An angel investor is a high-net-worth individual who provides funding to entrepreneurs and startups. High net angel investors might also be referred to as funders, private investors, and seed investors as well. An angel investor is where you should go if you need an injection of capital to turn your small business idea into reality.
Anyone can be an angel investor – from big venture capitalists and accredited investors to your family and friends. Crowdfunding and social media platforms have been gaining particular popularity in recent years as well.
Any funding you receive could help you through the early stages of business development. In exchange for the money, you give the investor private equity in your company. They’re not co-founders of your business, but rather – active partners.
The Top Angel Investors in the World
It’s hard to say who the best angel groups are. The factors you need to consider when awarding such a title include:
- Number of startups they’ve backed
- The volume of capital they’ve invested
- Rate of return
When you start looking for an angel investor, make sure you do your due diligence. You need to know who the top players are and what they choose to invest in. Ask yourself whether your business idea fits their portfolio.
Some prefer high-tech startups. Other venture capital firms invest exclusively in healthcare startup companies.
Forbes has compiled a list of the leading global angel investors for 2018. It’s based on how many startup companies they’ve provided with financial assistance and mentoring:
- Fabrice Grinda – 245 angel investments
- Paul Buchheit – 135 angel investments
- Wei Guo – 129 angel investments
- Alexis Ohanian – 126 angel investments
- Scott Banister – 126 angel investments
- Naval Ravikant – 121 angel investments
- Daniel Curran – 114 angel investments
Every startup in the world would like one of these individuals to become their angel investor, which makes the competition very fierce. Success rates, just for getting a meeting, are very low.
Where Does the Money Come From?
Angel investing is, most of the time, a wealthy individual’s game. Angel investors give their own money to the startups they find interesting. The hope is that the emerging business will provide high rates of return which will translate into profits.
This is the main difference between angel investors and venture capitalists. The latter use money from many sources, including other investors. While angel investors are usually private individuals, there are other forms of entities as well:
- Investment funds
- Limited Liability Companies
- Crowdfunding platforms
- Equity Crowdfunding
Think about the popular reality TV show Shark Tank. Mark Cuban and his buddies represent the core principles of angel investors. Shark Tank is, however, mainly a TV show, and it exaggerates the nature of an angel management team. You shouldn’t go into the seed funding scene armed with knowledge gleaned just from your TV screen.
How Does the Process Work?
Angel investing is, in essence, a partnership between the investor and the startup. The success of the former depends on the success of the latter. The angel provides a relatively small sum of money. Its purpose is to cover expenses in the early stages of the business’s development.
The typical investment is between $100 000 and $150 000. The funding doesn’t come from a single individual in most cases. 3 to 5 angel investors come together and put their trust and money into a startup business. There are instances when angels put forward as much as a million dollars. These cases are more an exception than the rule.
Angel investors look for promising mid-size and small businesses they can help. More often than not, the startups on their radar are valued at between a million and 4 million dollars. However, it isn’t the value of the company that is most important. It’s the promise of growth and returns.
You need to remember that a good angel investor doesn’t look for a controlling share of a company. They don’t need the majority interest and the power to meddle in the founders’ vision. The typical angel investor retains around 20% of the shares of the startup.
What if You Can’t Pay Back?
The short answer is – nothing. Angel investing is a risky endeavor, and the funders know it. They are willing to put a bet on your vision and the prospect of your success. If your company succeeds, that is great for them. They’ll get more than just a return on their money. They’ll see a profit as well.
Early investors in startups like Instagram, WhatsApp, and Facebook saw huge returns after IPO (public offering). In most cases, angel investors hope to get at least a 50% profit.
The good news for you is that if your startup fails, you won’t have to give back the money you received. That is the reason angel investments are the first stage of funding for a new business. If your company isn’t big enough to go to a private equity firm, it’s the right course of action for you.
The Pros and Cons of Angel Investors
The process has a lot of positive sides for new businesses. However, it can provide startups with particular drawbacks as well. To find the balance and do what is right for your business, you need to explore both. The positive sides of angel investors are:
- They take a risk and bet on the success of your vision, but you have to convince them first.
- They don’t give you a loan – they give you funding to grow your business.
- They know what they are doing. If an angel investor decides your business is worth the risk, it probably is. They have years of experience and detailed expertise in the field. As wealthy individuals, they know which companies will do justice to their money.
At the same time, keep in mind the cons of angel investing as well:
- You won’t have full control over your company. While the angel investor doesn’t have the majority share in your startup, they still have a say in what is going on.
- You give them equity shares, which means you’ll have to part with a portion of your future earnings.
- Some angel investors tend to set the bar high. It’s not unusual for them to expect a 10-fold return in the first 7-8 years. If you’re not in it for the hustle, you’d better stay away from angel investors.
How Do You Find Angel Investors?
The right match between a small business and an angel investor is crucial. Before you go out pitching your ideas left, right, and center, you’d better do your homework. There are several key things to research to ensure success.
The Profile of the Ideal Funder
Experienced entrepreneurs will tell you that the typical angel investor is an individual with a net worth north of a million dollars. They are typically older than 40 years of age and younger than 60. Good standing with the Exchange Commission is a must. They expect to hold the investment for at least five years. Most angel investors get their hands on deals through referrals and invest in fields they know.
Angel Investors Are Pack Animals
Give up on the idea of finding a single individual who is going to give you all the money you need. Angel investors like to share the risk with like-minded individuals. Most startups get funding from as many as five angel investors at a time. That is good news for you. However, you don’t have to catch the attention of all five of your future angel investors. All you need to do is convince one of them. The investor you won over, will call their friends and do some of the work for you.
Location, Location, Location
The majority of angel investors take an active role in the businesses they fund. That is why they are more likely to give money to startups from their hometown area. For example, if your startup is in San Francisco, you will have much better chances of looking for investors from the Bay Area.
Your Network Matters
The typical angel investor doesn’t do events. You need a recommendation from a friend or business ally to get in touch with them. That is why networking is an important parting of finding funding. To get in a room with the angel investor willing to put their trust in your company, you need to get to know people. More specifically – get to know other business owners from your industry and geographical area.
Financial Services in the Digital Age
The internet is full of useful resources for new startups. Get on websites that specialize in connecting entrepreneurs with angel investors:
- Angellist – A website that connects startups, job-seekers, and angel investors
- Angel Capital Association (ACA) – a professional development place for angels with over 14 000 members
- Angel Forum – A place where your company can do a “live” fundraising presentation in front of potential backers. It has a first-contact fee, but you can pay upfront for their premium services as well
- Gust – Formerly calledAngelsoft, it is the largest startup network around. It has helped startups raise over $1 billion in seed funding since its inception.
Do you have something you’d like to share about finding angel investors? Don’t hesitate to tell us about your business plan in the comments!