Hampshire's Center for Venture Research in a study on entrepreneurial capital gathering.
Today, Silicon Valley is the hub of angel investing, particularly in internet, software, and artificial intelligence startups.
Who Can Be an Angel Investor?
Angel investors are often former entrepreneurs or individuals with a passion for innovation. Anyone with the financial means and a desire to fund startups can be an angel investor.
Many angels have accredited investor status, granting them access to private capital markets based on their financial acumen and assets.
Sources of Angel Funding
Angel investors typically use their own money for investments, unlike venture capitalists who pool money from multiple investors. The actual funds may be provided by entities such as LLCs, trusts, or investment funds set up by the investor.
Types of Ideas Backed by Angel Investors
Angel investors fund a wide range of ideas beyond tech startups. Examples include franchises for archery facilities, innovative medical products, and electronic instrument carriers.
Difference Between Angel Investors and Venture Capitalists
Venture capitalists invest large sums from pooled funds into existing businesses for substantial profits. Angel investors, on the other hand, invest their own money in early-stage startups to help turn good ideas into reality.
Disadvantages of Angel Investing for Entrepreneurs
Entrepreneurs give up a share of their company and future profits to angel investors. Angels may also want control over product development, often requiring a board seat.
Investment Profile
Angel investors face the risk of losing their entire investment if a startup fails. They seek opportunities with defined exit strategies, such as acquisitions or IPOs. The average internal rate of return for successful angel investments is around 22%.
Conclusion
Angel investing has become a crucial funding source for entrepreneurs, fostering innovation and economic growth. For entrepreneurs, angel investors provide essential support not available through traditional funding sources. For angels, investing in early-stage startups offers big risks but the potential for substantial rewards and personal involvement in innovative projects.