Angel investors (also referred to as angels or business angels) are generally high net worth individuals who invest in startups and early stage businesses. Typically, angels invest between $10,000 and $500,000 of their own money in a single investment. Normally this investment is in exchange for equity in the business, although hybrid equity and debt deal structures like a convertible notes are commonly used. Generally the motivation of an angel investor is about adding value and ‘giving back’, as much as making money.
Angel investment plays a significant part in filling the funding gap between seed stage (where a startup is often initially self-funded by the founders or close personal network of the founders) and a later expansion stage where venture capital firms provide expansion capital, or the business is stable enough and able to gain finance from other more risk adverse sources like a banks.
Angel investors normally fit into two categories: The first are current and former entrepreneurs who’ve previously had business success and now have excess capital to invest, the second are individuals with no or limited entrepreneurial experience. This second group are often individuals like current and former corporate executives, lawyers, accountants and doctors who through other non-entrepreneurial means have also accumulated necessary capital to invest.
An ‘angel investor’ is a fairly broad term which includes one-off investors with one investment, to professional angel investors with a portfolio of 10 or 20 (or more) investments, and everything in between. As well as operating as individuals it is increasingly common for angel investors form an ‘Angel Group’ in order to create a useful business network, increase the number of opportunities the angels see and to provide support for each other when evaluating the investment opportunities.
The amount of money invested, the equity received and the structure of the angel investment deals can vary widely. However, because of the high risk of early stage investment, business angels would typically look to receive a return of 5-10 times (often higher) on their initial investment at the time of exit which is often expected to be after 2-7 years. In order to reduce their risk and achieve these high returns, angels are very selective of the businesses they invest in and try to focus on investing in business they understand, can add value and therefore influence its success.
Angel Investors are typically looking for particularly high potential businesses, “startups” that will grow very quickly (or develop a lot of value quickly) and then offer an attractive exit option like a trade sale, IPO or other liquidity option where the business angel can sell their equity and get their high return. Ideally, angel investors also look to come in at an early enough stage where their investment buys a significant equity stake of ordinary shares in the business, often 5-25% of the business, but also late enough stage so that the risk is lowered.
The stage that an angel will invest will depend entirely on the individual angel investor. Some angels invest at the seed/concept stage prior to a business being established – often providing initial seed capital and then having an option for a further investment round at a predetermined value. However, the majority of angel investors invest once the business concept (and the entrepreneurs) has been demonstrated to some degree. By demonstrated it might be that the business has received revenue, gained customers, established partnerships, gained users or some other similar success and the angel investor can see a good market response to the product or service and a clear growth path for the business.
Angel investors typically invest in industries and business types that they know and have had some experience in and generally in businesses geographically close to their location. An awareness of the market, the customers, the competitors, suppliers, trade groups, geography and other such industry dynamics allows the angel to make a more informed decision about the startups potential success when making an angel investment.
Knowledge of the industry, having useful business experience or connections also means that the angel is able to play a more active role in the investee business. In addition to providing capital, it is quite common for business angels to work closely with the entrepreneur(s) and key management team providing advisory, mentorship and connections to dramatically increase the chance of success for the business. When the angel does this either in an informal capacity of a more formal capacity such as taking a seat on an advisory board or board of directors they are said to be an ‘active investor’. This differs from a ‘passive investor’ who provide capital and little or nothing else.
If you’re looking for angel investor funding, there are two key things you need to do:
1. Get Educated
2. Get Connected
When looking for business angel funding it is very important for a startup/entrepreneur to understand: the angel investing space, how to raise capital, when to raise capital, how to position your business and how to actually approach and pitch to angel investors. It is also extremely important for a startup/entrepreneur to understand the investment criteria of the individual business angel before approaching them and pitching for capital.
Once you’re educated about angel investment and how to raise capital from angel investors, the next step is to get connected and approach angel investors. Your best chances of approaching a business angel successfully is through a warm introduction from a trusted connection of the angel.