An angel investor is typically a high-net-worth individual or a group of wealthy individuals who invest their money in a venture at an early stage in return for an equity share.
There are several ways a new small business might try to secure money for expansion or growth, from friends to bank lenders to joining a startup accelerator program. Angel investors are another option that can provide a capital infusion, but there are trade offs when accepting funds in exchange for a stake in a new company.
What Is an Angel Investor?
If you’ve ever watched the show Shark Tank, you’ve seen one type of angel investor in action. On the show, a group of wealthy investors listen to pitches from entrepreneurs who are looking for funding for their small business or startup. In exchange for funding, these investors generally ask for an ownership share in the business.
Angel investors can also be personal friends or colleagues of the entrepreneur. Typically they’re wealthy enough to provide a significant amount of money, despite the risks the startup could fail.
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That said, angel investors typically invest in startups that have the potential to grow and have minimal downside risk in the long term. An angel investor may provide a one-time investment in a company, or they may provide ongoing support. They may also be called private investors, seed investors, or just “angels,” for short.
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Who Can Be an Angel Investor?
Angel investors were once required to be accredited investors, which demanded, among other things, that they have a net worth of $1 million in assets, not including personal residences — or yearly income greater than $200,000 alone, or $300,000 for a household for the previous two years. (Anyone who holds a Series 7, Series 65, or Series 82 in good standing also qualifies).
This was meant to limit angel investing — which is a risky practice — to those who ostensibly had enough assets to safely dabble in it. In recent years, however, anyone can be an angel investor.
Ways to Become an Angel Investor With Less Cash
Angel investing is undoubtedly risky — businesses fail all the time. However, lately it is possible to get involved in angel investing without putting tens of thousands of dollars on the line. (A smaller investment won’t reduce the risk, but it may potentially reduce an investor’s total loss.) These crowdfunding platforms enable smaller investors to dip their toes in the water:
• WeFunder is an equity crowdfunding site that allows you to invest as little as $100 in startups and small businesses. The site encourages investors to invest in companies and products they love and believe in. Although the investment is smaller than might be typical, the site still describes these investments as risky and advises that people don’t invest money they can’t afford to lose.
• SeedInvest is an equity crowdfunding site that allows users to get started with $1,000. The company vets all startups on the platform and offers a variety of investment opportunities. The site notes that early-stage investors should expect to hold their investments for at least five years, and that there is no guarantee on returns.
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What Are the Pros of Using Angel Investors?
There are a number of benefits to using angel investors to help finance a venture.
Less risk
If you take out a loan to finance your business, you’ll still be expected to pay it back, whether or not your venture is a success. Angel investors generally understand the risk of investing in a startup business, and may not expect any return on capital if the business goes south.
Expertise
If angel investors also happen to be experts in your business, they can offer advice and guidance based on their years of experience.
Credibility
Angel investors are often well-known in their field, and if they invest in your idea, it can boost your reputation and status to have them on board.
They’re Willing to Take a Leap
Unlike a bank, which may need more concrete proof that you’re onto something big, an angel investor might be more willing to gamble on your great idea.
Better Chance of Success
Companies with angel investor interest stand a greater chance of survival than those with less angel investor interest, according to findings from the National Bureau of Economic Research. Having angel investment doesn’t mitigate the risk of starting a business, but it’s possible that having angel investors on board can provide some oversight or accountability that might be beneficial.
What Are the Cons of Angel Investors?
There are also some potential disadvantages to having angel investors.
Loss of Full Ownership
Angel investors often provide funding in return for a share of the business, so involving angel investors means giving up some of your control. It also means that if the business succeeds, they’ll share in the proceeds.
They May Add Pressure
Angel investors aren’t giving you money out of kindness and good will. They may be aggressive investors who expect to see a high return on their investment. If they’re sinking money into your venture, it may feel there’s more riding on your success or failure.
Funding May Be Slow
Finding angel investors can take time, and the process of securing backers — and for the cash to find its way to your venture — can take even longer.
It’s a Competitive Market
Even if you have a brilliant idea, there’s no guarantee that you’ll be able to find backers for it. Although there were 334,680 active angel investors in 2021, only 64,480 entrepreneurial ventures received angel funding, according to an analysis by the University of New Hampshire Center for Venture Research.
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Where to Find Angel Investors
Startups looking for early-stage investors can look in several places.
Friends and family
Most commonly, startups get much of their initial investment from friends and family who believe in their idea and want to support the venture.
High-Net-Worth Individuals
Networking within your business community may allow you to make connections with people who’d be interested in helping to back your idea. It can be helpful to join local business, trade, and community organizations. Attend meetings and trade fairs, and have your elevator pitch well-honed.
Angel Funding Groups
There are a number of sites that seek to match entrepreneurs with angel investors, including:
Angel Capital Association : A collective of accredited angel investors
Golden Seeds : A group whose members focus on women-led ventures
Angel Investment Network : A network that seeks to connect entrepreneurs with business angels
Crowdfunding sites
While traditional angel groups seek to match entrepreneurs with accredited investors, crowdfunding sites allow lots of smaller investors to pitch in to move your venture along. (Picture a GoFundMe for your business idea.) These include SeedInvest, LocalStake, WeFunder, and Fundable.
You’ll likely have to apply to have your idea or business vetted by the site before they’ll present your project to their members.
The Takeaway
Angel investors are typically high-net-worth individual or group backers that support startup and early-stage business ventures. But lately, opportunities have opened up for individuals of all types to invest in companies that have recently launched.
For entrepreneurs, an angel investor can be an enormous help, both in terms of financing their dream as well as providing guidance if they have relevant business experience. On the flip side, some entrepreneurs may find there is added pressure to deliver when an angel investor is backing their startup.
Whether you’re interested in finding an angel investor for your own startup idea, or thinking of becoming one, there are a number of risks associated with this type of business. Consider the pros and cons in light of your own financial goals, as there are many different paths forward.
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