What is an Angel Investor?
An angel investor is a person who invests in a new or expanding business, providing capital for a startup or expansion. Often times, an angel investor comes with a wealth of business experience and may offer to assist a startup as a mentor, in addition to providing capital. He or she usually takes an equity position in the company, although this is not always the case. Alternatives to taking an equity position include structuring the investment as debt, convertible debt, or revenue sharing.
The Important Role of Angel Investors
Angel investors can play an important role in helping a fledgling business get started. If a startup goes to a bank for a traditional bank loan, they are typically expected to provide a downpayment (10-30 percent of project cost) and put up collateral. They will also have to convince the bank of their ability to repay their debt.
There are instances where an individual has technical expertise in a specific area, an innovative idea, and a strong work ethic, but does not have the capital needed to start a business or the amount of equity needed to get a bank loan. An angel investor may come alongside that entrepreneur and provide the capital needed to fill the funding gap. This can provide a win for the startup, a win for the investor (if the business is successful and creates a return), and in small towns, a win for the community as new businesses are able to start operations.
Types of Angel Investors
Angel investor is a somewhat general term, and this label can be used for several types of investors. Angel investments typically come from:
- Family and friends: This is by far the most common source of funding for business startups. Given the high rate of failure with new businesses, it is also risky in terms of the possible impact on family/friend relationships if the business is not successful. It is important to be upfront about the risk of failure.
- Wealthy individuals: successful business people, doctors, lawyers, and others that have a high net worth and are willing to invest up to (typically) $500,000 in return for equity are another good source. Opportunities are communicated through business associates or associations such as the local Chamber of Commerce.
- Groups: Angels are increasingly operating as part of an angel group or fund, which raises their potential investment level accordingly. Investors pool their funds and make decisions together about which businesses they want to invest in. Sometimes, several funds band together for a deal, which is called syndication.
- Crowdfunding: A form of an online investing group, crowdfunding involves raising funding by having large groups of individuals invest amounts as small as $1,000. If this route interests you, you can find a comparison of the top online fundraising and crowdfunding platforms on crowdfunding.com to get a sense of today’s crowdfunding landscape.
