What Is an Angel Investor?
The economy is driven by innovation and the implementation of fresh ideas. However, most new entrepreneurs or inventors who are starting to work on their side hustles need financial assistance to bring their big ideas and business opportunities to fruition. Investors and the investments they make are a key part of ensuring these ideas come to life so innovators can change and advance the market.
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Angel Investor Definition
An angel investor is an individual who helps a new company or entrepreneur with the initial funding for startup costs. Most angel investors are extremely wealthy and have their money in many different investments. Since an investment in a startup company that’s new to the market is risky, angel investors usually only offer 10% or less of their investments for any one business venture. This ensures they won’t lose too much wealth if the new company isn’t profitable.
While angel investors provide these startup loans with favorable terms that are easy for entrepreneurs to agree with, they don’t provide this money for free. Angel investors usually expect a portion of ownership equity or convertible debt in exchange for the funding provided to the entrepreneur. They do extensive research on specific industries, different types of businesses, and up-and-coming technologies so they can predict what to invest in now that will bring them success.
An angel investor who invests in an entrepreneur hopes the business will be successful enough to make a quick and large profit on the money invested. These investors expect their high-risk investments in new or small businesses to pay off at a higher rate than other more traditional investments.
Angel Investors Examples
There are many angel investors who specialize in investment management and focus on investing in startup companies and young entrepreneurs who are starting businesses. Some of the most well-known and involved angel investors include the following:
- Esther Dyson: As the chairman of EDVenture Holdings, Esther specializes in investing in startups and new businesses in the healthcare, aerospace, and human capital industries.
- Mark Cuban: Mark Cuban owns several companies and offers angel investments into small businesses or startups that pique his interest, including those in healthcare, apparel, sports, technology, film, or media.
- Fabrice Grinda: As the co-founder of FJ Labs, Fabrice Grinda has invested in countless startup companies, including many in the apparel, food, retail, and technology sectors.
While an angel investor is usually an individual, the investor may choose to set up a business structure and business name when providing investments to startup companies.
Angel Investors vs. Venture Capitalists
While both angel investors and venture capitalists provide money for businesses, the strategies they use to offer these investments vary greatly. Venture capital is money that’s raised from several investors and pooled together into one investment fund.
Venture capitalists typically don’t use any of their own money to invest in businesses and several different investors are part of one investment presented to a business searching for funding. These investors are usually more interested in investing in businesses that have already been established. Since the companies are already making profit, venture capitalists may offer more money. However, they usually also expect a higher return and may ask for more equity or other loan terms.
The money that angel investors provide is called equity financing because they ask for equity in the business in return for their investment. The investments you obtain from angel investors for your new business can also be referred to as seed capital, since it’s what you’ll use to cover your startup costs.
What Do Angel Investors Look For?
Starting a business is expensive and it can be impossible without the help of investors. If you’re looking for angel investors for a new venture, it’s important to choose individuals who you feel share the vision of your business and believe in your entrepreneurial skills.
Whether you’re looking for angel investors through friends and family, crowdfunding techniques, investor groups, or other sources, you’ll need to take the necessary steps to ensure your new business is attractive to investors. Before you begin pitching your business idea to potential angel investors, be sure you can prove that you have:
- A good track record: If you can provide information on previous successful business ventures you were involved in, you’re more likely to attract the attention of angel investors.
- A viable business plan: An angel investor will scrutinize your business plan to ensure it makes sense and is likely to be profitable.
- An innovative product or service: Not only does your business structure need to be impressive, the idea you present for your product or service should also be creative and address a gap in the market.
- Scalability: Angel investors are interested in how your business can grow, so the idea you present must be scalable and offer unlimited growth potential.
- Pre-existing revenue: An angel investor may feel more confident about investing in your business if you have pre-existing revenue and the startup costs don’t lie solely with one investor.
- A solid exit strategy: Angel investors aren’t interested in helping you run your business forever; presenting a feasible exit strategy that outlines how you can liquidate your business may be more attractive to investors.
When you present your idea to angel investors, it’s important to build their confidence in your new business, your skills as an entrepreneur, and the potential to make a profit.
How to Find an Angel Investor
If you feel an angel investor can help get your startup off the ground, there are many sources you can use to locate the right investors for you. You can connect with potential angel investors through:
- Financial advisors;
- Venture capitalists;
- Networking events;
- Friends and family;
- Crowdfunding sites, such as Kickstarter;
- Angel investor sites, such as AngelList.
An angel investor can be a helpful way to obtain the money you need for startup costs in a new business venture. When you find the right angel investor, it’s important to present a viable business plan that highlights future growth opportunities so you can encourage a large investment.
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This post was updated January 16, 2020. It was originally published January 16, 2020.