Angel investors often serve as the lifeblood for start-ups seeking initial funding to establish their business, and these specialized investors can be the stepping-stones to the next big business innovation or ground-breaking technology. To better understand the essential role angel investors play in the business realm, let’s take a closer look at who angel investors are, their investment strategies, the benefits and risks involved, and how start-ups can attract investment from them.
Angel investors are also known as business angels and seed investors. They will usually require convertible debt or ownership equity in exchange for start-up capital.
Who Are the Angel Investors?
Angel investors are typically high-net-worth individuals who provide financial backing for small start-ups or entrepreneurs. Unlike venture capitalists, they use their own money to finance budding companies during their early stages when risks are at their highest. Angels can be successful business individuals, executives, or even friends and family members with sufficient resources. These investors are called ‘angels’ because they often invest in high-risk, unproven business ventures for which other sources of funds—like bank loans and formal venture capital—may not be available.
Why Are They Called Angels?
Using the term angel to denote this type of investor has its roots in the world of Broadway, where wealthy individuals – angels – would provide money for theatrical productions that would otherwise be forced to shut down.
Using the term angel for other investors was not a thing until 1978, when Professor William Wetzel at the University of New Hampshire completed his ground-breaking study on how U.S. entrepreneurs raised seed money. He used the term angel to denote a specific type of early investor, and the term caught on.
Angel Investors’ Investment Strategies
Angel investors typically invest in industries or businesses with which they’re familiar. They often provide the first round of “seed” financing, quite literally helping to grow the business from the ground up. They can contribute anywhere from thousands to millions of dollars, depending on their resources and the potential they see in the business. While some angel investors invest solo, others pool their resources together in angel networks or syndicates to share research and pool investment capital.
Benefits and Risks for Angel Investors
Like any investment, angel investing comes with its share of benefits and risks. The potential for high returns is a key draw—successful start-ups can yield significant profits. Angel investors also often take satisfaction in supporting entrepreneurs and contributing to innovation and job creation.
On the flip side, the risk of start-up failure is high—many start-ups do not survive beyond a few years. Also, angel investments are not liquid, meaning they can’t be easily sold or exchanged for cash. Thus, angel investors must be prepared for a long-term commitment and the possibility of losing their entire investment.
Attracting Angel Investors
For start-ups seeking angel investment, it’s crucial to have a compelling business plan, a unique value proposition, and a strong team. Effective networking is also key—angel investors often rely on referrals, industry contacts, and platforms like AngelList or Gust to find investment opportunities. Since the 1980s, angels have been establishing informal groups where they share deal flow, help with due diligence and pool resources and information.
Start-ups should be prepared to offer convertible debt or equity in their business in return for investment. They should also be able to articulate their market size and growth potential, business model, and revenue projections. Remember, angel investors are not just sources of funding—they can also provide valuable industry expertise, strategic guidance, and networking opportunities.
According to the Center for Venture Research, there were over 360,000 active angel investors in the United States in 2021.
What Are Founding Angels?
In recent years, the term founding angels have become more widespread in the world of business. Founding angels are angel investors that will get involved with a startup even before it officially exist. Since they invest at such an early stage, they are seen as funders and called founding angels or angel founders.
Founding angels tend to be heavily involved in each company they invest in, and often go in without having any predefined exit strategy at hand. They often seek out new inventions and use their money and business acumen to help the start up come into existance, thereby also helping to bring the new invention into the world. Founding angels often work together with scientists and engineers.
Conclusion
Angel investors play a pivotal role in the entrepreneurial ecosystem by providing crucial early-stage capital to start-ups. While it comes with significant risks, the potential for high returns and the opportunity to fuel innovation make it an attractive pathway for many high-net-worth individuals. For start-ups, attracting angel investment requires a compelling vision, a strong business plan, and the ability to build effective relationships within the investment community.
As the world of business continues to evolve, angel investors will undoubtedly continue to serve as vital catalysts for innovation and growth, forever shaping the landscape of entrepreneurship.