What Are Angel Investors? – Councilor Forbes


Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but this does not affect the opinions or ratings of our editors.

Angel investors are individuals who provide funding to promising startups in exchange for a portion of the business, usually in the form of equity or royalties. Although the numbers vary from year to year, as of 2017, angel investors invested around $ 25 billion in 70,000 companies.

Angel investors may or may not be accredited investors, a classification given only to investors with very high income or net worth. With the passage of the Jumpstart Our Business Startups Act in 2012, the criteria for start-up investors were broadened to include more daily retail investors, including crowdfunding campaigns.

Know Angel Investors

Angel investors often come from the business world, but that’s not their only point of origin. Angel investors are typically found in the following professions:

Business professionals, such as lawyers, doctors, accountants and financial advisers, among other professions.

C-level business leaders who have risen through the ranks and know what it takes to run a successful business.

Successful small business owners and entrepreneurs who have already started successful businesses and know how to recognize startups who have a bright and profitable future.

Investors who make small business financing a professional hobby.

Crowdfunding platforms that raise funds in groups, with each person investing a small amount in exchange for a small share of any profits, if the business is successful.

How angel investing works

Angel investors prefer to get involved upstream of a business, during the “seed” or “angel” funding phase. This could mean that the angel invests when the business exists only as an idea, or it could happen when a business is already operational.

Sometimes angel investors come onto the scene after the first round of funding, which normally comes from the founders themselves, founders’ friends and family, or bank funding. Typically, the initial financing of the business is not substantial. It is common for founders to deploy their product or service with around $ 10,000 in seed funding.

Angel investors come in after the initial funding is in place, but usually before a business needs a larger investment from a venture capitalist. Their investment is needed to grow a business at a critical (and usually early) stage of development, after initial funding threatens to run out and before venture capital groups show interest in partnering with a promising company. .

Here’s how the actual investment process goes:

Angel investors connect with young, growing companies through word of mouth, through business and industry seminars or conferences, through referrals from professional investment organizations, online business forums or local events such as chamber of commerce meetings.

If there is a mutual interest, the angel investor will perform due diligence on the start-up by talking to the founders, reviewing the company’s investment documents and assessing the industry targeted by the company.

Once a verbal agreement between an angel is in place, a condition sheet or contract is drawn up, with agreements on investment terms, payments or participation percentages, investor rights and protections, governance and control parameters and a possible exit strategy for the angel investor.

Once the contract is finalized, a true legal agreement is created and signed, the transaction is formally concluded, and the investment funds are released for the use of the business.

Although contribution amounts vary, funding levels can be as low as $ 5,000 and as high as $ 150,000. Some angel investors form a syndicate and can provide funding of up to $ 1 million to some companies.

Angel investors typically do not acquire more than 25% of a company’s equity. Seasoned angel investors know that company founders need to have the largest stake in their own business, because then they also have the most incentives to grow their business.

Angel investors vs venture capitalists

While angel investors and venture capitalists (VCs) both fund companies in exchange for a share of the stock, there are significant differences between the two entities.

Although angel investors and VCs invest in startups, they typically invest money at different stages of the process.

“An angel investor is more likely to provide capital for an idea when the majority of VCs would like proof of concept in hand,” says Courtney Lawless, a venture capital firm at Philadelphia-based MoxeHub.

Another difference is the source of funds: Angel investors are private investors who invest their own money. Venture capitalists are professional investors who usually invest other people’s money, rather than their own money, although that doesn’t mean they never invest their own money.

Other differences include:

• Lower funding amounts. Unlike venture capitalists, who typically write finance checks of $ 2 million or more, individual angel investors typically write much smaller checks. “These checks are typically between $ 10,000 and $ 100,000,” says Dave Lavinsky, co-founder of Growthink, a business finance provider in Bend, Ore.

• Angel investors are more likely to maintain a “hands-off” policy on corporate ownership. Venture capitalists, on the other hand, almost always sit on the board of directors and are operationally involved in a company.

Advantages and disadvantages of angel investing

There are several reasons why emerging startups might partner with an angel investor.

Benefits for Angel Investors

• No obligation. Because they haven’t applied for a new line of credit, and most angel investments involve equity transactions, business owners don’t have to pay back the angel funder if the business goes bankrupt. .

• An angel investor is usually also an entrepreneur. Angel investors often have an abundance of business knowledge and experience. “Funders who have built effective organizations themselves are especially valuable,” says Garett Polanco, a certified angel investor who has funded 29 companies.

• Less administrative work. Organizations that raise funds from angel investors are exempt from onerous investment deposits with the US Security and Exchange Commission (SEC) and state regulators that they may have to do if they decide to hold, for example example, a Initial Public Offering to raise funds.

• More money down the line. When angel investors fund a business, they are often for the long term. “They often make another injection of money later,” says Polanco.

Disadvantages of Angel Investors

• Less control. Businesses that work with angel partners may need to divest some equity in their business. Although this is normally a small amount, angel investors may decide they want to play a larger role in business decisions.

• A blow in the wallet. Angel investors demand compensation for their funding. “It usually takes the form of equity, which could be more expensive than debt financing,” says Lavinsky.

• Potential for novice investors. A big downside to angel investing is ending up with an inexperienced angel investor offering bad advice or hounding business owners for status updates. This can be especially the case with new angel investors who direct large sums of money into a business.

How to find an angel investor

Finding angel investors is a fairly straightforward process.

Start by focusing your research on finding someone who is geographically close, as many angel investors like to take an active role in the business they are funding. “We prefer to invest in companies close to where we live,” says Polanco. “The vast majority of angel investing takes place within 50 miles (80 km) of the angel investor’s home or office. “

Then target industry associations and digital platforms to find a good angel investor. You can start with these two angel organizations:

Angel Capital Association (TO THAT). ACA is the largest association of experts for advancing angel investors globally, with over 14,000 private funders and over 250 angel gatherings and licensed stages. ACA operates in the United States, Canada, South America and the Middle East.

Messenger Angel Forum (AMF). New companies seeking equity financing of $ 100,000 to $ 1 million can use the AMF to introduce themselves to prequalified private and private angel investors.

Small businesses looking for angel funding can also use social media to find good angel investment candidates. LinkedIn, in particular, can be a gateway to angel investors. Just use the search key to find angel investors operating in your area.


Back To Top