Angel investor – definition and meaning

An angel investor, also called an angel, business angel, or seed investor, is a very rich person who provides capital for a start-up business, typically in exchange for an agreed share ownership or convertible debt. An investor is a person who commits resources to a project or company with the expectation of making a profit.

A growing number of angel investors get together with others and form angel networks or angel groups. These groups pool their investment capital, share their research, and provide advice and know-how to their target companies.

An angel investor will only consider becoming involved with a start-up if it foresees a good return. Some of them will become actively involved in the business they invested in, while others prefer to be sleeping partners who just provide capital.

Angel Investor

Angel investors have been involved in the early stages of many well-known companies.

Difference between angel investor and venture capital

Venture capital generally refers to specialized companies that invest in start-ups or expansion projects. Angel investors are people who invest their own money. Venture capitalists firms often use other people’s or firms’ money.

Money invested in the very early stage of a project’s or product’s life is called seed capital.

Finding an angel investor

For many start-up entrepreneurs, their angel investor is a family member, personal friend, major supplier, or even a client.

Some formal networking organizations have lists of people seeking angel investment opportunities.

A well-known US network, called Band of Angels, has over 120 members who provide funding for high tech start-ups, as well as advice. The network has helped several well-known companies get off the ground, including Logitech and Symantec.

The UK’s largest network, Angels Den, an angel-led equity crowdfunding platform, has about 5,400 members. It connects investors with start-ups and offers three different types of investment: equity, debt and donations.

EBAN (European Business Angels Network) operates across Europe and represents a large number of early stage investors.

Why become an angel investor?

Many angel investors are retired business people or executives whose interest in investing goes beyond simply seeking a return.

Some like becoming involved with start-ups because they want to keep abreast of what is going on in a specific business arena, while others may wish to pass on their experience, contacts and networks to budding entrepreneurs.

Apart from injecting money, angel investors, who have many decades of business experience, can often provide priceless management advice.

Richard Harroch writes in Forbes that angel investors look out for six important things in the people and start-ups they are considering:

1. The integrity, commitment, passion and quality of the founders.

2. Interesting technology or intellectual property.

3. There is a market opportunity, which is being addressed. The start-up has the potential to become huge.

4. The business plan has been clearly thought out. There is early evidence of obtaining traction toward the plan.

5. An appropriate valuation with reasonable terms. There are several ways of valuing a company, among them the Earnings Evaluation Approach, the Market Approach and the Asset Approach.

6. If progress is made, how viable would additional funding rounds be?

The Financial Times Lexicon says the following about angel investors:

“Angel investments are typically the earliest equity investments made in startup companies. Angel investors are almost always wealthy individuals and commonly band together in investor networks. Often these networks are based on regional, industry, or academic affiliation.”

Video – What is an angel investor?