An angel investor, angel, business angel, or seed investor is a very rich person who provides capital for a startup business. Usually, the angel investor provides capital in exchange for a share ownership or convertible debt.
Many giant companies exist today due to angel investor involvement. In fact, Paypal, Ask Jeeves, and Google grew because of capital that came from angel investors such as Ron Conway.
These angel groups pool their investment capital and share their research. Additionally, they provide advice and know-how to their target companies.
Angel investors will only consider becoming involved with a startup if they foresee a good return. Above all, they need to predict a very good chance of success.
Some of the investors will become active participants in the business. Others, on the other hand, prefer to be sleeping partners who just provide capital.
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.”
Angel investor vs. venture capital
Venture capital generally refers to companies that invest in startups or expansion projects. Angel investors are people who invest their own money. Venture capitalist firms often use other people’s or firms’ money.
Put simply; angel investors are people who use their own money. Venture capital, on the other hand, belongs to companies. These companies invest not only their own money, but also other people’s, and sometimes both.
We call the money that an investor puts into the very early stage of a project’s life seed capital.
Finding an angel investor
For many startup entrepreneurs, their angel investor is a family member, personal friend, or major supplier. In fact, many angel investors were once clients. An entrepreneur is somebody who sees a business opportunity and sets up a business to exploit it.
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. The network provides not only funding for high tech startups, but also advice. In fact, the network has helped several reputable companies take off. For example, Logitech and Symantec started off with angel investments.
The UK’s largest network, Angels Den, an angel-led equity crowdfunding platform, has about 5,400 members. It connects investors with startups. Angels Den offers three different types of investment: equity, debt, as well as 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 former business people or executives. These people’s interest in investing goes beyond simply seeking a return.
Some like investing in startups because they want to keep abreast of what is going on in a specific business environment. Many angel investors want to pass on their experience, contacts, and networks to budding entrepreneurs.
Additionally, some angel investors see the startup founder(s) as younger versions of themselves. Therefore, some of them may be trying to relive those exciting entrepreneurial experiences.
Not only do angel investors inject money into startups, but with decades of business experience, many provide priceless management advice.
Richard Harroch writes in Forbes that angel investors look out for six important things in the people and startups:
1. The integrity, commitment, passion, and quality of the founders.
2. Interesting technology or intellectual property.
3. There is a market opportunity, which somebody is addressing. The startup has the potential to become huge.
4. The founders have thought out their business plan clearly. There is compelling evidence of obtaining traction toward the plan.
5. There is an appropriate valuation with reasonable terms. There are several ways of valuing a company, including the Earnings Evaluation Approach and the Market Approach. Additionally, there is the Asset Approach.
6. Would additional funding rounds be viable if the startup makes progress?
Many business moguls admit that their success was due to an angel investor. Above all, the majority of tycoons stress that the angel’s know-how helped them through.