What Is an Angel Investor?
Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund, angels use their own net worth. Compared to venture capitalists, angels may also be more patient with entrepreneurs and open to providing smaller dollar amounts for a longer time period. But they do want to see an exit strategy at some point where they can pocket their profits, typically through a public offering or an acquisition.
Angel investors fund businesses in many industries. According to the Center for Venture Research at the University of New Hampshire, 2020 was the first time in several years that angel-funded businesses were in the seed and startup stage.1 The total investments during that year were $25.3billion – a 6% increase over 2019.2
The Pros and Cons of Angel Investors
The Advantages of Angel Investors
Having an angel investor means your business doesn’t have to repay the funds because you’re giving ownership shares in exchange for money. Angel investing is usually reserved for established businesses beyond the startup phase. These companies have shown promise for profits, but still need capital to develop products or grow. Because an angel’s money is on the line, they can be highly motivated to help you succeed through mentoring or by offering direct management help.
The Disadvantages of Angel Investors
One big disadvantage is that angel investors typically want 10% to 50% of your company in exchange for funding. That means business owners could lose control of their business if the angel investors determine they’re keeping the company from succeeding. It’s important to think about how much equity you want to give away to an investor for funding because if you give too much, you may not own the company anymore if things don’t go well and the angel investor has more ownership than you.
Sources of Angel Investing
Since angel investors are typically wealthy individuals, it’s not uncommon for business owners to want to seek them out for funding. So, how do you find angel investors? A few sources of funding include:
- Angel List: An online platform that helps business owners find investors.
- Angel Investment Network: An online network with over 279,000 investors. Business owners can create a profile and promote their business. If there are interested angels, they’ll invest.
- LinkedIn: Professional social networks, like LinkedIn, can give you a direct way to contact an angel investor.
- Local business groups or schools: Check local business schools or organizations in your area to see if they can put you in touch with an angel investor.
Before you reach out to an angel investor, make sure you have your business plan in place. They’ll want to make sure your business has the potential for success before investing in your company.
What Percentage Do Angel Investors Want?
The more money an angel investor gives your business, they more they’ll expect a bigger return on investment (ROI). The ROI expectation varies between angels and the specific investing opportunity. It’s not uncommon for an angel investor to expect a 30% return on their money.3
Angel investors will have a ROI expectation in mind as part of their exit strategy. This is the point in time when they sell their equity in the company to make up their initial investment and any profits.
Be aware that funding from venture capitalists will have a higher expectation for ROI. Because these kinds of firms are giving significantly more money, they’ll want to have a larger percentage of profit.
1,2 University of New Hampshire Center for Venture Research, “The Angel Market in 2020: Return of the Seed and Start-Up Stage Market for Angels”
3 Money Morning, “Why You Need an Angel Investor Exit Strategy Before You Invest”
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